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Book review: The crowdfunding revolution: how to raise venture capital using social media.

The crowdfunding revolution: how to raise venture capital using social media

Kevin Lawton and Dan Marom

McGraw-Hill, New York, 2013, 224pp., $35.00

ISBN: 9780071790451

FUNDING IS A perpetual topic for life sciences startups. Historically, venture capital (VC) funding for this sector has been among the highest of all industries. In both 2011 and 2012, VC funding for biotechnology companies ranked second after funding for software. (1) However, VC funding for the sector has been on the decline since its peak in 2007, measured both in dollar amounts and in number of firms participating in biotech financings. (2), (3) It is under such financing circumstances that the authors Kevin Lawton and Dan Marom argue the merit of crowdfunding.

In the book an introduction to crowdfunding was not given, and it is not needed. Crowdfunding platforms, such as Kickstarter and Indiegogo, have already made headlines by helping entrepreneurs raise millions of dollars in funds. (4) In 2012, congress passed the JOBS Act which included a provision for equity-based crowdfunding. (5) There is no doubt that a potential disruptive force in startup financing is building up in the U.S. Despite this excitement, there are key issues specific to the life sciences industry that may impede the widespread use of crowdfunding. First, can it raise sufficient funds to satisfy the intensive capital needs for drug and device development? Second, will regulatory requirements make it difficult for crowdfunded startups to obtain follow-on investment from VCs and institutional investors?

Lawton and Marom's goal is to convince the reader that crowdfunding will displace VC in the early stage financing of startups. Their argument lies on the observation that increased rate of technology turnover has led to a shorter technology generation-resulting in less time on market. The authors assert that the VC industry is inefficient at the early stage because firms rely on the knowledge of an exclusive group of individuals and thus are ill-equipped to handle the rapid pace of change. This reason is used to explain the observation that VC firms have shifted toward less volatile later-stage deals. On the other hand, the authors claim, due to the rise of the internet as a communication medium, individuals can connect and contribute their expertise as part of the crowd. The authors go on to explain terms such as "the collective IQ" and other reasons why crowdfunding will overtake VC funding by being more efficient in identifying the best ideas and allocating capital. This is what the word revolution is referring to in the book's title.

Lawton and Marom's revolutionary ideas are surely intriguing for entrepreneurs who have been following recent trends of the VC industry. Their argument on the evolution of innovation development extends beyond the uses for crowdfunding, and further toward the crowdsourced execution of ideas. The shrinking role of experts and the rising significance of collective wisdom brings to light a new, and perhaps inevitable, way of human innovation. In future workgroups and product development teams, efficiencies created by increased connectivity due to the internet must be utilized. The authors offer a compelling argument for this shift.

However, the book does not discuss how to actually raise VC funding via social media, as suggested by its subtitle. VC funding implies equity crowdfunding, and the Security and Exchange Commission (SEC) rules on this matter have yet to be finalized as of this writing. Instead, Lawton and Marom discuss tips on how to successfully start and run a campaign on leading donation-based crowdfunding websites, such as Kickstarter. Readers who were expecting details on how to actually raise equity financing may be left disappointed. However, the goal behind cultivating a loyal supporter group should apply to equity crowdfunding once SEC rules are finalized. Lawton and Marom do touch briefly on regulatory aspects at the end-but more as evidence to oppose the restrictions within the JOBS Act. This is nonetheless informative from a policy standpoint.

Now onto the book's relevance for the life sciences. Biotechnology and medical devices are characterized by long development cycles and appear to be exempt from such ideas, if only for the time being. The authors identified such capital intensive projects as being beyond the scope of current crowdfunding platforms. The patent system is also briefly discussed, another potential roadblock for biotechnology crowdfunding. While the book is currently more relevant for less capital intensive projects, it would be prudent to keep an open mind and an eye out for changing models. There is already a trend in more patient-driven drug development and the FDA has recently launched the FDA Patient Network to stoke participation from patients. (6), (7)

What the book lacks in the "how" of crowdfunding in the present, it makes up for in the "what" of crowd-based innovation of the future. While prospects remain uncertain for crowdfunding in the capital and regulation intensive life sciences industry, Lawton and Marom's book serves as an effective primer-or vaccine-and prepares the mind for the next disruptive model of early stage financing.

Received: June 3, 2013

REFERENCES

(1.) PricewaterhouseCoopers and National Venture Capital Association. MoneyTree Report. New York: PricewaterhouseCoopers, 2013. [Online]. Available at: https://www.pwcmoneytree.com (accessed 27/05/13).

(2.) Rockoff, J.D. and Tam P. (2012) Biotech Funding Gets Harder to Find. The Wall Street Journal, 16 Mar, http://online.wsj.com/article/SB10001424052970203961204577267814201399918.html, accessed June 2, 2013.

(3.) Booth, B. (2012) Where is Everyone? Biotech's Dwindling Number of Venture Firms. Forbes, 23 Jul, http://www.forbes.com/sites/brucebooth/2012/07/23/where-is-everyone-biotechs-dwindling-number-of-venture-firms/, accessed 2 June 2013.

(4.) Kain, E. (2012) On Kickstarter Two Projects Pass the $1 Million Mark in a Single Day. Forbes, 13 Feb, http://www.forbes.com/sites/erikkain/2012/02/13/on-kickstarter-two-projects-pass-the-1-million-mark-in-a-single-day/, accessed 27 May 2013.

(5.) Colao J.J. (2012) Breaking Down the JOBS Act: Inside the Bill that would Transform American Business. Forbes, 21 Mar, http://www.forbes.com/sites/jjcolao/2012/03/21/jobs-act/, accessed 27 May 2013.

(6.) Swan, M. (2009) Emerging Patient-Driven Health Care Models: An Examination of Health Social Networks, Consumer Personalized Medicine and Quantified Self-Tracking. International Journal of Environmental Research and Public Health 6 (2): 492-525.

(7.) U.S. Food and Drug Administration. The FDA Patient Network. Silver Spring: U.S. Food and Drug Administration, 2013. [Online]. Available at: http://patientnetwork.fda.gov (accessed 03/06/13).

Journal of Commercial Biotechnology (2013) 19(3), 76-77. doi: 10.5912/jcb.621

Steven S. Ma is a biomedical research associate based in Maryland, USA. He is interested in bioentrepreneurship and will be attending Duke University to earn his MBA (class of 2015). He received a B.S. in biology from Oregon State University in 2010.
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Author:Ma, Steven S.
Publication:Journal of Commercial Biotechnology
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Date:Jul 1, 2013
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