Healthcare Startups: Common Mistakes and Lessons Learned-The HSB Blog 6/14/21
Our Take:
Telehealth usage is increasing at a rapid pace as are the number of startups who are commercializing the use of telemedicine and digital healthcare tools. There are common mistakes that these startups can avoid as they begin to operationalize these tools. Some of the most common mistakes pointed out by Forbes and our recent presentation in collaboration with Georgia Bio include lack of diverse leadership teams, improper networking, unfocused go-to-market plans, and inept founders and strategic partnerships. There are approximately 63,703 startups in the United States of which 2,500 are healthcare startups (as of 2019) with an overall failure rate of 90%. In order for startups to succeed and avoid the most common mistakes, they should prepare beforehand, and spend money in the initial phases which will eventually lead to more cost savings and success in the long run.
Key Takeaways:
Being coachable and being realistic about your limitations, understanding the sales cycle and customer discovery and being conservative and realistic as possible with investors are key skills for founders
Despite lacking early capital, startups should look to advisory boards, non-dilutive funding often available through grants and their advisors network of connections
While there were almost 64,000 startups in the U.S. in 2019 and 2500 healthcare startups, with a failure rate of approximately 90%
While every startup has its own unique set of opportunities and challenges, many tend to repeat a common set of mistakes that can be looked at in a five-part framework: founding, strategy/vision, funding, execution, scaling or growth
The Problem:
Healthcare accounts for approximately 18% of U.S. GDP amounting to a $640B industry that is projected to reach $1.3T by 2025 according to Pitchbook. They estimate that enterprise health and wellness startups raised approximately $8.1B over 330 deals in 2020 which was up over 80% in dollar amount with average deal size increasing to $150M from approximately $37M. According to Venture Scanner there were approximately 2,500 healthcare startups in the United States as of 2019. According to Fallory 20% of startups fail after one year, 30% of startups fail within two years and 50% fail within five years and the overall failure rate for startups is 90%, While there are numerous general and unique reasons for startup failure, lack of success are often traced to errors made in the following areas: 1) the founding principles of the company, 2) strategy or vision, 3) funding, 4) execution of the business, and 5) scaling or growth of the business.
The Backdrop:
While digital health was already growing rapidly before the Coronavirus pandemic, with the arrival of the pandemic and the waiver of many regulations limiting telehealth, usage of telehealth and other digital health tools as well as funding rose dramatically. For example, in 2020, global investments in healthcare startups reached a new record of approximately $81 billion in equity funding across at least 5,500 deals in North America, Asia, and Europe. To look at what may separate the winners from the losers and what pitfalls current healthcare startups should seek to avoid, our founder Jeff Englander recently moderated a session at the Georgia Bio MedTech and Digital Innovation Summit. This panel , entitled, “Startups: Common Mistakes and Lessons Learned”, featured Mr. Englander, Steve Tolle, partner at HLM Venture Partners and Nakia Melecio, Startup Catalyst at the Advanced Technology Development Center (ATDC) of the Georgia Institute of Technology. Using the framework noted above, the discussion highlighted a number of issues.
With respect to issues that arise when founding a company Mr. Tolle noted that one of the biggest mistakes he sees is founders lacking or losing focus and failing to have a unique value proposition, Mr. Englander added that in finding your company’s own unique value proposition, startups should not seek to imitate the latest and greatest success as each company is unique. Mr. Melecio noted that new companies, particularly those that are making use of a university incubator or accelerator often fail to take advantage of all of the resources made available to them like subject matter experts (SMEs), executives-in-residence (EIRs), technology transfer assistance, etc.
In terms of strategy and vision, two risks that were noted were the “celebrity CEO syndrome” and the “shiny penny syndrome”. Mr. Melecio defined the celebrity CEO syndrome as “where the hype around the founder doesn’t match the hype around the tech”, adding that “the technology and the problem you’re trying to solve should be the rock star”. Mr. Tolle defined “shiny penny syndrome” as startups letting their strategy get corrupted away from the original intent of the business by “going after something just because someone else got it”, not because it helps you reach your goals.
Continuing with the five point framework, the panel then looked at the issue of funding. Mr. Englander began the discussion by noting that although the recent interest in healthtech and accompanying high valuations are often perceived as a positive they can have a downside as well. Mr. Tolle agreed noting in highly valued market like this companies may often stretch for an artificially high valuation but that may hurt them later. In addition, Mr. Tolle noted that many companies often make a mistake by taking too much convertible debt initially leading to valuation issues or problems should they need to raise money later. Mr. Melecio stressed that startups, particularly those that are coming out of academic labs, often fail to take advantage of non-dilutive financing and fail to de-risk their investment by accomplishing as many milestones as possible before seeking institutional funding. Mr. Englander also raised the issue of new entrants like private equity entering the market and potential risks that entailed. Mr. Tolle added that companies often don’t differentiate between the underwriting criteria that venture capital and private equity investors have to underwrite too and that can be a mistake.
