of traditional investors, however, or are as leery of crowdfunding.
At Princeton University, Ethan Perlstein and lab mates raised $25,000 through donations in late 2012 for a project. That experience led Perlstein to start his own company, Perlstein Lab, win a spot in the QB3@953 incubator in San Francisco, and raise a $2 million seed round in 2014—in part from Martin Shkreli, who was then CEO of drug developer Retrophin. (Perlstein raised the funds before Shkreli left Retrophin under a cloud in the fall of 2014, and well before this year’s pricing controversy at Shkreli’s new company that brought him worldwide notoriety. Perlstein says Shkreli is no longer on the board of Perlstein Lab.)
“[I] definitely would have tried equity crowdfunding if it had been available in late 2013-early 2014,” Perlstein says.
Now Perlstein Lab needs another $2 million to move its rare-disease drug discovery program toward milestones “that would entice VCs.” The new equity crowdfunding rules won’t be in place fast enough for Perlstein to go that route, he says: “We need to close this round by year’s end.” (The SEC rules will go into effect 180 days after they are published in the Federal Register, and portals will be able to register with the SEC on January 29, 2016.)
But Perlstein has no doubt equity crowdfunding will attract startups like his because there are simply too few VCs funding early-stage life science work. “No matter how much they bloviate about innovation, et cetera, they don’t put their money where their mouth is,” he says.
Strong feelings like that are sure to buoy the spirits of those running healthcare-themed portals. Ever since equity crowdfunding was authorized in principle when the Jumpstart Our Business Startups Act was signed into law in 2012, Simon, Arthur, and others have talked about eating the lunch of traditional venture. “The math is clear, we’re going to squeeze the VCs’ deal flow in the next five to ten years,” says Arthur.
VCs respond with arguments like Zhang’s: It’s not just money but connections and mentorship that matter. They also point out potential crowdfunding pitfalls, such as having a gaggle of investors on board that are harder to deal with than a family full of crazy aunts and uncles.
Veteran biotech VC Mike Powell, a general partner at Sofinnova Ventures, says some of the issues are the same as in earlier days, when he invested in companies with a large number of angel investors, such as “how to get their vote when you need it, [and] how to ensure some don’t go rogue with lawsuits when things go sideways,” says Powell.
Having them vote with one voice under orderly rules would help, he says. That’s what sophisticated angel groups are doing, and that’s what Jenny Rooke does. She’s a San Francisco-based investor who’s both a venture partner with Fidelity’s life science venture fund F Prime Capital and the managing director of her own firm 5 Prime Ventures. (Other than her affiliation and the similar names, the firms are unrelated.) With 5 Prime, she finds individuals via the AngelList fundraising platform to back her investment decisions on a company-by-company basis. In effect, the “crowd” of wealthy investors is betting more on her track record than the merits of the company receiving the investment, which isn’t far off from what pension funds and the like do when bankrolling a traditional venture fund. (So far, she’s channeled the crowd to invest in gene editing firm Caribou Biosciences, single-cell analysis firm Zephyrus Biosciences, and industrial microbe maker Zymergen.)
Rooke is the proxy in each case. It’s not equity crowdfunding for the masses—Rooke is dealing with accredited investors—but she says the retail version now empowered by the SEC needs something similar.
Rooke recommends that entrepreneurs who want to sell crowdfunded equity look for portals “where individual investors can be rolled up into a single vehicle with a single point of contact.” Short of that, platforms should at least offer protection from “the downside of crowdfunding, such as excessive interference and liability from unsophisticated investors,” Rooke says. “Whether this will be sufficient to give comfort to institutional investors remains to be seen.”
Likely a bigger turn-off for individual investors thinking of crowdfunding biotech companies is the long slog to get scientific results—and therefore returns. Many venture firms shy away from industry, and they may be better able to wait for a financial payoff than individual investors of modest means. Advances in bioinformatics, sequencing, and the outsourcing of various parts of the business have cut development times around the edges, but for drug making, only patience is rewarded. Add to that realization the low esteem in which the biopharma world is held—thanks most recently to Shkreli and Valeant Pharmaceuticals International for providing far-too-easy targets—and one could hardly blame mom-and-pop investors from steering clear of the drug business.
But there’s a counterargument for the slow-investment-returns problem. Disease foundations have responded to donor pressure by shifting more funds toward translational work—not just basic research, but more advanced R&D to get drugs into pipelines faster. The most famous example is the Vertex Pharmceuticals (NASDAQ: [[ticker:VRTX]]) drug ivacaftor (Kalydeco), which benefited from tens of millions of dollars from the Cystic Fibrosis Foundation.
Perhaps equity crowdfunding will funnel some of those donors’ dollars directly into companies instead of through the foundations. In other words, a personal connection—a child with juvenile diabetes, a parent with Alzheimer’s disease—will trump suspicion of the sector, or skittishness about security and privacy on the Internet, with one extra carrot: the promise of a return at some point in the distant future.
