The Five Reasons Why VC-Backed Healthcare Companies Fail and What to Do About it

— Video Transcript —

FIVE REASONS VC-BACKED HEALTHCARE COMPANIES FAIL DURING THE STARTUP PHASE…
AND WHAT YOU CAN DO ABOUT IT

MODIFIED VIDEO TRANSCRIPT

This is Matt Tucker and these are the FIVE REASONS VC-BACKED HEALTHCARE COMPANIES FAIL DURING THE STARTUP PHASE…AND WHAT YOU CAN DO ABOUT IT.

Before we get too deep into this video, I’m going to ask a few questions just to make sure that you’re in the right place, watching the right video, and there’s absolutely no chance that you will be wasting your time at all.

If any of these things sound familiar, keep reading:

• If you’ve lost confidence in picking great products that match market needs this video is for you.
• If you think decision-making by insurance payers is mysterious this video is for you.
• If you spend more time validating leadership than you do products this video is for you.
• If you feel like your technical founders are barely keeping their heads above water this video is for you.
• If leaders of companies in your portfolio feel that all they need to do is get the product on the market and it will sell itself this video definitely is for you.

You should also continue reading:

• if you want to increase your hit rate
• if you want to understand where healthcare overall is going in the future
• you’re getting the feeling that your technical geniuses need help figuring out how to make money from their innovations
• if you want to make sure that you’re aligned with big device or Pharma to get a big exit

Who am I?

Because it’s impossible to look at your business like an outsider, and so easy to become inwardly focused and miss opportunities, I help companies identify ways to innovate their business models so they can accelerate growth.

It’s also very hard to keep up on the trends that are going on in healthcare today and be able to navigate the ecosystem successfully. I help companies make better strategic decisions so they can avoid mistakes that could either delay revenue generation or could create even bigger problems.

Over the course of my career, I’ve been a catalyst for product and portfolio growth and organizational transformation.  I’ve had several diverse experiences growing products and portfolios in large multinational companies like Baxter Healthcare and Mylan pharmaceuticals. My time at Highmark Health has given me a truly unique perspective that others just don’t have.  

I’ve founded two successful companies.  One is a healthcare consultancy working with VC startups and other small companies in medical devices, diagnostics, or other MedTech categories.  The second was a regional medical device distributorship that included a portfolio of six medical devices used for plastic surgery and cosmetic procedures.

I perfected my commercialization and management approach at Baxter Healthcare where I learned to focus on building sustainable businesses that capitalize on opportunities over the long-term.  This taught me to avoid fly-by-night strategies that would ultimately create problems down the road.  I’m a coach and a mentor who has helped others do the best work of their careers.

My background is technical achieving my Bachelor’s in chemistry and my MBA with a focus on Global Finance. I’m a member of the Board of Directors at Facing Forward which is a nonprofit in Chicago working tirelessly to end homelessness.  I’m the author of the ‘Selfish Career,’ a book about taking ownership of your professional life which is available on Amazon for purchase.

Let’s start digging into the five reasons healthcare companies fail during the startup phase.

• The first one is that companies are misaligned to the rapidly changing healthcare ecosystem. This means that they’re not actually even creating a product that will fit in to the healthcare systems of today.
• Number two:  They misunderstand who the real customer is and what they care about
• Number three: They are led by an outgunned technical founder who, through no fault of their own, just don’t have the necessary information or background to know how to create a company that’s built to sell
• Number four:  Founders aren’t designing their company with the end in mind.  Maybe that’s an acquisition and exit, or maybe that’s a longer-term play by generating revenue.
• Number five:  They are working with advisors who just aren’t thinking big picture enough and are unable to help them on their journey to becoming a successful company.

Why is Healthcare so broken?

Before we move on, I think it’s important for us to quickly talk about why healthcare is so broken.  You can ask any thought leader in healthcare why healthcare is broken and you’re going to get a different answer.  Everyone has their theories, but I’m going to tell you mine.

The system of healthcare we have today, which is generally focused on treating symptoms of conditions rather than the cause, was created at a time when patients weren’t nearly as sick as they are today, and there really weren’t that many treatments or technologies to make an impact.  As we move past the postwar era, and dual incomes became necessary to provide a high standard of living, our lifestyles became more about convenience than health. Nutrition was sacrificed and poor diets increased, creating an obesity academic throughout the United States. This has resulted in a population that is extremely unhealthy. There have been significant technological advancements that also help treat conditions more effectively while conditions are increasing in numbers.

