Start me up
This Round Table is the first in a series of posts on science startups and crowdfunding.
Two weeks ago I was fortunate to attend the Kauffman Foundation’s first Life Science Ventures summit in San Francisco – #lsvs2012 for the Twitterati – which was hosted by UCSF and its entrepreneurial support arm, QB3. Like a lot of startup-related news these days, I first caught wind of the summit in March on my Twitter feed. The two-day, breakout session-filled program featured panel discussions led by key opinion leaders from the Bay Area startup cluster and elsewhere. For example, business model canvas guru Steve Blank (@sblank), founder of Strategyzer Alex Osterwalder, and the CEO of Genomic Health Kim Popovits all spoke about the grand themes and practical challenges of life science entrepreneurship in the Internet Age.
I learned way too much to recount it all here in a single blog post, so for now I’ll focus on one specific topic area that was of keen interest to me as an early stage life science entrepreneur, namely the Small Business Innovation Research (SBIR) and the Small Business Technology Transfer (STTR) programs. SBIR and STTR are basically taxpayer-funded technology transfer grants; in entrepreneur speak, an attractive source of non-dilutive funding.
Most academic trainees, and non-tenure track researchers like myself, are familiar with the alphabet soup of taxpayer-funded basic research grants, especially the R01, the workhouse of the National Institutes of Health (NIH) extramural research program. However, not as many denizens of academia are familiar with SBIR and STTR grants, which can disburse monies commensurate with RO1 levels, i.e., greater than or equal to $100,000 per annum.
I attended a breakout session on innovations in funding therapeutics that was moderated by Doug Crawford, assistant director of QB3, and included Jesus Soriano, program director of SBIR/STTR at the National Science Foundation (NSF). Here are some of the highlights.
Out of $7 billion in NSF funding outlays, $150 million goes toward SBIRs. Sums up to $150,000 over 6 months are available in Phase 1, which is all about proof of concept. Phase 1 peer review assesses intellectual merit, originality, and societal and commercial impact. To use Clay Christensen’s ubiquitous turn of phrase, it must be disruptive. Phase 1 has a 10% funding rate, so be prepared for cycles of feedback and revision.
Phase 1 awardees are eligible for Phase 2, which provides up to $1,000,000 for two years to translate proof of concept into a prototype. At least for NSF vs. NIH-sponsored SBIRs, applicants proposing novel drug discovery platforms, as opposed to drug discovery products, are highly encouraged. To be eligible for SBIR funds, all you really have to is incorporate somewhere – and not necessarily in Delaware. In fact, you should probably incorporate in the state where you envision the startup taking root.
Building off that momentum, last week I attended a crowdfunding teach-in led by patent lawyer Kiran Lingam and Gust.com CEO David S. Rose in a classroom at General Assembly, which is an awesome multicity, educational space with a focus on entrepreneurship. I heard about this event from my cousin, who forwarded me the event Evite.
I attempted to livetweet the proceedings but was thwarted by a lousy AT&T 3G signal. (Granted the antenna on the iPhone 4G sucks, but still). So I resorted to taking notes on my iPhone.
Lingam explained that one of the major provisions of the recently enacted JOBS Act is a reversal of the 70-year ban on “general solicitation,” which was enshrined into law by the Securities Act of 1933, and given regulatory muscle by the Securities Exchange Act of 1934, which created the Securities and Exchange Commission (SEC). The rationale for the ban was that in the financial ruin of the Great Depression, Congress needed to protect unsophisticated investors from unscrupulous securities issuers who helped fuel speculative bubbles during the Roaring Twenties. Exemptions to the ban are given to accredited investors, basically rich people who are sophisticated enough to invest without supervision.
Lingam discussed the gory details of the law and to be honest much of it went over my head. (Say “broker dealer” ten times fast). The upshot is once the SEC issues formal rules later this year, a hypothetical entrepreneur will be able solicit investments from the general public using social and traditional media, but there will still be restrictions on the number of unaccredited investors that can participate. And there are other restrictions in place on the total amount of money that can be raised by crowdfunding, so it’s not a total opening of the floodgates.
David Rose echoed many of Lingam’s points. Most of what he said also went over my head but I grasped his vision of a crowdfunding utopia, which went something like this. An entrepreneur starts by issuing debt (as opposed to equity) to the crowd. Once the venture begins to bring in some revenues, a few percentage points are scraped off to pay back the crowd. Investors may get paid up to 3x or 5x the value of the loan. This modest return is in exchange for the slim chance that the venture becomes the next Google.
If all of this feels a bit ethereal, you’re not alone. Next time I’ll dig into some real-world examples of science crowdfunding.