Mass Appeal: Medtech Funding Follows the Crowd

Farmers, for instance, funded Louis Pasteur’s 1881 anthrax immunization trial (but being relatively poor folk, the agriculturalists only could spare enough cash to inoculate 70 farm animals against the infectious disease). IBM Chairman and CEO Thomas J. Watson, by contrast, single-handedly bankrolled surgeon John. H. Gibbon Jr.’s ardent quest to build a heart-lung machine, while Siemens AG and Swedish testing firm Tekniska Rontgencentralen AB teamed up to help cardiologist Inge Edler and physicist Carl Hellmuth Hertz uncover the diagnostic wonders of ultrasound.

Such fabled funding, however, has lost its Prince Charming in recent years. Past heroes—particularly the angel investors who, for all intents and purposes, created the biotechnology sector with their deep pockets and abiding faith in scientific research—no longer are rescuing the struggling inventor or cash-strapped startup. These Goodwill Guardians now tend to hide behind bad deal terms to protect their pocketbooks in subsequent financing rounds, leaving their victims to fend for themselves.

Consequently, many startups have turned to the general public for salvation, using crowdfunding platforms like Kickstarter and Indiegogo as launchpads for their ideas. Brooklyn N.Y.-based Kickstarter is perhaps the most renowned and successful of all crowdfunding conservators. Since its April 2009 launch, more than 5.7 million people have invested roughly $991 million in more than 56,000 creative projects, according to the firm.

Indiegogo is popular as well, but its success rate is dwarfed by that of Kickstarter. An unofficial comparison of funding data shows that Kickstarter campaigns are more fruitful, raising six times as much money for successful projects than Indiegogo ($612 million to $98 million, respectively).
Kickstarter also bests its rival in total million-dollar-plus projects (40 compared with Indiegogo’s three), and success rate (44 percent versus 34 percent).

Indiegogo projects, though, are more flexible and diversified. The San Francisco, Calif., company does not place geographical or categorical limitations on its campaigns, welcoming ideas from innovators in potentially risky industries like energy and healthcare (Kickstarter blacklists those sectors). One of the firm’s most successful 2013 campaigns, in fact, was conducted by Silicon Valley startup Scanadu, designer of a Star Trek-like medical tricorder that measures and monitors the body’s blood pressure, respiration rate, blood-oxygen level and cardiac electrical activity. Scanadu’s founders received their first round of serious financing in 2011; last year, they appealed to the Indiegogo community for $100,000 to produce a tricorder prototype and wound up raising $1.6 million.

That outpouring of support has given hope to the legions of medtech muses grappling with a severe funding drought spawned in part by the 2008 financial crisis, tightfisted health insurers, more stringent regulations and declining procedural volumes. The capital dearth is driving an increasing number of medical device startups into the arms of the global investment community, through healthcare-specific crowdfunding groups such as MedStartr, Healthfundr, B-a-MedFounder and HealthiosXchange.

“[Crowdfunding] is a great way for medical technology companies to reach a broader array of investors,” Healthfundr CEO Jared Iverson told Orthopedic Design & Technology. “Just think for a minute about the number of companies out there right now that have an idea or a device that someone in the U.S. or rest of the world would be passionate about. A Nashville firm could have a great potential investor in Tampa, but the two might never meet up without the crowdfunding platform.”

Iverson describes Healthfundr as an equity-based platform where investors can purchase stock in early-stage health companies. The site is geared toward companies raising generally between$500,000 and $5 million that already have funding “traction” in their current financing roundand want/need help finding additional investment to close thecycle. Angel funds or venture capital firms negotiate terms with the companies, and only accredited investors are allowed to provide financial support. Rather than taking a cut of the capital raised, Healthfundr earns a small portion of the upside (carried interest) if the company seeking funding exits successfully.

“This is really a way to bring all the offline and word-of-mouth relationships online and nourish them by greatly opening up the potential investment pool,” Iverson said. “It’s a more efficient and transparent capital-raising process. That’s what crowdfunding is to me.”

Daniel Yachia, on the other hand, considers crowdfunding to be more about access. Last year, the Israeli urology professor/patent holder and his brother-in-law’s son built a world stage for small medical device entrepreneurs through B-a-MedFounder. The online crowdfunding effort is designed specifically for inventors of small medical devices that need $70,000-$100,000 in financing. People can contribute as little as $10 in U.S. currency, euros or British pounds to any posted project (there are only three currently). The funds are considered donations that will translate into equity for the backers.

MedStartr works similarly, allowing only contributions to featured projects. At least 18 proposals have successfully found funding through the site, including a patient empowerment film and a startup that coordinates customer service trade-offs. MedStartr’s website claims its projects raise $13,012 “immediately” and more than $405,000 over six months. Co-creator Alex Fair, however, believes the true measure of his platform’s success lies in the nurturing of ideas: “What I see are thousands of new ideas that suddenly have begun to bud from all types of seeds.”