May 11, 2012
As founder of Crowd Startup Capital I hope to use the growing enthusiasm for crowdfunding to solve a pressing issue facing healthcare in America: funding for biotechnology startups. Research and development at major pharmaceutical companies has faltered in recent years as the patents on existing drugs run out. As such, many companies are buying intellectual property developed by startup biotechnology companies to keep afloat when generic drug competitors erode profits. Major pharmaceutical company CEOs now openly admit that small biotech startups innovate more efficiently than they do. Unfortunately, crucial funding for these startups is drying up given the current economic crisis. Angel investors and venture capitalists, who have traditionally invested in high growth biotech startups, are reluctant to provide seed funding in the biotech sector because its relative risk and long product development cycles are less favorable compared to Internet or financial services startups. Moreover, inflation-adjusted government funds for scientific research and development are decreasing at this critical junction in the future of healthcare. Yet innovation in the healthcare space still requires early-stage biotech investment crowdfunding could fill the financial gap facing the industry while giving ordinary Americans a chance to invest in high-growth startups for equity shares.
Regardless, major challenges remain for using crowdfunding to fill the fiscal gap healthcare entrepreneurs face as they strive to improve public health and create jobs. Identifying promising biotech startups often requires specialized scientific expertise. And most importantly, long-term public confidence in the legitimacy of equity-based crowdfunding could wane if transaction intermediaries distort the scientific quality of startup company technology in order to gain more commissions. That is to say intermediaries seeking quick cash without regard for the success of crowdfunded biotech companies would undoubtedly slow growth in this new investment paradigm when investors lose money.
Eschewing initial commission deduction from seed-stage investor contributions may be a solution in this situation. Crowd BioVentures seeks to incubate companies that receive further rounds of funding and eventually achieve profitability and/or a successful exit to reward investors. If we aggregate funding for a biotech startup, we'll do our best to make sure it's successful. It is only upon gaining equity returns for investors that we plan to make a commission—that way we have a vested interest in selecting startups we believe will be successful to feature on our website. Investors know, then, that we will perform the scientific due diligence to see their contributions managed wisely and give them the best chance of making money. At Crowd we take accountability very seriously. Our team of scientific and business experts will do everything it can to allow only the most promising biotech startups on our site--and to help startups stay on the right track towards profitability after they receive funding. We fully expect the SEC to enact any laws necessary to protect the crowdfunding investor preferably the majority of the regulatory burden would be on portals as opposed to the end investor. However, we hope the SEC will keep our business model in mind while it drafts rules for Title III of the JOBS Act. We believe our business model provides maximum incentive for best practices at startups funded through our site. We therefore urge the SEC to give legal protection to crowdfunding portals that take equity commissions after startups prove themselves successful rather than before.