5 Lessons that Innovative Healthcare Execs Can Learn from Venture Capital
Over the past decade, health insurers and providers have placed a tremendous amount of focus on innovation. They stood up new departments, invested in accelerators and venture funds, and created a lot of press around innovation endeavors. But real innovation in healthcare is like Big Foot, its existence is widely reported in the press but there is no real hard evidence that it actually exists.
In my previous life I advised big healthcare incumbents at Goldman Sachs and then invested in them at OrbiMed. These days I run a digital health startup that is funded by the venture arms of big insurance companies like AXA and Independence Blue Cross (via Dreamit). I meet with executives from large healthcare companies everyday to help try to solve their biggest operational problems with innovative products and services. What I have seen over the past several years is at once both frustrating and encouraging. There is a tremendous amount of untapped potential for innovators and incumbents to work together. Both sides recognize the opportunity and are doing everything in their power to capture it. And while there are a lot of tactics innovators can adopt to be better partners, I think the majority of the onus falls on the BigCo’s to systematically change the innovator/incumbent relationship in order to create a collaborative ecosystem without all the inertia and friction that currently prevents positive change.
Currently, there are enough entrenching market forces and complexity in healthcare to prevent a disruptive company from taking over market share rapidly like Uber did in transportation. Yet, eventually with enough time and funding, the companies who create the products that do the best job at creating more enjoyable, effective, and efficient care will win.
So what can the big guys do to ensure they remain the big guys over time? Well, they can start by learning from the progenitor that has spawned the majority of the most innovative companies over the past 30 years: the venture capitalist. Here are some proven strategies that VCs have perfected in order to ensure the best innovations survive and scale.
1) Create a Portfolio of Innovations — Accept and learn from failures, spread the risk over many projects
VCs think of their investments in the context of a larger portfolio, requiring the ability to accept (and learn from) failures. Venture capitalists assume that 7 out of 10 ideas will fail, 2 will break even, but that last 1 will be a home run. By contrast, healthcare organizations will only invest in a program if it seems a perfect, risk free win for all stakeholders. Lots of very smart people have analyzed why healthcare innovation is hard, but I believe that the myopic intolerance of failure in any form and extreme risk aversion is the numero uno obstacle we face to creating a better system.
2) No good money after bad — Eliminate the Sunk Cost Fallacy and stop supporting legacy systems if they are no longer the best choice
In VC circles, continuing to support failing companies is called “throwing good money after bad,” while academics prefer the phrase “sunk cost fallacy.” We see the sunk cost fallacy rear its ugly head all the time with big companies. For example, I have witnessed large hospital systems who continue to spend millions of dollars a year trying to get dinosaur Electronic Medical Records and back office IT systems to continue to work, simply because they have already substantially invested significant time and money there. The better choice is often to write-off the sunk costs and go with a better, more modern system.
3) Double down on the winners — Rapidly evaluate and scale innovations that are working
A key strategy for maximizing VC gains is doubling down in the subsequent fundraising rounds of portfolio companies that are doing well. However, a common theme amongst health startups that fail is often “death by a million pilots”. In other words, the innovator has a lot of customers that want to try out their product in small populations on the cheap but none step up to the plate and scale it up to large populations with large fees attached. Sometimes this failure to scale is because the startup did not adequately perform the job their product was hired to do. Often, however, an innovator that would have been successful at scale is not able to buy enough time in the market to survive. In order to be better partners, incumbents should create a process to objectively review their innovation portfolio. If you don’t have plan to scale up the winners, you’re not ready to truly innovate.
4) Shoot for the moon — Invest a little money in high risk but high potential projects
VCs always save a little space in the portfolio for moonshot investments that are extremely risky and likely to fail. However, in the off chance these ‘lottery ticket’ investments actually work, they can re-define whole industries. We see too much incremental innovation coming out of large companies due to extreme risk aversion. We need more disruptive innovation, projects that have potential to change the way we think about health care.
5) Deal Velocity — Move fast and fix things
Deal flow, the volume and speed at which potential deals move through a VCs pipeline, is crucial to the success of any investor. The problem in the world of healthcare is that typical sales cycles are 12–18 months. This glacial pace kills startups and inhibits innovative ideas from coming to the market. We can do better! Create a standardized innovation intake process to rapidly evaluate the project’s value proposition, potential impact, and risks (legal, regulatory, patient safety, financial). Force your team to get to a yes / no decision as quick as possible. Rinse, repeat.
I love thinking about corporate innovation and spend most of my ‘free’ time learning about it (currently reading and highly recommend: Competing Against Luck by Clay Christensen). I’m sure my opinions are biased by my experiences. Let’s start a conversation. I’d love to hear from those on the other side of the table. Comment on this post, email me, call me…let’s chat.
