Happy New Year
Happy New Year from the S. Jordan Associates team. We are very thankful for being a part of the healthcare industry and for the outstanding year the sector experienced in 2013 including robust capital markets activity (~IPOs), surging stock prices, creative and innovative partnering deals, and number of drugs/medical devices approved. We wish you and your family many blessings in the year to come.
Many consider 2013, “The Year of the Crowd,” and the S. Jordan Associates team had the honor of assisting Healthios with the launch of their Crowdfunding portal, HealthiosXchange. The mission of HealthiosXchange is "To Unify the Promise of Medicine with the Fortunes of Those Who Invest in It."
Predictions for Crowdfunding in 2014
1. The Rise of Meaningful Investing (Source: Jonathan Sandlund, TheCrowdCafe.com)
Crowdfunding is the social vehicle from which investors are assigning value to an opportunity based upon its meaning (does it reflect who I am and what I believe in? What is the story behind it?), not just the potential for return. Meaningful Investing, which found its roots in donor/reward (~Kickstarter) based Crowdfunding platforms, has migrated to the equity side. Equity Crowdfunding has the potential to help issuers define, organize, and motivate the $60 billion in capital invested annually by Friends and Family, over twice the amount invested by VCs. One of the primary drivers of why people invest is the desire to support a friend/family member and oftentimes investors rely on their networks to socially validate an opportunity before it is financially underwritten.
2. Rise of Crowdfunding: Niche and Affinity Platforms
“Niche” and “Affinity” Crowdfunding platforms will rise in prominence dovetailing on the success of industry agnostic sites (~SeedInvest). Niche platforms are defined by targeted industry (~healthcare, consumer goods), and leverage domain expertise to curate deal flow reducing noise in the discovery and diligence processes. Combating challenges facing this subsector of Crowdfunding (primarily scalability), companies like CrowdFundConnect are seeking to assist niche sites with achieving scale by connecting multiple sites akin to the real estate MLS system. CFC enables investors to gain access to multiple sites (~healthcare, consumer goods) via a universal login/password allowing them to diversify more readily. “Affinity” platforms such as Crowdfunding aimed at what people are passionate about/what defines them (i.e., University/Alumni networks) will also rise in prominence given investors’ loyalty to investment opportunities sponsored by their respective schools.
3. Investor Protections Becomes Paramount
High-net-worth does not indicate knowledge in the financial world, “a sophisticated investor is someone who has enough money to lose.” Broader trends of globalization, decentralizations, and new legislation (JOBS Act) threatens to remove intermediaries between issuers and investors who have fiduciary responsibilities to protect investors. In response, Crowdfunding portals safeguarding investors via education, utilizing technology to identify bad actors, and firewalls protecting intellectual property will rise in prominence.
4. Data Driven Approaches to Crowdfunding ~Big Data
Crowdfunding platforms acting as clearinghouses are in an ideal position for collecting and analyzing large amounts of structured and unstructured data (sentiment data). Crowdfunding portals, such as EquityNet and HealthiosXchange, have incorporated data driven approaches to matching issuers and investors and conducting due diligence (Investor and Company Scoring). Social networks and Geoweb data (algorithms to identify potential matches based on proximity) will allow investors to more easily connect with one another and with issuers. Automating due diligence makes manual approaches more efficient by providing ecosystem participants with valuable tools for assessing deal flow including standardized investment reports for listed companies (guidance around valuation, risks, capitalization, and other factors).
5. Investor Syndicates will Scale the World’s Investors
Crowdfunding portals such as AngelList, HealthiosXchange, and SeedInvest will build-out “Syndicate” models for Accredited investors to participate in private equity. Within the Syndicate structure, “Lead” Investors (typically with many years of experience and successes, “exits”) raise capital from their network of investors receiving carry from these “Syndicate” investors. Syndicate model advantages:
- Motivates Accredited investors, who truly believe in startups, to put in the hard work of helping raise capital
- Accredited investors now have an avenue for securing pro rata terms (allow investors to continue putting money into a company in order to maintain their existing % even as the company raises new funding at higher valuations) by fundraising to buy stock made available via collecting carry on any resulting profit from syndicates
- Lead Syndicators receive carry and leverage on their personal investments enabling them to make larger investments; access to startups with higher minimums
- Investors in the Syndicate get the benefit of the Lead syndicator’s access, governance, and value-add
- Syndicate investors have the ability to invest less than the startup’s minimum
6. Does Equity Crowdfunding threaten VC’s?
Effects will be minimal given VC’s are the preferred funding platform because of their industry focus (“Smart Money”) and connections especially for big-idea projects. In fact, Crowdfunding may assist rather than hinder given VC’s can leverage their brand to attract more startups. Of note, Bruce Booth – Atlas Ventures, wrote in an article in Forbes, “Crowdfunding: Angels In Biotech, Or Devil In The Details?” where he details the opportunities made available to VC’s via Crowdfunding including accessing the vast amounts of Accredited investor capital motivated by access to premium deal flow and social good motivations.
