Path Opens for Physicians to Invest in Healthcare Startups

This article is the third in a 4-part series about biotech and healthcare investing. Read the first article here, and the second one here.

No matter what form it takes, the funding of medical research is critical to our future — and to the future of our children and grandchildren. It’s the only way for us to alleviate and perhaps eliminate some of the suffering we as an extended medical community witness daily.

Furthermore, medical research is especially prone to serendipity — in many instances, researchers seeking answers for one disease have discovered a solution for something entirely different. For example, while investigating a potential treatment for cardiovascular disease researchers found something entirely different. Enter Viagra.

But fortuitous results, whether intentional or not, cannot occur without patient, ongoing research — motivated by all the right reasons — as well as a desire to alleviate human suffering, intellectual curiosity, and the hope for significant financial gain. Experience also tells us that the more ways a particular problem is attacked, the greater the likelihood of ultimate success. That’s why it’s crucial to find new ways to fund promising early-stage startups — these companies need maximum support from the greatest possible number of people in order for them to realize their (and our) goals.

The profit motive is a critical catalyst to creating results. Because of the sheer magnitude of challenges in healthcare, traditional sources of capital — government grants, venture capital, etc. — are not sufficient to explore the many exciting ideas in medicine. The ability to create widespread, stable, and interested pools of investor capital is critical to enabling a larger number of these ideas to reach critical milestones and create value. And, it stands to reason that the more enterprises that reach these milestones, the greater the likelihood of real improvements — both evolutionary and revolutionary. The experience of the past 30 years informs us that real financial gain accompanies these accomplishments.

Many startups show great promise (and could potentially lead to great profits), yet never reach the clinical stages. They fail due to a lack of funds. The narrowness of the existing funding universe simply cannot supply sufficient capital — and the average investor, who may have wanted to lend support in getting such initiatives to the clinical stages, had no way to do so. Venture funds typically have very high minimum contributions and angel groups often require a significant time investment, and tend to be geographically concentrated.

Invest in what you know

As discussed in my previous article, the passage of the Jumpstart Our Business Startups (JOBS) Act has opened the path for the average investor to support early- to mid-stage startups. One result of this legislation has been the emergence of online investment platforms. Physicians — along with other individuals — can now invest in those private companies that most interest them.

We physicians have a special advantage in the field of life science investments since we have direct professional knowledge and experience. There is obviously no guarantee of success, and early-stage investments are high risk, but a limited number of today’s startups will lead to tomorrow’s game-changing medical innovations. Isn’t it at least plausible to suppose that a knowledgeable investor can tip the odds (even slightly) in his or her favor?

Benefits and risks

A company seeking funding on an online platform will specify a range of capital it wants to raise. Funds received from investors are typically held in an independent escrow account pending achievement of the specified minimum commitment. If this minimum is successfully raised in a pre-determined amount of time, funds will be released from escrow to the company. If the minimum dollar amount isn’t reached during the set period, then the money will be returned to investors.

Online investment platforms share some similarities with donation crowdfunding in that it is a way to raise money for a given cause or project from a particular self-assembled crowd.

Here are 5 primary benefits of online investment platforms, along with a few words of caution.

1. Show and tell

The JOBS Acts has removed some of the major obstacles that potential investors once faced in funding private equities. Private companies are now allowed to publicize that they are seeking funding, so individuals can evaluate investment opportunities as they arise. Since this information is available online, the process is more transparent and easily accessible.

2. Have it your way

As a result of the JOBS Act, individuals can now invest smaller sums of money than with many traditional capital markets vehicles. Minimum investments can be as little as $1,000. Therefore, you can invest in a number of companies conducting research on a particular malady or you can opt to invest in a combination of start-ups, in particular areas such as regenerative medicine, digital health, health IT, bioinformatics and orphan diseases, or by stage of development.

Diversification — repeatedly proven to be the single best most important investment strategy, and one which all successful professional investors follow — is now achievable in early stage-private company investing. For the first time, you can build a portfolio of investments in private healthcare companies, with a reasonable outlay of capital and without paying excessive fees to professional managers

3. Stay connected

Getting online feedback, advice, and input from physicians — and other individuals — from all over the country is a valuable resource. You can connect online with like-minded investors who are interested in the same companies you are, but who may have additional information about the company to share. The online community is a great way to gain insight and to share your insight with your fellow investors.

4. Take control

Having direct control over your investments is extremely beneficial, and online investment platforms make this concept a reality. You know exactly where your investments lie. You can choose precisely where, how, and when you invest your hard-earned dollars.

5. Invest with impact

Online investment platforms allow investors to secure timely information on companies they deem to be doing compelling and meaningful work. You can locate companies focusing on research you’re passionate about — and you can even reach out to the management teams doing the work. Wouldn’t it be nice to invest in causes that are meaningful to you and, at the same time, reap the rewards of potentially profitable investments?

Risks

It’s important to note that investing in startups (especially early-stage startups) is risky business. Just like any other high-risk investment, there is no guarantee of success no matter how much research you conduct. Although the upside definitely exists, so does the potential to lose everything.

These investments are not publicly traded and are illiquid securities involving an indefinite holding period; they are intended for investors who do not have a need for liquidity and can afford to lose their entire investment. Given the risks, it’s essential to do your own homework, to review the information featured on the online investment platforms, and to use sound judgment.

Louis Pasteur famously said, “Chance favors the prepared mind,” and nowhere is this more true than in medical research and investing. You must be diligent, thoughtful, and skeptical. Uncertainty and risk will remain regardless of how much research you sift through and how many people share their points of view with you.

The good news is that the more clinical trials that make it up to bat, the better the chance of hitting a ball out of the park. Online investment platforms are compelling, efficient, and innovative ways to get more players in the game.

Rania Nasis, MD, is a Managing Director at Poliwogg, a financial services firm transforming healthcare investing. Its online investment platform enables accredited investors to access and directly invest in innovative healthcare and life sciences companies. Contact Dr. Nasis at rnasis@poliwogg.com.

Private investment marketing and other broker-dealer services are currently offered through a partnership with SDDCO Brokerage Advisors, LLC, member FINRA/SIPC ("SDDCO-BA"). Poliwogg and its affiliates are independent and unaffiliated with SDDCO-BA. All such services offered by Poliwogg-associated persons are done so in their capacities as registered representatives of SDDCO-BA.