Four Red Flags for Digital Health Investors
It’s been a banner year for startups raising money to start digital and mobile health businesses—enough to spark a recent Time magazine article called “The Obamacare Start-Up Boom.” Here in San Francisco, it seems the number of job applicants my own digital heatlh company receives, as well as the number of attendees at health technology meetups, keeps swelling each month.
It’s hard to say whether the investment dollars flowing into digital health startups have reached “bubble” levels, but what’s clear to me is that many angels, and even experienced venture capitalists, fail to appreciate the significant growth challenges these companies face.
Having taken two SaaS companies from garage to profitability—including my current company, DoctorBase—I’ve learned that there are four red flags that investors should watch out for when learning about new startups in this space.
1. The wrong ratio of hustlers to engineers.
I have the privilege of mentoring other startups at the UCSF Entrepreneurship Center as well as judging startups in hackathons like Pre-Backed, whose teams compete for a contract with large provider entities like Wellmark Blue Cross and Blue Shield.
Unlike many other early stage technology startups, these companies usually have three business people for every one engineer. That’s not sustainable. Healthcare applications and services often require integrations into legacy systems, and that takes database engineers, competent network and systems administrators, and seasoned user interface designers who know enough about coding to be familiar with the “front end stack.”
While one brilliant engineer can surround him or herself with three business-minded folks who land that promising pilot, getting beyond the pilot to a full blown repeatable deployment requires another set of resources entirely. Medium- to large-sized customers in B2B healthcare will ask for integrations into legacy systems, change their mind and ask for “critical” features at the last minute, and require startups to navigate a maze of legal, regulatory, due diligence and budget cycle hurdles.
When investing in other digital health startups or evaluating potential early-stage partners, I look for a 3:1 ratio of engineers to business people if the startup has 4 or less employees, a 2:1 ratio if they have 5 to 12 employees, and a 1:1 ratio at 13 to 25 employees.
2. Completely unrealistic assumptions about user acquisition costs.
At a recent digital health startup presentation by a brilliant Stanford student turned health-tech entrepreneur, someone in the audience asked, “How are you going to get doctors to actually use this?”
Her reply was, “Because patients are going to demand it and they [doctors] are going to have to cave in to this demand.”
Wrong answer. Not only does it cost about $2,000 to get a doctor to become an active user of any software or mobile application (just ask anyone who has advertised to doctors in Google or LinkedIn), but healthcare professionals hate being “forced” to do anything, especially in these sensitive economic times where they feel they are the victims of a rapidly changing system.
A founding team whose attitude toward doctors, nurses, and staff is basically, “they’re technophobic idiots who we’re going to teach a modern lesson to,” is in for a rude awakening. They may be able to create some noise by grinding away at a few dozen customers, but healthcare providers by and large will find a way to give the proverbial finger to such startups as they try and scale. After all, there are only about 600,000 physicians and 200,000 dentists in this country, most of whom belong to professional organizations where they routinely share clinical knowledge and vendor reviews.
Startups whose strategy is to obtain patient consumers first should know that it costs more than $22 per click to be in the #1 position in Google Adwords for the keywords “Physician San Francisco.” Oftentimes when I tell that to startups focused on B2C, their spreadsheets and expectations change wildly.
Teams whose business plans call for Internet marketing and social media campaigns to obtain users will need to raise enough money to cross the revenue desert they will likely face to get to operational break-even.
I always ask start-ups how they’re going to “nail the viral loop” for new user acquisition. If they give me a blank stare or ask for a definition, I discount them immediately. It costs a lot of money to play the digital health game to profitability. Simply building something useful does not mean that patients or providers will come. Or stay.
3. Ignoring the adoption requirements of the office staff.
While it’s often a doctor or manager who makes the purchasing decisions in a healthcare practice, it’s the administrative staff and mid-levels (nurses, nurse practitioners, physician assistants and office managers) who will be required to use and adopt the startup’s product or service.
For SaaS or service-based companies, that means that the office staff or mid-levels could be a roadblock if the product doesn’t help them. They’re famous for staunchly refusing to adopt new behaviors and technologies that they don’t absolutely love, and all they have to say to shut down a promising pilot or a month to month licensing agreement is “this isn’t safe for my patient workflow.”
One of the most common mistakes I see digital health companies make is that they focus solely on the decision maker, one who makes value-based judgments on ROI and cost savings. But the true heavy users of such technologies often feel they are being forced to adopt something that they don’t see a clear benefit from. When the staff doesn’t love it, all bets are off. Even the signed contract, which likely has a convenient out for the mid- to large-sized enterprise, is not safe under such conditions.
Successful digital health startups have an innate sense of empathy for their users. Like method actors, they can perceive the user experience from their users’ perspectives. When I see a startup’s blog permeated with end user interviews, onsite visits and phrases like “being in a nurse’s shoes for a day….” (a real blog post by a successful digital health startup in Florida), my level of confidence in the team rises significantly.
4. A belief that more efficiency and “doing good” sell themselves.
I truly believe that our American healthcare system, which is currently riddled with cronyism, fraud, local oligopolies, and price fixing, will change. Eventually.
In the meantime, startups need to understand that simply building something better or more efficient won’t necessarily guarantee adoption or sales.
Many doctors and nurses are jaded about “improving patient experiences,” and rightly so, not because they don’t care, but because they’ve heard these promises for decades from drug companies, device companies, consultants, and now digital health startups. While it’s easy for software types like me to talk about how we’re going to make things better through technology, medical professionals have been actually healing and caring for people most of their professional lives, and many of those promises from vendors ring false to them.
In the face of decreasing reimbursements, increasing costs, and increasing pressure to do more for less, doctors and staff are looking for ways to make their lives easier and their endeavors more profitable. Successful startups teams should focus on that fact and align their products and services with this more imminent need from their customers or end users.
Founding teams that talk about “fixing America’s dysfunctional healthcare system” or “revolutionizing healthcare” will receive a wave of rolling eyeballs from medical providers.
I can feel my eyeballs rolling already.