The potential for crowdfunding, as defined in the JOBS Act, to fundamentally change the nature of capital formation is tremendous, potentially opening up avenues to investment and borrowing that were previously only available to a small segment of the investing community, let along the general public. And one sector that could see truly revolutionary change is health care.
Greg Simon is the CEO of Poliwogg, a crowdfunding site committed to funding early-stage health care companies. Prior to working at Poliwogg, he held senior positions in both houses of congress, acted as a strategy consultant to tech CEOs, and co-founded a patient advocacy non-profit. He talked with Equities.com about how the JOBS Act, crowdfunding, and Poliwogg could bring a new class of investors to the health care industry and help fund a new generation of novel therapies in the process.
EQ: You spoke some at the ROTH conference about how the JOBS Act stands to change the nature of finance in the health care industry. How do you see financing changing in health care over the next 5-10 years and what impacts do you think that’s going to have on both how ordinary people access care and how investors of all types are involved in the development of different treatments?
Greg Simon: So, one of the trends that has been bad for health care is the absence of venture capital for early stage companies. We have the NIH and foundations for very early stage companies and early ideas, and then we have traditional venture capital and institutional capital once a company is near the market. But in between, getting started, we lose thousands of companies not because their ideas fail but because their network doesn’t have the ability to connect them to venture capital or growth capital.
With the advent of the JOBS act, we’ve now unlocked the investment process for millions of people. Right now, only 3 % of the 8 million accredited investors in America have ever invested in a private company. So if you think about the other 97 percent, what has kept them out of investing in private companies including health?
Well, it’s been very expensive because health care companies need a lot of money and before the JOBS act they could only have a certain number of investors. So it made every investor give them a whole lot of money which kept a whole lot of people out of the game because they couldn’t afford to diversify with those levels for minimum investments.
Before the JOBS act, you also could not generally advertise that you’re raising money for a private company. So if you’re raising money for a company that’s working on a treatment for Parkinson’s disease, you can’t tell anyone unless you know they’re wealthy enough. That means you have to go to investors one at a time, and that’s a very lousy way to raise money. We wouldn’t be able to sell many cars if we had to sell them that way.
Now, all of a sudden, the amount of money you need to have to invest in a private company, even if you’re accredited, has dropped enough so that people can get a diversified portfolio of private companies for far less money than you used to need.
And now they can find out about the companies, too. In the health sector, people often didn’t know what was going on out there unless they were professional health investors because nobody could tell them what was going on unless they already knew them personally. And that’s a lousy way to raise money.
So now you can tell the world what you’re doing and people can invest with far less money, which means we’re going to bring millions more people into capital formation. And the area that’s going to help the most is health care, because health care is an area that has huge capital needs. It’s the largest sector of the economy, it’s the fastest-growing sector of the economy, and it’s a 100 percent market. Everybody uses health care, everybody pays for health care, and everybody is going to need health care.
And we’re not going to budget our way out of our current problems, we’re going to invest our way out of them by turning health from a cost to an asset. So instead of thinking of health as a constant drain on your pocket book, people will now realize “Hey, I have diabetes. I can own my disease, my disease doesn’t own me. I can go out and invest in a portfolio of companies that are working to lower the cost of treating diabetes and improve the outcome. And if it works, I get better treatment and I make money.”
In every other sector of the economy, people have those kinds of options of investing in your future. Through indexes, through options, through venture capital, through the futures market. Health has not done this before. So with the advent of the JOBS act and the kinds of products Poliwogg is making, people have the opportunity now to put their money where their heart is in terms of their health interest. They can invest in the companies that are investing in them, that are trying to create new therapies for them but need a lot more money than the venture capital industry is willing to provide.
Now, the venture capital people will tell you “90 percent of our investments fail, therefore we’re investing in too many companies.” Well, that’s ridiculous, it’s the other way around. If you’re a baseball player in a slump, you don’t want fewer at bats. You want more at bats. If you’re having a 95 percent failure rate, you need to invest in more companies and have the 5 percent be a bigger number, not the total be a smaller number.
So that’s why I think, with the JOBS act and with the kind of innovations that Poliwogg is bringing to the market, the individual accredited investor is going to have far more opportunities to invest in the health care industry. And with some of the other innovations Poliwogg is bringing, like public venture funds, the average investor is going to be able to invest in what they care about in a diversified way for a low amount of capital, and that is going to draw a lot of people and money into the sector.
EQ: Do you see crowdfunding and crowdfinance being an active part of the sector in the near- or long-term future? Given the relative success of non-profit organizations in raising money for medical research over the years, do you envision appealing to the public for financing could become a viable strategy for for-profit health care companies in the future?
Greg Simon: Well, there’s two different types of crowdfunding. There’s donation, which a lot of people are doing and that is classic charitable giving just in an online version. But all that does is create more people with better ideas. Then all you end up with are more failures of people who can’t get money to build a company. So we have to combine the interest of Americans for donating to health causes with interest in investing in the companies that come out of those donations.
That’s why Poliwogg is partnering with foundations: we have to be able to fill the valley of death with investment capital. We’re partnering with the Epilepsy Foundation because they have looked at companies and helped companies that they think offer the best help for treating epilepsy. But they also realize that those companies are going to need more private capital than their donors can provide. So we work with them to find the best companies, and then we will work with them to market those investments to their donors as well as to the rest of the world so that we can bring more private capital into these companies.
Poliwogg is in the business of raising $2 to $10 million per company. So that means $15-20,000 per investor as compared to $200-500,000 per investor for traditional biotech investments. But the thing about crowd equity, which is what Poliwogg does, is it allows far more people to be involved. It’s still a significant amount of money, $20,000 is still real money where I come from, but it’s not $200,000.
By appealing to the 97 percent of accredited investors who’ve never made a private investment, you’re able to bring in a lot more people into the game, which we think will lead to a lot more of these companies being able to at least test their ideas so we can find out if they will work or not. So the crowd donation is an important phenomenon, but we’ve gotta have crowd investment so that the donations will make a difference.
Greg Simon is the CEO of Poliwogg, a firm dedicated to finding innovative health care investments and connecting them to capital.