- “About 120MM households in the U.S. The top 1% is ~1M households, and they have a mean household net worth near $15M. If they invested just 0.1% of their net worth each year – or $15K – into crowdfunded biotech working in a disease area of their interest, it would create $15B of fund flows into biotech. This is 3x more than the total biotech VC market. If just 10% of them did it, and focused it on brand new startups, it would still more than double the amount of capital flowing into first time financings.”
- “Keep in mind that crowdfunding could open up private biotech funding to a broad range of individuals well outside of the top 1%. Since disease affects all of us, “doing well by doing good” could be a motivating investment thesis supporting increased angel interest in the space. In short, the scale of the potential impact of small relative allocations of capital is enormous.”
- “It’s clear that crowdfunding won’t replace VCs in biotech, as others have said before (here), but I do believe that if positioned properly and supported more broadly by the sector, these platforms and their offerings could greatly augment the capital flows into the earlier stage biotech arena.”
7. Can VC’s and Crowdfunding Learn to Play Together?
Select Crowdfunding platforms will strive to work closely with Venture Capitalists given their valued industry capital, expertise, and connections. In particular, Crowdfunders will institute structures to meet the challenges posed by Venture Capitalists (See Bruce Booth’s comments below):
- “Cap Table chaos: having 100s of individual investors on a cap table for an early stage startup requires a lot of investor management. And complicates the information rights around what to share or not. Is this something VCs want to deal with?” Financial Innovation: Consolidate investors into Special Purpose Vehicles (LLC’s) acting as single shareholders (looks like a Limited Partner)
- “Future rounds: we build syndicates that can go the distance and do their “pro rata” going forward. We often include pay-to-play terms to encourage that participation. Will angel investors be there for future fundings? Should VCs change their pro rata expectations? New norms probably need to be established.” Financial Innovation: “Syndicates” wherein investors commit capital “Backing” future deals/rounds
- Risk expectations: 40% of biotech’s lose money historically, and drug development is hard and often takes longer than expected. Are angels ready for the ride? Lots of money could be lost chasing bad ideas or tough science. Financial Innovation: Lower investment thresholds so investors can participate in and diversify across multiple deals
Recent news releases confirming the convergence of Crowdfunding and VC’s:
- Atlas Ventures created an “AngelList Syndicate” where the company is investing in a set of active angel “Lead” investors in the Boston area in an effort to strengthen the city’s ecosystem while priming the pump for early-stage deals
- OurCrowd, an Israel-based Crowdfunding platform, announced a strategic co-investment partnership with GE Ventures; GE Ventures will have the right to co-invest in early-stage ventures with OurCrowd
- FoundryGroup and AngelList syndicated to funnel $2.5MM into 50 startups (FG Angels) in 2014; each of the 50 deals will be capped at $500k with the balance of the funds generated from follow-on funders in the syndicated deals (FG angels will charge a 15% carry)
8. Does Equity Crowdfunding threaten Angel Groups?
Potentially, given the social reach of Crowdfunding is longer (Angels, like Crowdfunders, are social investors and rely on networking and pre-established contacts to locate investment opportunities), investors do not pay annual dues, benefit from lower investment minimums, and do not have to participate at meetings. Select Angel Groups like HealthTech Capital see the opportunity to partner with Crowdfunding portals as evidenced by their participation on a recent Webinar with HealthiosXchange, Join the Investor’s Winning Circle via Angel Side Cars. HealthiosXchange (The Champion’s Program) along with SeedInvest (Halo) have launched platforms to assist Angel Groups with:
- Streamlining Investing: Investors sign legal documents and fund investments online
- Offline Meets Online: Schedule road shows, one-on-one meetings, and webinars for angel-sponsored deals
- Accredited Investor Verification: Automated system for verifying accredited status including compliant for 506© offerings
- LLC Tools: Structure and build managed pooled investment vehicles
- Sourcing Investors: Assist Angel Groups with finding new members via streaming communications
- Syndicates: Facilitate syndication of deals amongst multiple Angel Groups
Read my Review of Crowdfunding in 2013
Upcoming speaking engagements:
Jan 14: OneMedForum SF 2014, San Francisco, CA (During JPMorgan Healthcare Conference)
With the passage of Title II of the JOBS Act, a handful of Healthcare dedicated portals have already begun raising capital for emerging growth companies to accredited investors. This session will include the primary players who will discuss the early results and comment on the effectiveness of this strategy for healthcare companies. " target="_blank">Learn more>
Jan 22: Crowdfunding Healthcare: Secrets from Industry Insiders, Boston, MA (co-hosted with HBS Healthcare Alumni Association)
Almost two years has passed since the congress approved JOBS act, which would allow small businesses to raise capital from ordinary people. The long-anticipated September 23, 2013 repeal of the ban on public advertising of private securities offerings will help to usher in a new era of transparent, information-rich, and crowd-vetted capital markets. Now thousands of healthcare and life science emerging companies can take advantage of new mechanism to raise funds from accredited investors. " target="_blank">Learn more>