As companies move from the funding of business plan to execution phase the panelists noted a number of issues they should address. Mr. Englander noted that many companies lack a strong operating person or COO to maintain the focus necessary (noted earlier) and keep the company following its business plan. Mr. Melecio advised that many founders are not “honest with themselves about their limitations” and often neglect to consider bringing in a talent advisor or human resources consultant to advise them on helping find the right personnel for the business and help the founders evaluate their own roles within the company as it grows. Along those lines, Mr. Tolle pointed out that many startups often lack formal advisory boards and fail to meet with them regularly, suggesting that founders often rely on friends and family who are not true experts and who will not “speak truth to power”.
Finally, in terms of the scaling or growth phase, Mr. Tolle advised that too often startups think nationally, advising startups to remember “healthcare is still a very regional and local thing, it is a lot of word of mouth between hospital CEOs or between hospital CIOs, or between providers.” Mr. Melecio also cautioned that as they grow company’s too often lose sight of “what problem they're trying to solve and ensuring how close the alignment is between your business model and their business model.” Mr. Englander and Mr. Tolle stressed that startups often make the mistake of giving away too much when trying to land a big contract with major partners, particularly those that are asking for exclusives to become part of their vendor network.
Implications:
Healthcare startups have an increasingly high failure rate given the risk averse culture, the siloed nature of the industry and the length of the sales cycle. However future founders can learn from the mistakes of previous startups and use them as lessons learned as they move forth with their new ventures. Keeping with the five part framework outlined earlier, below are some steps that startups can take to address the common pitfalls, to help ease the sales process and increase chances of longevity and success according to Englander, Tolle and Melecio.
In terms of founding a company, Tolle stressed the importance of “getting traction” and that in healthcare “adoption is always the hardest part”. Mr. Englander noted the importance of startups taking the time to understand what they are really good at and positioning that correctly in the ecosystem. Mr. Melecio cautioned that for academically driven startups it is important to know where the IP will sit in the market, what it will be valued at and which tools may be open source and which ones you can protect.
As they move forward into developing a strategy and vision, Mr. Tolle recommends the importance of “having a plan and critically and conservatively assessing where you are against that plan.” Mr. Melecio advises new healthtech companies to keep in mind that strategy is very different for every technology “drug discovery, medical devices, etc. all have very different runways, different pathways, and intent regulatory environments...you have to think about healthcare in its entirety and its whole value chain.”
In terms of funding Mr. Tolle advised startups to be conservative in doing Series A and B rounds, particularly if they expect to need additional funding as of they get a valuation they have to “grow into” it can cause them to have to do a future down round which could lead to conditions and structures that would hurt them in the future. In addition he advised seeking to align themselves with angel or family office investors who are often more mission driven than institutional investors. Mr. Melecio stressed the advantages of Small Business Innovation Research (SBIR) and Small Business Technology Transfer Program (STTR) funds and other non-dilutive sources that allow emerging companies to run pilots and work and hit milestones thus de-risking the technology before going for institutional investment.
With respect to execution both Mr. Englander and Mr. Tolle cited the need for operating talent but differed on ways to acquire the expertise. Mr. Englander suggested analyzing founders skill set or hiring a dedicated person with operating expertise, while Mr. Tolle suggested looking at a fractional hire. He added that “having the discipline [in sales forecasting] to know when to call something at a different stage in your pipeline and someone with the skill to do that is really important. As noted earlier, Mr. Melecio noted the importance of a dedicated talent advisor to both analyze the needs of the company as a whole and the skillset of the founders to determine if more permanent help at the senior level needs to be brought in.
When looking at what new healthtech ventures can do to avoid pitfalls during the scaling or growth phase, Mr. Tolle strongly recommends the use of a formal advisory board that meets regularly, potentially with an ex industry executive who can help you in the market when you need it. All of the speakers noted the importance of drawing upon advisors and consultants who have strong networks who help you in growing your business. Along those lines, citing the local/regional nature of healthcare in general, Mr. Tolle advocated establishing “regional beachheads” to gain traction, pointing out that a startup's “best salesperson is often a customer talking to a friend of theirs on the golf course or at a conference.” In addition, Mr. Tolle also cautioned that when contemplating a partnership with an established industry player, consider how they are aligned to your business and how they will get paid for talking about your business observing that if there is no alignment it is unlikely to benefit your business.
Finally, each of the panelists were asked to give some parting advice about actions startups could take to avoid mistakes going forward. Mr. Tolle advocated founders being “as conservative and realistic as possible when talking to investors”, Mr. Melecio emphasized the importance of understanding the sales cycle, the basics of customer discovery, understanding the healthcare ecosystem (who you’re talking to and why) and who’s paying for it. Mr. Englander concurred with earlier comments about founders being coachable and highlighted “the importance of being honest with yourself and your limitations” in order to be able to recognize when they needed help.
