Crowdfunding has become a popular, widely-talked-about financing tool that opens up new ways of acquiring money for projects that might not otherwise receive backing. The financing model is based on the simple idea of raising many small amounts of capital to finance a large project. RIBOXXIM is the first drug in Germany where crowdfunding was used by a pharmaceutical company to raise money from private investors for a clinical study. In early 2015, a company called Riboxx secured the capital it needed through a campaign on the Seedmatch crowdfunding platform. The German company aescuvest GmbH operates a crowdinvesting platform specifically directed at funding innovative healthcare projects. But is this novel financing form suitable for funding life sciences projects in general?
The concept of crowdfunding is simple: a large number of people provide a small amount of money to finance the costs of a large project. This is done through Internet platforms where individuals or companies present their project in order to find investors willing to invest money in return for equity.
This funding model is of particular interest for start-up companies with limited financial resources and gives them the opportunity to get their project up and running quickly without needing large capital investors or bank loans. Ideally, crowdfunding is beneficial for both capital-seeking start-ups and potential investors. Crowdfunding platforms put inventors into direct contact with potential investors. Private investors only contribute small amounts to the project, minimising individual risk. Thus connecting people with good ideas to people who appreciate the ideas and are willing to support them.
Countless websites have emerged where the most diverse business ideas can be presented. These not only aim to bring inventors and investors together, but they also make a preliminary selection of sound projects and conduct all crowdfunding transactions. aescuvest GmbH is the first equity-based crowdinvesting portal that focuses on funding healthcare projects in German-speaking countries.
The company’s experts pre-filter potential business ideas for their ethical, medical and legal feasibility and require a business plan that documents the economic viability of the proposed project. Once business models have met the evaluation criteria, the crowdfunding amount required by the start-up to successfully implement a planned project is determined. And then it is up to potential investors as to whether the idea gets off the ground.
aescuvest GmbH requires a minimum investment of 250 euros, and this can be provided by individuals as well as companies. If a start-up fails to raise the required sum of money by a specific date, the investors are refunded. If the projected sum is secured, the project can start. If the business model proves successful, the platform distributes the interest payments to investors. The service is free to investors but companies that successfully reach their target are charged a fee.
However, even before the existence of aescuvest GmbH, some healthcare companies had already successfully used the novel financing tool. Riboxx GmbH was the first German biotech company that used a crowdfunding platform to raise the funds needed to carry out a clinical trial.
Riboxx GmbH, which was spun out from the medical faculty at Dresden University of Technology in 2009, is using crowdfunding to raise money from private investors for a clinical study of its cancer immunotherapy. The active agent (Riboxxim) has been shown to boost the immune system and potentially prevent relapse in cancer patients. The company has now raised a total of 1 million euros and is able to start clinical studies.
“Crowdfunding has made it possible to independently finance our project. As a small biotech company we would otherwise have had to rely on cooperation with a major pharmaceutical company. But the money raised through crowdfunding now enables us to conduct independent research,” says Dr. Jacques Rohayem, CEO of Riboxx GmbH. Using a crowdfunding platform, the company has also been able to make itself and its technologies known to a broader audience.
“I call the people who support us through crowdfunding, life investors because they are investing in the fight against cancer and hence for life,” says Rohayem. “People investing in Riboxx are not interested primarily in the financial success of the product, but are using this opportunity to participate in an innovation that seeks to combat cancer,” says Rohayem on investor motivation.
While crowdinvestors have the advantage of becoming part of a large project just by investing a small sum of money, the fund-seeking company benefits from the independence the innovative funding tool gives it. However, not having a major financial backer might also be a disadvantage, especially for emerging companies who stand to benefit from the expertise and solid network of an experienced investor. That said, crowdfunding could also be risky for small investors. Companies often try to entice investors with lengthy promises about the planned project. However, especially in the biotechnology and healthcare sectors, the objectives of the companies who are seeking funds are not always easy for the layman to understand. A situation could therefore arise where people invest in a company that is doomed to failure from the start.
Most small investors donate money in the form of subordinated loans. This means that the individuals lend money to a project that is funded through crowdfunding. This is a key aspect because, under German law, individuals are not entitled to assign conventional loans. However, it also means that crowdinvestors will only get their money when all the company's other obligations, including vendor payables and other loans, have been repaid. In the worst case, they might not get their money back at all.
However, crowdfunding is an excellent way for early-stage companies to initiate a project in a relatively short time without having to rely on a major investor. However, the model will only work for those with a good business plan and who are able to successfully implement the development and marketing concept for the product they have in mind. If all this is in place, crowdfunding will become a way for companies in the healthcare sector to successfully raise money.