With President Barack Obama signing the Jumpstart Our Business Startups Bill into law on Thursday, the crowdfunding provision could mark a new era for startups, making it easier to raise money with more investment from new investors fueling early and later stage healthcare companies.
But some investors believe that with less rigorous regulatory checks and balances on company finances, the risk of investors getting burned by fraud will lead to new dynamics in the investment landscape, like novice investors partnering with individuals and groups with more experience.
Three individuals from the investment landscape share their thoughts.
Be careful what you wish for
Tom Olenzak, an angel investor with Robin Hood Ventures in Philadelphia, specializes in IT, healthcare services and medical devices, among other areas. He sees reason for optimism that some healthcare startups will benefit from crowdfunding. “Especially with crowd financing, the healthcare experience resonates with people, they personalize it. Everyone knows someone who has cancer.”
On the other hand the fragmented nature of the healthcare industry means that it takes time for businesses to scale up. The question is how long is a novice investor’s patience?
With all the advantages that new money can bring, Olenzak adds this caveat: “Taking money from individuals is a pain in the neck. Shareholders always want more information.”
He points out that good companies will continue to seek out institutional investment when they can get it. Crowdfunding may be less desirable, even a hassle for some companies because it could magnify the tensions that businesses already face with their shareholders ’ and create a cacaphony of priorities and interests that may clash with those of the company’s management team and pull the company in different directions.
The risk of novice investors getting burned by bad investment choices could have a negative impact on all the crowdfunding money the Act is designed to generate. For that reason, some new investment groups could spring up that partner novice investors with angels and other experienced investors.
There will be winners and losers
Jaine Lucas is an executive director of the Innovation and Entrepreneurship Institute at the Fox School of Business at Temple University and Mid Atlantic Diamond Ventures in Philadelphia. “Those firms adept at creating ‘buzz’ and who are masters in social media have an advantage in securing crowd funding.”
Lucas adds that inevitably start-ups with innovations in information technology (such as cloud computing and mobile app platforms, and software as a service) will virtually always have a quicker return on investment than start-ups based on biotechnology and new pharmaceuticals. “[IT companies] are also relatively ‘de-risked’ because the time to market, dollars to launch and failure rates are much lower. Crowd funding doesn’t change that.”
There will be winners and losers from the new legislation, Lucas said. “Some firms will benefit from the cash infusion initially, but will not have the coaching, advice and counsel that typically come from an angel investment and is often just as beneficial as the funding.”
Despite the new law, launching startups will continue to be a ’crap shoot’ since about half receiving angel investment fail as it is.
Lucas adds that the companies with the greatest chance of commercial success will be the firms with products and services that resonate with and are more easily understandable to a novice investor, like consumer retail products or firms with double bottom lines (those which make profits and provide social or environmental benefits).
It will remove barriers that stymie growth for small businesses
David Shrier, the CEO and co-founder of healthcare growth equity company KeyView Partners, believes the Act will right the wrongs created by well-meaning legislation passed in the aftermath of the Enron and Worldcom debacles to better protect investors but which ended up making it more challenging for startups to go public. “Bear in mind that the biggest abuses leading to Sarbanes-Oxley and Dodd Frank, Enron and Worldcom, weren’t small emerging-growth companies, but it’s those growth companies that have been hurt the most by the new regulations.”
He points out that it will also reduce the financing gap between early and later stage companies by making it easier for early stage companies to get access to up to $1 million a year.
Olenzak, Lucas and Shrier agree that novice investors will need to make investment decisions with “buyer beware” as their mantra. The new, less regulatory environment will mean investors need to be prepared that they could lose their entire investment