10 reasons why health care startups fail
In our roles at MedTech Innovator, a global accelerator for medtech startups, we’ve worked with thousands of early-stage health care companies in cities around the world. We’re proud to play a role in helping new companies get their innovative technologies to the patients who need them.
But we’ve seen a lot of failed efforts, too.
Grounded in science and regulated by the government, health care is a challenging sector. In the life of any startup, there are plenty of opportunities for missteps. And pivoting isn’t as easy as it is for companies developing tech solutions, like a photo sharing app. Mistakes in a health care startup can be fatal.
But that doesn’t mean your company has to make one.
Knowing the most frequent mistakes is the first step to avoiding them. With that in mind, here are 10 of the most common problems we’ve seen that can cause a health care startup to fail and some tips to solve them.
Failure to properly articulate your value proposition
The value proposition is the new elevator pitch. Too many companies in health care describe themselves as “better, faster, cheaper” than what’s already on the market, and their pitch ends there.
But that isn’t enough. How is your solution better? How much faster? How much cheaper than the standard of care? You must be prepared to communicate your unique value proposition from all angles, and you need to understand the health care economics for each stakeholder. Take the time early on to define the standard of care for each of your possible stakeholders and then quantitatively explain how your product improves upon it.
Not having an end-to-end evidence generation strategy
Health care companies are required to amass specific evidence and data to achieve key milestones such as raising capital, regulatory clearance or approval, and obtaining insurance reimbursement or payment. A common mistake is thinking about evidence generation in a linear manner and focusing just on what is needed for the next milestone. This is a common and costly error that can significantly delay time to success.
Far too many startups succeed in achieving a regulatory milestone but then run out of funding before generating sufficient evidence to convince customers to buy their products. To avoid this, start conversations early with all relevant stakeholders about what data they will require. Also consider the Food and Drug Administration’s innovative Payor Communication Task Force, which involves public and private payers such as Medicare and Medicaid, private health plans, health technology assessment groups, and others in the pre-submission process as well as parallel review with the Centers for Medicare and Medicaid Services to potentially shorten the time between FDA approval or clearance and coverage decisions.
It’s never too early to have these conversations.
Choosing the wrong CEO
The CEO is the face of a company, so it’s critically important to have the right person in this role. Investors know that startups need the right CEO at the right time. It’s OK to have a somewhat inexperienced founder as a CEO, as long as she or he has the general qualities that investors respect.
Common ways to tell if you need to replace the CEO — even with an acting CEO — include overconfidence, dismissiveness, arrogance, and a lack of transparency about important details. If your CEO checks any of those boxes, now is the time to make that change, because investors back people not technology. You might also consider if it’s possible that your current CEO would be more effective in a different position.
Staying in stealth too long
To be successful, a company needs to be talking to investors, customers, health care providers, patients, and potential acquirers early and often. Stakeholder input is needed early to avoid mistakes that can kill a company down the road.
Staying off the radar also carries exit risks. Acquisitions tend to happen in groups, because larger companies are competitive. If a rival buys a certain technology, a large player, such as a public company, might want to acquire something similar — and soon. They track and build relationships with companies in their landscapes of interest, and when there is urgency, they move quickly. A company that is in stealth mode too long could easily miss the window of opportunity.
As soon as your intellectual property is protected, start talking to the relevant stakeholders. Delaying these conversations is the one mistake that can lead to many of the other mistakes on this list.
Thinking the direct-to-consumer model will make life easier
Many health care startups develop a strategy that will let them sell straight to consumers so they can skip regulatory approval, which can be time consuming, labor intensive, and expensive. Angel investors with small pockets tend to favor this strategy. The problem is that this relies on the often-flawed assumption that consumers are willing to pay out of pocket for health-related products and services.
Beyond the super-early adopters, though, consumers want their health plans to pay. As a result, consumer health startups often wind up pivoting to pursue a regulated device strategy, but many run out of cash before they get there. Do your homework on this one, and come to an informed decision on whether your startup will do better as a regulated product.
Choosing the wrong initial indication
We regularly see startups whose technology has multiple potential indications. They typically choose the initial indication based on the one the company founder knows the most about — a founder who is a liver cancer surgeon, for example, choosing liver cancer over breast cancer. But this isn’t always the right call, and the evidence generated in the wrong initial indication can drain resources before you have time to pivot.
To find the best indication, do a value proposition analysis on all possible indications and choose the one that’s the most compelling in terms of market size, competitive landscape, and patient adoption. These should inform the decision on which indication to initially pursue.
Product doesn’t fit into existing workflows
Can you disrupt an industry without disrupting people who have important work to do? This is a vital question. You may think your technology will be adopted because of the potential for improved patient outcomes or lowering overall costs, but if it adds steps or changes a procedure, you’re interrupting people — and they don’t like that.
New technology should fit as seamlessly as possible into existing workflows, not delay or interrupt them.
That’s why it is essential to learn every step and every aspect of a customer’s workflow and every person who will be affected by it. A surgeon might love your technology, but if it adds too much work for nurses or technicians, an adoption hurdle looms. Conduct discovery, focus groups, and user testing with everyone in the workflow and in as many environments as possible.
Misunderstanding the payment and reimbursement dynamic
It’s important to know who will be paying for the product and to know how much of the reimbursement will go to it. Misunderstanding the complicated economics of payment is a deadly and easy one to make.
All too often, we hear people pitch us a product and assume they will be able to get the full amount of the payment for the relevant reimbursement code(s). But it’s usually more likely that one-third of the reimbursement will go to the product. Pricing a product without doing the necessary homework on the cost of goods and the reimbursement and payment dynamic can doom a company to failure. There are no shortcuts when it comes to understanding the economics of providers, payers, and other customers.
Putting too much money and effort into pilot programs
Pilot programs are important for early-stage companies, but there’s no guarantee that any given pilot will turn into a commercially profitable relationship. It is woefully common to underestimate the amount of effort it will take to achieve a successful pilot. For a startup with a handful of employees, even a single pilot can take up the attention of the entire team.
That’s why it is important for companies to put the right amount of resources into these programs, but not go overboard on them. A key way to know how much time, effort, and money to expend is to discuss the terms of a post-pilot contract with a potential customer. To help a pilot generate traction and revenue, ask the testers what key performance indicators they will use when evaluating whether to convert a pilot to a contract. Also ask for statistics on how many of the customer’s past pilots resulted in contracts. Getting answers to these questions will help you allocate the right amount of effort and be choosy about your pilot partners.
Staying in your echo chamber
A startup’s goal should be to create a new advancement that will help people all over the world, not just those in the company’s inner circle. That’s why input from leaders and stakeholders who are outside the ecosystem is essential. Relying entirely on local key opinion leaders and the immediate networks of the company’s founders risks making wrong assumptions about the need and potential uses for the technology.
Local support systems also tend to give plenty of applause and pats on the back but avoid giving startups honest feedback for fear. Get on the road, get out of the echo chamber, and solicit honest input from as broad an ecosystem as possible.
Developing medical advancements is a time- and labor-intensive process. Making the wrong call can mean long delays and escalating costs. But just because many companies make mistakes doesn’t mean yours has to.
There are no shortcuts, and there’s no substitute for buckling down and learning as much as you can about your market, your competition, and the needs of your customers and potential acquirers.
Paul Grand is the founder and CEO of MedTech Innovator, a nonprofit global competition and accelerator for medical device, digital health, and diagnostic companies. Kathryn Zavala is the company’s vice president for operations and business development. Together they have evaluated more than 12,000 startups.