5 of the Biggest Mistakes Healthcare Start-up’s Make

I’m thrilled to post my inaugural Medium publication. My name is Branden Fini, and I’m currently a Principal at Providence Ventures, a Seattle-based digital health-focused strategic venture capital firm. We invest in commercial-stage businesses solving the top pain points of the healthcare ecosystem. My introduction wouldn’t be complete if I didn’t mention my one-of-a-kind team of supportive peers and mentors. I owe much of my recent success to them.

If you’re reading this, thank you for taking the time. My goal in my publications is to contribute knowledge to investors, entrepreneurs, industry leaders, and generally curious minds. In my view, I accomplish this by creating original ideas, offering thought-provoking interpretations of original ideas, or sharing practical advice born from my experience as an investor. I hope you enjoy.

I’m an investor, but I make a point to say that I’m a healthcare investor. As an industry, healthcare has so many nuances (more on this in my next post). As such, I wanted to outline the five biggest mistakes I see healthcare start-up’s make. These mistakes are present in other industries, of course, but because of the unique complexities of healthcare, I view these mistakes as especially dangerous for healthcare businesses.

Technology looking for a problem

How many times have you heard that Machine Learning and AI will transform healthcare? If Google Trends is any indication, interest in healthcare AI has exploded since 2016. For good reason, too: AI/ML models have the ability to ingest massive amounts of data, find useful patterns, automate complex tasks, close information gaps, and even predict outcomes — theoretically without human intervention and at incredibly high velocity. Oh, and the ML model improves over time. Of course, there are downsides: the model’s performance is based on the availability and quality of training data, maintenance is resource-intensive, high error-susceptibility, and complex results interpretation.

But these aren’t the pitfalls I’m talking about. Successful companies identify a problem in the marketplace, and build supporting technology (and processes and people) to solve that problem. Misguided companies do the opposite: build technology first, then search for problems to solve. I can name countless companies I’ve met personally that have spent tens of millions of dollars on their “AI technology” and years of time, yet still can’t articulate what problem their solving and what value that solution brings to whom. This includes businesses with super slick tech stacks and top engineers.

Be a pain point-driven company. What industry pain points are acute, and, of those, which one(s) are you dying to solve? Build your business (and technology) around that. Every technology investment you make should directly translate into better solving that problem.

Over-indexing on personal interests and experience

Healthcare is full of emotions. People’s lives and livelihoods are ruined (or worse, taken away completely) in this industry. As such, many entrepreneurs (including successful ones) found businesses because of a deeply personal experience. I love origin stories — they uncover what drives the founder(s), which is a critical success driver and window into their soul.

However, with passion comes bias…what if the market you’re passionate about is simply unattractive? Oftentimes, I see founders invest everything they have into solving a problem they themselves experienced without realizing one or several issues with their business: the market is too small, competition is too intense, who’s going to pay for it?, you’re targeting the wrong customer, your passion and personal experience are insufficient differentiators, among others.

I’m not saying don’t solve a problem that you’re passionate about: absolutely solve a problem you’re passionate about! If a personal experience intensifies that passion, then all the better. Just ensure passion plays its rightful role: passion should not change the way you evaluate the merits and risks of your business; it should simply provide the fuel necessary to endure the rough road to success once you decide which path you’ll take.

Heavily focusing on the technical or clinical merits of the business at the expense of the business merits of the business

This pitfall is a corollary to the first. Many companies, especially clinically-oriented ones (eg. medical devices, diagnostics), forget that their technologies are actually products, not research projects. Or, they should be. A product must deliver some type of value that a customer is willing to pay for. In healthcare, the customer is another business, most of the time. As such, the value effectuated by a product must deliver clear ROI to the target customer. Customer ROI comes from one of two changes: revenue growth or cost savings.

So, DO ensure your technology is robust. However, that’s a necessary, yet insufficient, condition. Ultimately, customers will judge the merits of your product based on the business benefits it yields (while, of course, taking into account the cost for the product).

Not understanding the customer’s budget, incentives, or priorities

Why do I call out “budget, incentives, or priorities” (“B.I.P.”, for short)? Because these realities are not often at the top of entrepreneurs’ list of business evaluation criteria. Instead, their criteria are limited to the common stuff: market size/growth, differentiation, outcomes/ROI, management team, etc. And those are all important. But more stars have to be aligned to maximize adoption potential.

In healthcare, understanding these additional dynamics is especially important simply because the industry is so complex and, in many cases, irrational. You can have a differentiated business targeting a large market, run by a stellar team who can point to tangible outcomes. But if you’re selling to a customer who isn’t prioritizing the pain point that the business is addressing, then adoption will be slow. Likewise, if you’re selling a product that will all but guarantee a 10:1 ROI for a hospital tomorrow, if only they purchase it today, the hospital will not purchase the product if they don’t have the budget for it. It’s very frustrating, but very real.

The more entrepreneurs understand B.I.P., the better equipped they’ll be in not just selling and/or improving the product, but also in pivoting their call point or customer entirely if necessary.

Choosing the wrong customer

Another corollary: in healthcare, sometimes the success of a business is completely dependent on what customer you choose, precisely because of B.I.P.

As a digital health-focused investor, I segment healthcare customers as follows: providers, payers, self-insured employers, and pharma. This isn’t an exhaustive list (there are also ancillary service providers, intermediaries, and others), but it covers the major players. Sometimes, the most sensical customer is obvious: you sell AI-enabled drug discovery engines to pharma. Other times, it’s not obvious: who’s going to pay for a virtual behavioral healthcare offering? Hospitals? Outpatient clinics? Health insurance companies? Self-insured employers?

Choosing the right end-market is hard in healthcare because there are so many stakeholders, all with overlapping and symbiotic incentives. To continue the behavioral healthcare business example: a behavioral healthcare business benefits patients, providers who care for those patients, insurance businesses who are incentivized to take care of their members, and self-insured employers who are incentivized to take care of their employees. But what, specifically, drives ROI for each of these stakeholders, how does that ROI rank in the priority stack, and how much budget is available for behavioral healthcare? (Again, B.I.P.). Turns out, self-insured employers are quickest to adopt most behavioral health solutions because it not only leads to lower medical expenses, on average and in the long-run (emphasis on the long-run, particularly for the most common diagnoses and for people with few/none co-morbidities), but also boosts employer productivity, increases employee retention, and attracts talent. Insurance companies, on the other hand, have nothing to do with employee productivity or talent retention, and wouldn’t enjoy the cost savings benefits of behavioral healthcare investment if the member is gone in less than three years (ie. how often peoples’ insurance company changes through their employer). Of course, there are exceptions: insurance companies do indeed cover various behavioral health benefits despite the lack of clear, short-term ROI. Why? Competition forces them to. More nuances!

The point is that the same company or product can find immense success with one customer market, while facing constant struggle in another.

Choose the right customer.