Is crowdfunding a viable option for medical technology startups?

Anyone who pays attention to the venture capital industry has heard plenty of talk about why some VCs are abandoning medical technology investment (though there are notable exceptions).

The health industry is too heavily regulated, too fraught with uncertainty and facing too many cost pressures to make investment a tantalizing proposition for lots of VCs, the thinking goes.

Could crowdfunding, now enjoying a moment in the sun with the recent passage of the federal JOBS Act, be a route to early stage funding for medtech companies and rescue these companies from VC apathy and the valley of death?

The answer is a resounding “maybe.”

Certainly for some medtech startups, particularly those with simple medical devices that have already done some research and developed a prototype, crowdfunding could represent a realistic option. A provision of the JOBS Act that enables startups to raise as much as $1 million through crowdfunding and award equity to nonaccredited investors, is likely to make crowdfunding more attractive to medical technology companies.

“That’s a pretty significant game changer in how medical technology endeavors can be funded,” said Brian Meece, an enthusiastic crowdfunding evangelist and co-founder of crowdfunding site RocketHub. (Kickstarter is probably the biggest and best-known crowdfunding platform, while sites like FundAGeek cater more specifically to technology projects.)

Consider that crowdfunding has now been opened up to a much wider class of investors, and add to that an industry report that says the crowdfunding market quadrupled last year to $123 million, and it’s not difficult to see why some are predicting an explosion in this new type of financing.

It seems that crowdfunding is currently enjoying the “enthusiasm” phase of the familiar innovation cycle that begins with “a peak of enthusiasm followed by a trough of disillusionment, before achieving fruitful maturity,” as Todd Hixon said in Forbes.

But let’s temper that enthusiasm a bit. For medical technology startups that are developing complex, expensive products, it seems likely that most will find crowdfunding isn’t worth their time, except as a last resort. For many types of companies — pharmaceuticals being an obvious example, but complex cardiovascular devices would be another — $1 million simply isn’t enough money to make a huge difference in their development life cycles.

Plus, the sheer number of investors that it would take for a medtech company to raise $1 million could make the process a headache. With most individual investors pledging a small amount, raising up to $1 million through crowdfunding would likely require pledges from hundreds if not thousands of investors. Communicating with those investors could require lots of time and effort for startups.

“The crowdfunded company might get the startup capital it needs, but it must then create the infrastructure and devote resources necessary to deal with a large number of potentially unsophisticated individual investors,” said Craig Newman, an attorney with Richards Kibbe & Orbe.

Baiju Shah, president of Cleveland nonprofit business development group BioEnterprise, often endeavors to match cash-hungry biomedical startups with investors who can help them grow. He said he hasn’t discussed crowdfunding much with biomedical CEOs. But investors who place money in startups through crowdfunding have their work cut out for them, Shah said.

“The challenge is for the individual investor to assess the technical, commercial and operational viability of pre-revenue companies that may still have significant capital needs prior to positive cash flow or a strategic exit,” Shah said. “This is a difficult task even for venture and strategic investors.”

Nonetheless, acknowledging the drawbacks and inherent weaknesses associated with crowdfunding doesn’t mean the funding mechanism should be dismissed by biomedical entrepreneurs. While I was unable to find an example of a biomedical company receiving crowdfunding and then using that cash to hit a significant milestone, you’d have to figure it’s bound to happen at some point.

Solomon Nabatiyan, a Northwestern University researcher who co-founded recently launched crowdfunding site TechMoola, likely hopes his company is among the first. Nabatiyan is seeking to raise $25,000 for his startup, Cervia Diagnostic Innovations, which is developing a new biomarker test for cervical cancer.

The company would use the money to refine its prototype and do some testing. Thus far, Cervia has completed 2 percent of its fundraising goal.

“It’s not necessarily true that medtech startups require more funding [than companies from most other industries], and it also really depends on the nature of the medtech,” Nabatiyan said.

Medical technology startups’ “sweet spot” for targeting crowdfunding is to focus on supporting a discrete “point-A-to-point-B” type of project, Nabatiyan said. That is to say, biomedical startups shouldn’t view crowdfunding as a means to get from the idea stage to market launch.

Rather, crowdfunding will be more successful for biomedical companies if they look to raise a fairly small amount of money to help with technology validation or testing after an early prototype has been created. Before looking to crowdfunding, an entrepreneur should first invest in early development and seek grant funding, Nabatiyan said.

“Crowdfunding is not suited for entering at the conceptual point,” Nabatiyan said.

Startups that want to explore crowdfunding might be likely to find the most success through “medical interest networks” such as patient advocacy groups, foundations or clinical societies that are dedicated to a certain condition or disease, Shah said.

So while successfully crowdfunding a biomedical company is likely to represent a tough slog for most, entrepreneurs seem likely to embrace crowdfunding as one more avenue toward helping them share their medical innovations with the world.

“You just don’t know what happens until you put the idea out there,” Nabatiyan said.

[Photo from flickr user Sreejith K]