Out-Law / Your Daily Need-To-Know

Crowdfunding model yet to prove it can be panacea to biotech companies' funding challenges, says expert

09 Feb 2015, 3:00 pm

It has yet to be shown that fledgling UK biotech companies can derive all the capital they need from crowdfunding, despite the reported success of a Cardiff-based company which adopted the funding model, an expert has said.

Cell Therapy raised £691,000 through an offer of shares through a crowdfunding platform operated by Crowdcube, according to a report by the Financial Times. The amount is the most ever raised by a UK life sciences company from crowdfunding, the company has claimed.

"We wanted to experiment with a different model," Ajan Reginald, executive director and co-founder of Cell Therapy, said, according to the Financial Times report. "Regenerative medicine of the kind we are working on is going to change medicine for everyone and this provides a way for anyone to take a stake in it."

Corporate law and life sciences expert Charles Waddell of Pinsent Masons, the law firm behind Out-Law.com, said that crowdfunding may not be the panacea to the 'valley of death' funding gap many fledgling companies in the biotech and medtech industry encounter.

"Cell Therapy has got a very punchy valuation which I suspect it would not have got if it had gone to a venture capital fund," Waddell said. "The angel investors who participate in crowdfunding may not be best placed to value biotech companies and may accept without question the valuations put forward by the biotech's management. This is fine if crowdfunding can provide the cash needed for a biotech company to get to a value inflexion point where the company can achieve a trade sale or initial public offering (IPO)."

"However, if all it does is put off the day when the biotech company needs to do a large venture capital financing round, private investors are likely to see substantial dilution on the value of their shares as venture capital investors typically have a less 'rose tinted' view on valuations," he said.

"Drug development is very expensive and biotech companies typically have a very high cash burn. Raising equity takes a disproportionate amount of management time. Crowdfunding has yet to demonstrate that it can raise the sums management need to be able to focus on taking the company forward and not have to devote more time to raising additional capital six months later," Waddell said.