Is Crowdfunding The Death Of VC?

CrowdfundingWeight loss drug developer Symmetry Therapeutics has done it. Anti-infectives company ANTABIO has done it. Stem cell specialist Axol has done it. HIV vaccine company BIOSANTECH has done it. EyeBrain, Cell Therapy, Oval Medical Technologies, Parkure and QuantuMDx have all done it. Academic researchers have done it to fund LSD research. Done what? They’ve all raised money through crowdfunding. So what does this mean then, for institutional investors like us?

We at Midven– fund manager for the UK Innovation & Science Seed Fund (RSF)- have long believed in syndicating our investments at the earliest stages – companies always take longer and need more capital to get to cash positive or exit than is planned for in the first few generations of the business plan. Our RSF portfolio companies have raised £20 for every £1 we have invested (that amounts to nearly £200M of finance we have leveraged). In our view, the more like-minded investors around the table who can help the company ride out a few storms, the better. The increasing importance of angel investors over the last 10 years (see the latest figures at http://goo.gl/1hCEB5) mean most institutional investors have adapted investment structures and legal documents to co-exist happily with private investors, and increasingly now with crowd funding platforms.

We believe as professional investors that we have a few advantages over the platforms and angel investors. We have the time and resources to carry out more technical and market due diligence. We are happy to roll up our sleeves and work patiently with management teams to refine business plans, and to augment the team at executive and board levels. Which lead to stronger companies to all of our benefit.

Crowdfunding is likely to remain a funding game changer. The financial landscape is shifting, with crowdfunding expected to get a lot bigger in 2016, Luke Lang, co-founder of investment crowdfunding platform, Crowdcube said in a Virgin.com guest blog. He also reports that investors taking more of an interest in how industries are operating, and investment rounds becoming larger. NESTA’s Pushing Boundaries: the 2015 UK alternative finance industry report showed 45% of all platforms reporting some levels of institutional involvement.

In our RSF portfolio, the Electrospinning Company has raised funds via Syndicate Room, and there are several more businesses in Midven’s other funds which have been funded by the crowd alongside us. SyndicateRoom uses an ‘investor-led’ model that allows crowdfunders to invest on the same economic terms as angel investors. They have also taken a bold approach to dealing with one of the first failures of a crowd-funded company (Soshi Games, which was also in Midven’s portfolio).

Whilst we like working with the folks at Syndicate Room, we don’t agree with founder Goncalo de Vasconcelos’ prognosis that crowdfunding will quickly kill the VC model. Companies with great and innovative ideas should be prepared to hunt the funding that will provide the best fit, whether that’s biotech or real estate (which, by the way, the NESTA report showed was the biggest sector for crowdfunding in 2015…) It’s certainly the space to watch.

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