Now healthcare is essentially a collection of misaligned companies trying to solve problems one small piece at a time because no one can really influence everything that is needed for the patient.  Incentives between these companies are misaligned and there’s often competition and conflict of interests. The various companies try to make money off each other and costs for services and products are generally hidden from the buyer.  This is all the while patients still trust her doctor’s judgment more than they do anyone else, but because patients are at a significant information disadvantage, they’re generally ill-equipped to advocate for better care.  Lastly, doctors don’t pay for the cost of any of the tests or meds that they order, or procedures that they do, and that results in a lack of accountability for any of their decisions.

There are a few ways the healthcare community is trying to fix the problem. The biggest trend is a move from fee-based to value-based care. This means instead of getting paid for each service you provide to a patient; you get paid based on the quality of care you deliver. This essentially means you get paid for making your patient better. To help facilitate this many provider networks and health insurance payers are creating care models that roadmap how will patient should be treated for any given condition.  This is supposed to reduce variability and make sure everyone is getting care that is high-quality. In the meantime, nontraditional companies are entering the healthcare space and trying to use technology to address the healthcare crisis. Additionally, our government representatives, whether at the state or federal level, are talking about ‘Medicare for all’ and bringing socialized medicine to the US.

I think it’s important for us to understand where healthcare is today so we can make investment decisions that are aligned with where healthcare is going in the future.

Now let’s dig in deeper into the five misunderstood reasons.

As we just discussed, there are a number of changes going on right now to solve the healthcare crisis and it creates both opportunities and threats for every company. If companies are not aligned to where healthcare is going it will launch and will fail. Because of the move to value-based care and increasingly prescriptive care models there are a few things that companies need to be thinking about to gain adoption. They will have to demonstrate clinical superiority over the standard of care or it is not going to be as good as another product on the market. You’re going to have to show that your better. But showing that it is better and just about clinical outcomes isn’t enough.  It also must create an economic value that results in new revenue streams or cost savings. Because treatment patterns for complex conditions are increasingly complicated everyone is looking for technologies and innovations that reduce complicated care pathways and make it easier and more efficient to deliver that care to patients. If you are not making care delivery easier or more efficient, at a minimum you don’t want to disrupt Dr. Practice patterns which can lead to frustration and confusion by healthcare practitioners. Payers and health systems and provider networks are also looking for products that help solve niche problems but also stay in your lane over the long term. Lastly, the holy Grail for payers and health systems are risk-free agreements where they are essentially insured against waste and effectiveness of the products they purchase.

What happens when companies and leadership are not aligned to what we just discussed?

Eventually what you see after launch is a lack of uptake or product sales plateau. While you may find some doctors who will adopt the product, you don’t get very far:  sales just stall. Many companies will continue to throw marketing dollars at the problem, but it doesn’t yield additional sales. That’s because they’re not aligned to the overall value proposition that is needed to make progress within the market. You also begin to see strife between sales and marketing and lots of finger pointing. Each group will say that the other isn’t doing a good enough job when it really isn’t the sales or marketing efforts that are the problem at all. It’s the design of how the product was brought to market and whether or not it was appropriately focused on the value proposition. You also start to see disagreement within the team and leadership about the direction of the product or the direction the company should take. This is because everyone’s looking for an answer but they’re not looking in the right place. When these things happen, you are also going to see increased pressure and impatience from the Board of Directors, or venture-capital leadership, or even the executive leadership on the team. They are feeling that stress because they’re not making the progress they anticipated.  And lastly frustration. Frustration will permeate through all parties and will just continue to get worse because progress hasn’t been made.

Case Study #1

Let’s hop into to a case study. I previously let a brand of 17 years old and right around $40 million a year that was used for pain management during surgical procedures. For the previous three years unit sales continued to decline and the only way they were able to maintain revenue was through very large 20% price increases that really irritated customers. When I talked to providers they said the product was completely unnecessary, wasn’t worth the money and it didn’t contribute to providing better patient care. This was right around the time when quality metrics for taking hold in the operating room. Obviously my goal was to grow sales significantly and reestablish this brand is top of mind.  I also needed to drive alignment between marketing and sales so they could work together and be on the same page.  The key to my approach was realigning the brand positioning to have a value proposition to improve quality metrics that all the doctors were now being measured on.  I rebranded the product and created a complex marketing ecosystem and established a new sales operation plan.  I focused on targeting customers that were the highest opportunity and implemented a new needs-based selling approach highlighting the importance clinicians were placing on those new quality metrics. I grew this brand massively.  The first year it was a new building year and only increased from about $40-$43 million. But the second year, when everything started clicking, the product really took off and we grew 30% which no one at all expected. I eventually received a Brand Champion Award by the national magazine PM360.  

