I’m starting Crowd BioVentures because I think crowdfunding can revolutionize biotech startup fundraising and ultimately get more early stage companies the seed money they need to succeed. Getting early stage companies money is a crucial step towards better care in the clinic, but unfortunately angels and VCs have begun to neglect seed funding in the biotech sphere. I can’t blame them. Major biotech/pharma companies now pay huge premiums for startup intellectual property. As such, investors can get quick money by funding late-stage companies that are ready to sell their product to Pfizer, GSK, Invitrogen, etc.
Even though there’s a crunch on funding for early stage biotechs because of this trend, it doesn’t have to be a bad thing: enter crowdfunding. Alina Dizik at Art of the Startup wrote an excellent summary on the advantages crowdfunding offers startups compared to traditional funding sources like venture capital. Briefly, crowdfunding gives startups 1) a pre-revenue proof of concept 2) early customer feedback by engaged users 3) sales and marketing insight 4) market size data 5) incentive to get organized early on and 6) new ideas for future projects. I highly suggest you check out the full post; it’s worth a read.
There’s no doubt crowdfunding offers some advantages to fundraising from angels or VCs. What surprises me is how unimaginative traditional investors have been in their reaction to the crowdfunding craze. To be sure, VCs have some real questions to answer about their role and rate of return–especially given that so many actually lose money. But that doesn’t mean the VC biz is dead like Fred Wilson seems to think. Here’s his scathing forecast for VCs:
This is, I think bad news for the venture capital industry, but terrific news for the entrepreneurs…it’s been an inexorable march from an industry that was very much skewed towards institutional VCs to an industry very much in favor of the entrepreneurs and it’s just going to get more and more and more that way.
Check out the full story on GigaOm. Wilson’s conclusion is that VCs will likely end up blogging, filling advisory boards, and contributing large portions of capital to crowdfunding campaigns. Wow. The end of the VC as we know it? I don’t think so. In fact, I think crowdfunding will help VCs make more money. Right now, venture capital as a whole underperforms public markets, but ultimately crowdfunding will change that. Startups will raise small sums of seed money (up to $1 million/year under the JOBS Act) to get their proof of concept, market data, etc., and eventually they’ll turn to traditional VCs for future rounds of funding. While VC firms would no longer be necessary for series A, they’ll be crucial for expansion! The really exciting news for VCs is that they’ll get more mature companies looking for money: no more losing millions on the next high profile failure like Color (you know, that app that lets you share photos with people around you? No? Hm. It got $40 million from VCs). Startups will be able to approach VCs with more specific goals in mind instead of a makeshift app that may or may not have a real market. This is huge, and I expect VCs will see a massive increase in their rate of return as a result of vetting by the crowd early on.
Another important point to make is that crowdfunding platforms will make it easier for VCs to hold a large, fully diversified portfolio of startup companies. Wilson, of course, mentioned this possibility, but it’s ripe for more discussion. By owning smaller portions of hundreds of companies, VCs and angels can increase the likelihood that they’ll get massive returns from rare runaway success stories (think Facebook–$10k of early investment would now make you a multi-millionaire). While a situation like this is rare, having a diversified portfolio would let VCs stay in the seed funding game (losses from unsuccessful startups won’t hurt so bad) and support startups they’d like to see succeed and eventually work with to expand. A supporting role like this could be enormously significant for crowdfunding campaigns (“$20k pledge from Union Square” is great advertising), and VCs can extend this support with relatively little risk!
While I think VCs will soon become startup expansion specialists rather than maintaining their current role, there’s no doubt in my mind all of this will be good for both startups and traditional investors. Crowdfunding has the potential to be revolutionary. VCs like Fred Wilson have already realized this, but I think they’re failing to see the positive side for their own business. Crowdfunding will help their bottom line even if they’re no longer superstar entrepreneur scouts. Assuming funding portals arrange the right regulatory environment alongside the SEC, crowdfunding could become the new stock market and prove itself a legitimate investment option. The coming months will be critical to establishing legitimacy for crowdfunding portals. It’ll be very interesting to see how the story unfolds…