Article focus:

• Leveraging the medtech crowd
• When and why to use crowdfunding
• The crowdfunding landscape

Crowdfunding is a fairly new paradigm shift. It started in more of the arts and movies side of the business by a site called kickstarter.com. And crowdfunding, although in its infancy, is not foreign to healthcare companies. A few have found success in achieving funding from general funding sites, such as indegogo.com. But now David Guy and Perry Mykleby have launched a crowdfunding site dedicated to medtech. The two cofounders of MakerStaker.com believe that the industry needs a site that focuses on the special needs and requirements of medtech companies, inventors, and entrepreneurs.

“Kickstarter had done a good job of providing a vehicle for noncertified investors to be able to invest in a company, and rather than equity, get a reward for their participation,” says Guy. Such rewards, he says, might have included an advanced copy of the movie or mention in the credits. These rewards do not include equity in the company.

Guy says the timing is right for MakerStaker because the JOBS (Jumpstart Our Business Startups) Act (HR 3606), which was passed in April 2012, enabled the general public to receive company equity in exchange for funding. So there are now both rewards and equity sides of the funding model. The SEC has been taking comments for the last 6 months with a goal of releasing their rules and regulations for crowdfunding in an equity manner by the end of December 2012. The SEC has not yet issued those rules, and crowdfunding proponents now sit and wait.

Guy explains that crowdfunding is the chance to bring lots of people together in a manner so that they can aggregate their funds and help someone get from the back of a napkin to a launch. And even the ones that were out there were focused more on entertainment or other nontechnical ideas. And so, Guy and Mykleby saw a need.

Leveraging the medtech crowd

“We left Olympus with a surgeon from Walter Reed Army Medical Center who started his own device company. And when we started running the company itself, we went through the traditional angel round of investment and approached VCs,” says Guy. At that point, he says he realized that as CEO, raising money became a full-time job. “We had a large number of angels in our network that were supplying little bits and pieces of money here and there and didn’t have the ability to go back into their pockets for additional rounds. We also found that a lot of times, the accredited ones that are able to invest in companies are lawyers and CPAs and people from the finance world who probably haven’t actually built something.” Guys says that they didn’t really understand how a product gets form the back of a napkin to a finished good.

“And that’s where we came in. We realized that there is an opportunity to leverage the crowd—crowdfunding—to be able to pull funds for nurses, doctors, patients, and industry—those who have a good concept but don’t have a mouthpiece or ability to garner interest in the larger market today. It doesn’t mean they don’t have a good idea; they just haven’t knocked on the right door,” says Guy.

Guy says they learned from talking with some of the large device companies that these big manufacturers see value in pointing people toward such an option, particularly in cases where a physician or entrepreneur were to approach them with a good idea that perhaps doesn’t fit with their portfolio.

“One of the things that you see attending innovation meetings and venture capital conferences is that they are not taking on a lot of these smaller devices,” notes Mykleby. “They want organic growth around technologies they already have. Sometimes they won’t even have a conversation because they are afraid of something called IP pollution,” he says. “In other words, they may be working on something in the skunk works very much like the idea being brought to them, and they don’t want to have any sort of questions about who got there first. And so some very good ideas are going unrealized.”

Crowdfunding opens doors that were previously closed, but Mykleby stresses that all of this hinges on the yet unknown SEC rules. “The value that crowdfunding brings is that in order to make a device patentable, often it needs to be reduced to some kind of usable prototype. Crowdfunding, even today, can allow a person to take an idea and realize it so that they can take it to the next step,” he says.

When and why to ask the crowd

Many inventors and entrepreneurs struggle to get funded through traditional methods, and some even find it difficult to get any reception from industry. A lot of times these would-be device manufacturers find their ideas just don’t match up with what a VC is looking to fund. “If you have a physician who has come up with an idea and wants to take it to a working prototype, he or she might only need a million dollars to get it there. A VC often looks at that and says ‘I can put $5 million to work in this idea or $20 million to work in this other idea. I’m going to have to work just as hard for the $5 million investment as I do the $20 million investment, and I want to put more money to work.’”

This choice, says Guy, leads VCs to focus on those that have greater need for cash and that have a quicker exit. Angel investors, by contrast, often help traditionally the middle ground (between the friends and family and the VCs). Such groups have the ability to provide initial fuel, but unlike VCs, they are unable to reach back in their pocket to provide additional funding.

A majority of crowdfunding auctions are set up such that the inventor only gets the money if the market pledges the desired amount (if they are asking for $100,000 and only get $1000 in contributions; they don’t get the $1000). “A neat byproduct of crowdfunding has been that the inventors get to see if the market is saying ‘we don’t think this is a good idea,’” says Guy. “It provides a market litmus test to understand whether or not you have a good value proposition to bring to the market. If you are unsuccessful in your fundraising on a crowdfunding site, it gives you some great feedback as to whether you have a marketable idea or not.” With this feedback, inventors can see that maybe the need for their product is not as dynamic as expected. “It can prevent people from having to come out of pocket putting good dollars after bad,” he says.

Although much of this depends on how the SEC rules, the crowd could potentially enable ideas that may have never been realized before, says Mykleby. In order for a device to make it all the way to market, there is a fairly rigorous pathway, including getting FDA clearance or approval, having a quality system in place, and developing an infrastructure to handle getting it to market. “A small inventor is not going to be able to do those things without some kind of cash,” says Mykleby. “Crowdfunding allows proof of concept and allows the realization of a device to the point where the inventor can take it to the next level—whatever that level might be. It takes a lot of money to get any type of device to market and then the jury is still out as to how the crowd will react to act.”