Why is the story important? It’s important because it shows that if the product is not aligned to the needs of the provider and the healthcare ecosystem, you just don’t make progress. Once we had aligned our value proposition in our education about how you use the product to meet the quality metrics, the brand took off. We established niche uses and clinical superiority.  We highlighted the ability to wake patients up faster from surgery.

The number two reason VC backed healthcare companies fail is because they actually have poor customer alignment.

This one is tricky. But what I've seen is that early stage startup companies are overly focused on providers. While providers are important they’re not the only important customer. When I say this I don’t just mean patients. Your product strategy and your business design has to include a variety of other customers such as health insurers, IDNs, administration, office staff, and even advocacy groups. What makes this challenging is the medical policy, formulary, product committees, and reimbursement decisions are generally shrouded in mystery. Luckily my unique background has exposed me to them. I’m sure what happens when you miss addressing key customer needs will not be a surprise.

• You experience providers expressing excitement and saying they want to adopt, but the sales never happen.
• Your company ends up having a very high amount of activity but low to no results.
• Again, more strife between sales and marketing happens; finger pointing towards each other about who’s not doing a good enough job.
• The company begins jumping from initiative to initiative without success because they are grasping at straws trying to find a solution but are usually focused on the wrong things.
• There is pressure and impatience from the board, venture leadership, and executive leadership because they are really just confused and don’t understand why such a great technology is not been adopted.

Case study #2

I inherited an underperforming $100 million plus COPD brand with about 30% market share and only one other competitor in the market. Sales and been stagnant for four years but the product had been rebranded recently and the materials were effective. It didn’t need any improvement of the sales force efforts or targeting, which was recently optimized. There was still no traction. My goal was to think creatively and determine new ways to grow the product through nontraditional means. The approach was to create strategic partnerships with multiple DME companies and align efforts to focus on the highest value prescribing doctors. I designed a contracting strategy that rewarded the DMEs with discounts for significant market share increases. We also drove collaboration between our sales force and the DME company sales force so they could coordinate targets and amplify efforts and results. In the end, market share went from 30% to 40% in two years and revenue was increased by about 10 million. Why is the story important? It’s important because it shows the impact of aligning to the right customer or leveraging a secondary customer that was undervalued.

Before undertaking this strategy, leadership was frustrated and confused because providers kept giving positive feedback about the product and/or message, but what was undervalued was the distribution strategy through the DME’s and how much an impact they had on product sales.

The third reason VC backed companies in the healthcare space fail is that the technical founders face frustrations

Technical founders can be great innovators and can add insights about clinical challenges that can’t be duplicated. That doesn’t mean they effectively understand the business of healthcare and how to maximize the opportunity. They will often have a poor understanding of the healthcare ecosystem and how services and products and dollars move from company to company. If faced with the challenge of trying to simultaneously create a product and a business often for the first time in a very complex environment, you’ll find that they will be overly reliant on what doctors and other healthcare providers think or feel, and if they are a clinician themselves, may have biases the blind them. They routinely struggle with business jargon and financial expectations, and usually have not had the opportunity to lead large teams or to build a team from the ground up to create a culture that ensures success. Lastly, they don’t know what good looks like within the context of a business that is a complex operation.

What happens when technical founders flounder?

• Obviously, there are strategic mistakes that arise from being blinded by their technical or clinical orientation because they will get overly excited about the technology.
• They sometimes don’t face the reality of how difficult it is to be successful in healthcare.
• They will go down clinical ‘rabbit holes’ and focus on how to make the product better than it needs to be or try to expand it to other uses.
• They will make unexpected mistakes by exploring new technical uses and will often make commitments they shouldn’t and are difficult to back out of.  
• If they start to feel like they aren’t succeeding I’ve seen a secretive nature arise because they have difficulty in admitting they actually need help.

Case Study #3

Another case study.  This situation is actually a very positive one.  The CEO and COO of a new medical device startup were looking for strategic advice and guidance. They were first timers but were very open to getting the help they needed to make sure that they were on the right path. They had an innovative surgical technology and a 510k [approval] that was pending but they had a lack of experience launching products in the market. I was asked to establish a perspective on the initial commercial launch including how to position the mesh, competitors, development of a promotional plan, cultivating key opinion leaders, and generally ensure that the leadership team was making good decisions.  In addition to the full commercial strategy I conducted weekly conference calls where I fielded questions from the CEO and COO about the challenges that they had faced over the course of the week.  We worked together in a very organic nature and as we discussed their progress. I was able to guide them in their approach so they would be more effective. Sometimes this included developing simple discussion guides for them to use with clinicians, and other times I would act as a third party to interview regional sales distributor candidates. Since then the product received 510K approval and they are currently manufacturing the launch product and expect a very positive market reception.

