City AM: How crowdfunding will revolutionise R&D – What platforms offer the world’s most innovative businesses

City AM

by Harriet Green

Iriss Medical recently closed a round on Seedrs, 197 per cent funded. The company makes an innovative medical device which performs automatic eye tests aimed at the early detection and prevention of lazy eye in children. It raised £491,387 for 4.92 per cent equity.
Over the past decade, donation-based crowdfunding has played a reasonably prominent role in helping to fund technological development. DIY robots have been funded on Kickstarter, along with drones and 3D printers. In the US, it has become an alternative go-to for science researchers struggling to get grants. Experiment.com, for example, is a platform devoted to donation-based crowdfunding of scientific projects. It’s backed by Bill Gates, who writes on the website: “this solution helps close the gap for potential and promising, but unfunded projects”.
But as the crowdfunding industry has evolved, businesses which have in the past looked to donation-based funding have started offering equity to investors. Iriss is just the latest example.

PRACTICALITIES AND DEFINITIONS

Yet although increasing numbers of tech businesses are turning to equity crowdfunding, provision for research and development (R&D) projects – particularly for firms that are still at the pre-product stage, but also those that are pre-market – is still extremely limited. “You generally see companies that have a prototype or are on a clear path to have a product. The (usually donation-based) crowdfunding supports the commercialisation of the product,” explains Thomas Tanghe, an associate at Space Tec, which last year authored Crowdfunding Innovative Ventures in Europe for the European Commission. “R&D isn’t very application driven generally – otherwise, you’d call it product development,” he adds. This makes offering equity and debentures very difficult – investors aren’t just betting on a high-risk startup, but often on a model with no clear path to revenue generation.
But does this mean that R&D and equity and debt crowdfunding simply aren’t compatible? Not at all, says professor Raghu Rau, director of research and head of finance & accounting at the Cambridge Judge Business School, who expects to see the market take off over the next three to four years. “R&D doesn’t work well for banks – they’re giving money based on financial ratios, provable numbers. R&D is, by its very nature, nebulous and intangible. If you can’t get funded on the open market, crowdfunding enables you to raise money from an equity market without going public.”
One of the reasons crowdfunding as an industry has taken off, Rau says, is that it decreases upfront costs and the cost of monitoring – investors make a direct assessment themselves.


Iriss Medical’s device performs automatic eye tests aimed at the early detection of lazy eye