Crowdfunding for medtech

While the crowdfunding world awaits the final rules and regulations from the SEC, companies like MakerStaker are left to plan as best they can—and then wait. “What they’re looking at is changing the number of nonaccredited investors you can have as well as what the profile looks like for nonaccredited investors,” says Guy. “If grandma has a million dollars in her savings account, how much should she be able to invest in this type of thing? There will be some sort of percentage to your net worth and the SEC is going to want to make sure that investors are not overextending themselves.” Guy says that the SEC is most concerned about is where this new paradigm might be manipulated in a negative way, and so they want to set rules to try to prevent loopholes.

“Crowdfunding in a rewards-based system is allowed in that I get some tangible product back for my participation,” says Guy. “The equity portion was approved with the JOBS Act but they’ve been taking comments for the last 12 months and those regulations have not yet been issued.”

There are several important variables to being successful with a product concept in the device space. One is to have a great idea to solve a problem. Two is to get the fiscal fuel to turn that idea into a working prototype or go to pilot production. The third thing, which Guys says is part of their value proposition, is that people new to product development need advice.

“As the CEO of a startup, I can tell you I ran headlong into obstacles that I didn’t know existed and had to quickly become an expert in many areas. A lot of times I would go to a CPA or a lawyer for general counsel information. Of course, they were glad to send me a bill even though I didn’t really have any money because I was still seeking money to pay for these types of thing.”

Guy and Mykleby felt that having a mentorship program was essential. “We felt the program it was essential to have a variety of categories that an entrepreneur in the medical device space would need in order to take an idea to from concept to commercialization. So we have a list of categories of experts from regulatory to intellectual property, general counsel, contract manufacturing, and a variety of engineers on the site.” The inventor can invite the experts to have a conversation. The inventor gets advice from an industry expert in area where they truly have a need—without having to pay. “The reason the mentors do this is that they all understand business development and they certainly want to have this company’s business once it is up and running. They do a little quid pro quo to give them good advice so that they’re the firm the inventors select once they’re funded.

The MakerStaker team has been recruiting mentors that are experts in their specific field. They will let the inventor and mentor work together to create and provide advice. “Having run an underfunded medical startup, I’m keenly aware of things that one needs to be successful—all the resources you need—that are nested in the big houses and aren’t available to smaller groups unless you’re paying large checks for their advice,” says Guy. “We want to flip the paradigm so that the mentors provide free, good advice to the inventors with the hopes of gaining their business later on.” The result is that it removes not only the financial burden from the inventors but also removes the barriers to market entry from an intellectual and a fiscal side.

The crowdfunding landscape

As a relatively new concept, there are very few crowdfunding firms and even fewer that focus on healthcare. “We see a couple of competitors coming to market on the mhealth side and they have a little experience on the software side, but none of them have any experience with a product where if you dropped it on your foot it would hurt,” says Guy. “Perry and I have a much broader resume of bringing products to market, and we think that type of advice is very important. We’re trying to build that resource—a virtual incubator for the medical device space. And in that aspect we are definitely unique.”

MakerStaker will spend the next six months building out its site from a functional and content standpoint. “We’ve been extremely fortunate to have some early buzz around what we’re doing. We have four projects that have been brought to us by physician inventors that would like to be part of the initial launch. We’re going to take in a lot of applications, choose the most engaging projects, and launch those when the SEC regulations come out,” says Guy. MakerStaker will have both reward and equity offerings, depending on whether the product lends itself to one or the other. Some products, he says, will never lend themselves to a reward-based offering. “We’re waiting for the build out of our site and will launch in the March time frame, but it will be contingent on the SEC providing those rules and regulations so that we can make sure that we have the rights forms and disclosures available on the site.”

For those ideas that are not accepted, Guy says, the firm will provide feedback to those companies, giving them guidance in the areas they need to take a stronger look at and then encourage them to reapply. “In the world of the Internet, content is king, so the better the concepts are that we can put on the site, the greater the likelihood of those projects getting fully funded. And their success will be our success.”

The ­mentors

The mentors will also be judged on the type of advice they give. The inventor will weigh the advice they are given. “We want to make sure that those mentors in a given category that are giving the best advice are listed at the top. Over time, we will start to cull off those who are not giving the best advice.”

The firm has identified some key charter members they plan to tap as their initial mentors. Guy says there has been overwhelming interest primarily because of the business development opportunity and to increase their personal exposure.

“We’ve identified people we think would enjoy the experience and would add a lot of value because that’s going to be part of our value proposition,” adds Mykleby.

“It’s going to be voluntary. So it will be up to the mentor as to how much they’re getting involved. We’re going to recruit members who don’t see their time as completely precious and who enjoy sharing the knowledge they’ve gained through their careers.”

A new opportunity

Access to capital is one of the greatest barriers to market entry in medtech. Knowing how to execute or having the experience in taking something to market are the two biggest hurdles that prevent good ideas from getting to the big medical device industry, at the end of the day, to patients.

VC funding has tapered off as risk aversion to the medical device space set in during the economic downturn. As VCs look at the amount of money and infrastructure that is needed to take a tangible product to market, they are much more cautious.With the introduction of crowdfunding, medtech entrepreneurs have a whole new avenue available to them to turn their ideas into real product that may have never been realized before.