The fourth reason VC backed companies in the healthcare space fail is that the business has not been designed with the end in mind

Sometimes when I bring up this subject it gets touchy. And it gets touchy because the question I’m asking is if everyone is really on the same page. Does everyone have the same objective and are goals aligned across the company and leadership team. You can’t assume that they are, and its best to verify. Defining a clear vision for the company is critically important. It’s equally important to share that vision so everyone is rowing in unison and everyone is going the same direction. A vision should be created to define the big picture objective. Is the company looking to be acquired? Would you rather sign a licensing agreement or at have a marketing partnership? Or is the founding team walking into the sunset after the product development cycle is over and the product is launched into the market? Additionally, if you’re trying to be acquired are you designing the company in a way that makes it attractive? In addition to the product the company is launching, are the company leaders asking themselves questions to make sure that they are solving problems that will be beneficial to the acquiring companies?

One of the signs that everyone is not aligned or on the same age is a focus on the wrong things.

• It  will seem like people are going different directions creating dissent and discord within different groups inside the company.
• No one is carrying on active discussions about the acquiring companies.
• Orders and demands are being given by the leadership team instead of collaboration, teamwork, and co-creation of solutions.
• And lastly, your ‘Spidey Senses’ are tingling, and you just feel like something is wrong.

Case Study #4

The fourth case study is about the company I worked with.  It had two ADD founders. This was in the medical device space. Both of these people were first-time founders. They did have a commercially available product and it was available for sale but a complete lack of clarity on where they were going long-term. This company had not established a detailed vision that aligned everyone on the team, including the angel investors and the day-to-day staff. Because of this lack of clarity people were working against each other unwittingly. Some people were trying to get market adoption and others were trying to redevelop the product based on feedback. Everyone was going in different directions because there was no clarity in the overall goal for everyone to rally around. Frustration, dissent, and discord increased day by day. The company was a revolving door of employees and contractors, none of which understood the direction of the company, each going along for the ride as long as it lasted. The CEO had a tendency to move from one project to another, but never fully closed anything out.  The result was that the team was constantly shifting directions and routinely was frustrated. This company has continued to tread water and not make any real progress. The website indicates clearly that they continue to change focus every six months. I think the story is important because it tells you what not to do. It tells you that if you don’t design with the end in mind, and you don’t establish a company vision that everyone can rally around things can go bad quickly. You can end up spending a lot of money and not getting anything out of the endeavor and generally complicating things to where there’s no hope for the company at all.

The fifth reason why VC backed healthcare company startups fail is because they don’t leverage best in class industry insiders as advisors

It’s important to bring in subject matter experts for things like manufacturing or regulatory approvals. But those individuals don’t typically exhibit the qualities of a true industry insider who can help the company achieve the success everyone is hoping for. When you’re looking for the best in class industry insider that can really amplify your chances of success there are a few things to look for.

• You want to make sure that person has diversity in their experience. This ensures that they have encountered a variety of business models and business challenges and are good problem solvers.
• They should have previous P&L responsibility, so they fully understand the accountability of the founders face.
• They should have both big-company and start up experience, so they understand how to bring best in class big-company diligence and apply it in a rapid and nimble environment.
• They should be steeped in the business of healthcare, but also have a technical or clinical background so they can adequately understand the reasons why innovations can be so groundbreaking.
• They should have acquisition and integration experience as well to help position the company for an exit at the highest valuation.
• And lastly, they should be a thought leader within the industry and up to date on the latest changes affecting healthcare.

What happens when you don’t have the right kind of advisors? First thing you get is silo thinking because the advisors are typically focused on very narrow areas of expertise. They let that lens affect everything they touch. You will see hourly fees on projects that routinely have scope creep and never seem to end. Proposals and contracts are not outcomes-based and often the advisors eventually asked for a job or a full-time role.

There such a great opportunity in the startup world to bring innovations that really make a difference, both economically and clinically. But it is important to avoid a number of pitfalls that can plague a startup from becoming successful.

There are three categories for how we can work together.

• I can advise your firm to help you make better decisions
• I can advise the companies in your portfolio to help them make better decisions
• We can work up front and design a company together

If this video resonated with you I think it’s a great opportunity to dig a little deeper. The link to my shared calendar is www.calendly.com/bgm. After digging deeper if it makes sense for us to explore working together there are a variety of different models.

Once again, I just like to say thank you.

I’m looking forward to speaking with you soon.