Startupfreude, Leveraged Technology Bets,

& Why Healthcare Tech is an Utterly Frightening Place for Startups

Startupfreude

Yesterday I had a moment of what I like to call startupfreude — guilty pleasure derived from watching another startup get pummeled by fate. In this scenario, a healthcare startup building Google Glass apps raised $16m in funding just days before Google Glass went on indefinite sales hiatus. Oops.

If you’ve built a startup and never experienced startupfreude, congratulations — you’ve either had a much smoother startup experience than the rest of us, or are a better person than I am.

I try to convince myself there’s always a lesson that belies such experiences, however. In this case, the one I’ve taken away is the danger of making “leveraged” technology bets.

Leveraged Technology Bets

I recently finished When Genius Failed. It’s one of those face-palm books about finance: the whole world read when it came out in 2000, said “now that we know about these problems I’m sure somebody else is solving them”, then watched in horror as the same basic issues crashed our financial system in 2008. Oops.

One of the many things that resonate in When Genius Failed is the notion of leverage, or making a bet that’s far larger than you have assets to cover. If the bet succeeds, you win big. If it fails, you lose big… as do all the dopes that underwrote your leverage. Sometimes the leveraged bets are so big they bring down entire markets.

In startupland, we make leveraged bets often because the cost of failure is low. Like the finance world, startupland is a place where most of those making the bets have little to lose, are enamored with big risks that lead to big wins, and live in a culture where second acts are common and celebrated. You bet big on the unproven technology of Google Glass, hoping to ride on a rocket of engineered publicity and consumer mania. Like the hedge fund traders who bet on Russia because “nuclear powers don’t default”, you tell investors and your mom that Glass is a sure thing because Google wouldn’t let it fail. Hindsight is 20/20.

In this way a strong CTO is often like a capable Wall Street trader: able to weigh the size of the potential dividend of adopting a technology today against the risk of it failing tomorrow.

Even if a startup makes a bad bet, though, the truth is that knock-on effects are typically localized, as opposed of recession-causing. Some qualified investors lose their cash, the founders and employees get aqui-hired or end up traveling to Tibet to “find themselves”, and the customers move on. Ultimately, we all admire those that took a chance and rode the rocket (even if, perhaps, we think that the bet was utterly dumb… I mean, come on, this is just creepy), and derive our feeling of startupfruede from the fact that, this time, it wasn’t us that fell on our ass.

What happens, however, if not one startup but a whole industry of them underwrite a bad leveraged technology bet? Then the story could be very different.

Too Big to Fail

With leverage the bets can sometimes be so big that there’s no way to avoid the knock-on effects. One place this is glaringly obvious is in the technology bets the government is making in healthcare.

The unfortunate punchline of When Genius Failed is that the Federal Reserve became so concerned by the potential economic fallout from one single heavily-leveraged hedge fund that it arm-twisted Wall Street’s big banks into bailing the fund out. The author presciently argued that this decision encouraged other traders to take big risks in the future. When those other bad bets came knocking on the economy’s door in 2008, it ended up being taxpayers that had to bail out the banks (and the economy still went to hell).

In healthcare for the past few years, there’s also been a trend of leveraged technology betting occurring — except in this scenario it is federal politicians making the bets… and the healthcare system being arm-twisted into underwriting them.

I’m not even talking about the debacle of healthcare.gov, but far more obscure things like HIPAA, HITECH, and Meaningful Use. These are vague laws turned into labyrinthine regulations that govern pretty much every tiny bit of technology a doctor ever touches. It all started out as good intentions but wound up as a series of leveraged bets on outdated or utterly unproven technologies.

For example: Ever heard of the Direct Project? Don’t worry, neither has your doctor, though he or she is almost certainly going to have to pay for it at some point and will likely never use it. Built a startup with a lightweight, intuitive RESTful JSON API for transmitting health data that people love? You’re still going to have to plop down good money and spend endless hours learning to support a vastly overwrought XML standard called HL7. Ever pulled down your health information via a service called Blue Button? Neither has anybody I’ve ever asked… and I’ve asked a lot. The list goes on.

These leveraged tech bets hit startups the hardest. Experienced investors and potential clients know to avoid startups with exposure to these areas, which forces most would-be entrepreneurs to start working on marginalized ideas that they think are sheltered from the risk, rather than the big ideas that promise to “disrupt” the industry. This, in turn, reinforces the position of established players (who, incidentally, convinced politicians these technologies were good bets in the first place). It all leads to cost bloat that gets passed on to your MD and then, ultimately, to you.

Startupfreude is Really Just Schadenfreude Directed at Yourself

Leveraged technology bets made by governments cause economic drag — a good case in point is South Korea’s bad bet on Internet Explorer. In the case of U.S. healthcare, I would argue that these bets are a significant factor in the enormous spiraling bloat of healthcare costs, which has itself been a factor in preventing a rapid recovery from the recession.

What this boils down to is this: just by being players in the space, healthcare tech startups have to underwrite any and all new leveraged bets that politicians make in the future, no matter how hard they try to plug their exposure to such risks. Meaningful Use, HIPAA, and the Affordable Care Act are still under active “interpretation” by Congress and federal regulatory bodies and could result in new technology mandates that might, overnight, turn a healthy, growing healthcare startup into an untenably leveraged one. It’s usually not long after that happens that investors and clients jump ship.

Which brings me back to the hapless Google Glass healthcare startups. Reflecting on my own feelings of startupfreude, I realize I’m a little jealous of the Glass startups. At least the bad tech bet they leveraged was one of their own making.

Maybe that flutter of pleasure at the misfortune of others, in other words, is recognition that all health tech startups are not in a much better position, and should at least enjoy the pleasure that we made it through yet another day. For my part, as long as I stay neck-deep in this world, I’ll not be ashamed to feel as much — when the axe of leveraged tech hangs over your head, after all, it makes sense to cherish the pleasures you happen to find.

Michael Carroll is VP of Engineering at RubiconMD and a Technologist in Residence at Cornell Tech. He also helps maintain aqua.io and Health Devs, a grassroots community of healthcare developers. A doctor once declared Michael a “walking public health concern”.