Health IT, Startups

Crowdfunding: 8 things healthcare entrepreneurs and investors should keep in mind

Crowdfunding is growing at a pretty frenetic pace based on some startling stats Andrew Dix […]

Crowdfunding is growing at a pretty frenetic pace based on some startling stats Andrew Dix of Crowded Media Group offered as part of a series of discussions on crowdfunding at the MidAmerica Healthcare Venture Forum this week. About 900 deals have attracted $10 billion from accredited investors from September through March under Title 2. Here are some of the highlights from the discussions which can be viewed here.

Getting validation or rejection: One of the biggest benefits of crowdfunding is that it helps entrepreneurs rapidly find out what their potential user base thinks about their product. They may also find a new audience for their mobile health app, service or medical device that they hadn’t anticipated, as was the case for Meghan Conroy, captureproof founder. Jeffrey Borenstein, of healthcare crowdfunding website Medstartr, said of the 170 projects that have gone live on the website, 40 percent have been funded, from early-stage mobile health apps to medical devices. One of the success stories from the site was a company called Your Nurse is On. It developed a software solution based on how nurses wanted to be contacted. On the other hand, the failure rate for startups is an unsexy 98 percent. From an investor perspective it represents the greatest amount of risk, given how early stage most of the companies are, and the lowest amount of risk in terms of the size of investments.

What’s the oldest form of crowdfunding? Scott E. McIntyre, board of directors, Crowdfunding Professional Association, said a lot of people liken crowdfunding to raising funds from friends and family. One of the most familiar forms of crowdfunding is asking for donations. Charles Luzar, the director of CrowdfundInsider.com, noted that the Statue of Liberty was crowdfunded through advertisements in the paper.

A few words on equity crowdfunding: There’s a lot of trepidation associated with this type of crowdfunding, particularly with what happens after the fundraise — especially when it comes time to approach institutional investors. Some  investors have taken issue with complicated cap tables. McIntyre pointed out that there’s a lot of concern that the regulations will be too onerous to make this form of crowdfunding worthwhile. If the purpose of the JOBS Act is to foster capital creation, having 587 pages of rules is likely to make that pretty difficult. McIntyre added that there’s been talk among his group of developing a crowdfunding share.

Rewards-based crowdfunding pros and cons for healthcare: How do you get people to invest in a product that’s a distant promise at best? It’s often from friends and family and friends of friends that want to support the person, not necessarily the product. McIntyre shared that some crowdfunding portals will appear that focus on a particular disease, therapeutic or issue and people will come to these sites based on how successful the community outreach effort is.

Attracting new potential customers: Conroy shared her experience with a Medstartr campaign and highlighted the broader audience it attracted. Among them were doctors from specialties such as cardiology and other specialties where it hadn’t anticipated there would be value. To illustrate that point, she talked about a hospital it’s working with in which surgeons use the patient-physician communication tool for patient education. It uses the image-capture tool to show patients angiograms before and after a stent is inserted so they understand how it works and why it’s needed. Among the areas where it has attracted interest are general surgery, plastic surgery, dermatology, podiatry, emergency room doctors, cardiology and neurologists.

Reasons for skepticism: A few. For all the benefits it can provide entrepreneurs, particularly for seed funding, it is still early on in its development. Lack of standardization is a big concern. Although services between sites are generally similar, the lack of escrow protection on some platforms is a big turnoff for would-be investors and illustrates the wide variation and lack of standard sets of rules. McIntyre said his group is drafting a term sheet for crowdfunders this year, for example as part of the slow process of building standard practices.

It’s a lot of work: There’s a great deal to consider when startups initiate a crowdfunding campaign. Meghan Conroy did a successful crowdfunding campaign for her doctor-patient communication startup, captureproof, on Medstartr. This is the first time your product is being presented to an audience, with a diminishing attention span. So in your video presentation, the first minute needs to convey enough information to hold your potential investors’ attention, but not overwhelm them, and spark their interest in learning more. McIntyre added that the campaign needs to be planned well in advance. Entrepreneurs need to think about how to make themselves relevant to stakeholders.

The white label segment of crowdfunding: As universities and other institutions move into crowdfunding, they don’t necessarily want to use Kickstartr or AngelList. Just this week University of Maryland launched a crowdfunding website called LaunchUMD. White label companies for crowdfunding offer Software as a Service to help these groups set up their own sites to host campaigns from their communities.

[Photo credit: Crowdfunding sign from BigStock Photo]

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