The notion of crowdfunding early stage medical device development is spreading. By now everyone is familiar with Kickstarter and the many examples of companies that have successfully raised funds by appealing to large numbers of “average Joe/Jill” supporters. There are more than a few copycats now that Kickstarter has been successful. Most, however, do not encourage or permit crowdfunding of medical devices.
There is obviously a funding gap for many early stage medical device companies. Venture capitalists have abandoned the early market except for blue chip prospects. Angel investors have become extremely risk-averse in my opinion and have functionally replaced VCs (although not the big VC investments of 10-15 years ago). Between federal budget sequestration and increased competition, grants from NIH, CDC, NSF, and DoD have dried up and take too long to be a reliable source of funds for most startups.
As usual, savvy entrepreneurs to the rescue! Here are a few specialized sites that are crowdfunding medical device startups:
- Medstartr “Patients, Doctors, and Companies Funding Healthcare Innovation.”
- Poliwogg “Put Your Money Where Your Passion Is”
- indiegogo “The world’s funding platform. Fund what matters to you.“
- b-a-medfounder “A uniquely positioned crowdfunding platform dedicated to medical device invention and innovation projects.”
- healthfundr “Accelerate health innovation. Invest in the companies shaping the future of health.“
- microryza “FOLLOW & FUND SCIENTIFIC RESEARCH“
Many of these sites and organizations are new and do not have a track record. Most are focused on investors who want to put in a small amount of capital. Perhaps they are angel investment neophytes who are just starting out or maybe they prefer to make lots of small investments. Who knows? Others seem to focus on “donors” who are essentially giving a gift to the company, again, for very personal reasons. In any event, all of the crowdfunding sites seem like resources to investigate for early stage startups looking for that first $100k or so of seed funding.
It will be interesting to see how these services develop. As many of you know, early stage investors can get diluted down to almost nothing in terms of equity very quickly. And although medical devices cost only a fraction of what a biotech drug might cost to develop, it still requires a minimum of a few million dollars in capital to get a Class II device to market. If that funding is stretched out over a few rounds, the early stage investors almost certainly won’t get much, if any, return on their investments.
It remains to be seen if a relatively obscure and small niche like medical device development can attract sufficiently large numbers of investors. It’s also a big unknown if the proliferation of crowdfunding sites prevents any of them from reaching a critical mass of investors.
There are caveats in using these services, of course. Just as investors perform due diligence on you and your startup, so must you conduct your own diligence on the crowdfunders. Keep in mind also that these are for-profit businesses, not charities. They will take a percentage of the funds you raise. One popular crowdfunding model takes a percentage if you raise your target amount and a larger percentage if you fail to achieve your fundraising goal. I suppose that’s intended to be an incentive for you to work hard to promote your offer.
There is also some uncertainty about how these sites screen for accredited investors and avoid the laws against general solicitation. I’m certainly not well-versed in these matters but I’ve been keeping up with recent new regulations issued by the SEC on a blog written by a Seattle attorney, William Carleton. Read it here: Counselor @ Law.
There is also an older, more established online funding presence at AngelList.
Takeaways: Crowdfunding is a relatively new funding option for medical device startup CEOs and CFOs to consider. Add this option to your fundraising toolbox. Keep in mind that these investors may be less financially sophisticated and less experienced than the typical angel investors you are accustomed to dealing with. Some of these investors may be making decisions based on emotion. I strongly recommend consulting an attorney before signing up with any of these services and at least getting a thorough review of the service’s terms and conditions.