The healthcare industry is constantly evolving and there seems to be an innumerable amount of startups trying to keep up with the changes. These companies need funding to grow and one emerging option for these nascent operations is crowd funding.
Crowd funding is an online platform where large numbers of investors supply small amounts of money for a startup organization. Instead of the traditional funding process of meeting with venture capitalists and pitching an idea, crowd funding offers companies of all sizes and at all stages of development the ability to reach out to the masses.
[See also: Disruptive Innovators: The Hive]
Companies that fundraise with groups like Indiegogo and MedStartr set up profiles on the sites for investors to peruse. They set goals for fundraising and, when those goals are met, the investors receive a perk or reward. The rewards could be a free t-shirt, a discount on software being funded, or their name on a product. These sites are for smaller fundraising campaigns, traditionally less than $1 million.
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“Startups with a prototype or cool project or consumer app gain from these sites because they get a huge window of market opportunities,” said Komal Garewal, a healthcare crowd funding consultant based in New York. “They introduce them to backers or those interested in buying that technology early. It provides recognition and consumer awareness.”
Sites like Healthfundr, Inc. typically raise between $1 million and $5 million for organizations. Unlike reward sites, Healthfundr investors receive equity in the startups. For this reason, the platform works with a much smaller number of companies (only about 2 percent of those that request to be on the site). The startups are screened by Healthfundr to ensure the new companies have sound financials. The site was launched in May and currently has three groups seeking funding.
Sean Schantzen, co-founder and COO of Healthfundr, said the startups they work with aren’t as exciting as those on a site like Indiegogo, but are just as important to the industry. This is in part because perks funding relies on broad appeal, or products that anyone might want to use, like a personal activity tracker.
Healthfundr’s niche is companies that are creating things like post-relief care for rehabilitation centers. Their investors are looking for companies that are vetted and that they can be part of from the beginning.
Schantzen said healthcare is a good environment for crowd funding because it touches on a couple of investors’ needs.
“It is more common for people to have interaction now with their investment,” he said. “There is movement toward wanting to know where their money is going. We also see a lot of passion investing in healthcare because they feel like they are investing in something that is good.”
That said, crowd funding in healthcare is difficult and a lot of sites have had trouble staying afloat, said Garewal.
“It’s not a particularly cool, trendy field where everyone wants to get involved and appeals to everyone,” she said. “It’s counterintuitive because we are all patients and … should be supporting it, but it isn’t as exciting as something that goes viral in technology or media.”
Crowd funding can be a good tool for healthcare companies because it opens up a pool of investors and can provide funding in some cases without giving up equity. It also provides a lot of traction in the market.
“The pool of startups is growing and crowd funding has given these startups a way to demonstrate potential success in a way that wasn’t possible before,” Garewal said.