Straightforward advice for healthcare startups

As an entrepreneur and business manager specializing in the health care industry for well over 20 years, I’ve had the opportunity to found a few startups and advise and invest in many others. For the past three years, I’ve been evaluating new business opportunities for an AMA-founded business accelerator in Silicon Valley targeting nascent opportunities to address chronic disease and diagnostics at the systems level.

My area of specialization leans toward biotechnology, but I’ve worked with budding businesses in a variety of domains across the health care spectrum. From experience, I know that health care is a particularly difficult space for entrepreneurs, and I’d like to offer some advice for health care startups.

The startup landscape

In one sense, health care innovators are in the same boat as every other startup. They face the same three fundamental questions that any entrepreneur thinking of starting a business has to answer:

1. Who are the customers? 

2. What problem are you trying to solve? 

3. How do you define success?

But in addition to the fundamentals, the formation of a health care business comes with discrete challenges. It is a heavily regulated space and it is particularly dominated by large companies, which makes it extra tough for any entrepreneur to successfully start a company. Even great ideas often fail to get traction on a road lined with potholes and crowded with giants.

Common pitfalls

Many health care startup failures stem from early-stage decisions about building the business.

For example, an innovator may pick the wrong core team or cofounder: Instead of building a collaborative business arrangement, they wind up embroiled in a lot of interpersonal nonsense that scuttles prospects right from the start.

I’ve also seen promising startups get sidelined simply by picking the wrong law firm for representation — one that really doesn’t have the time or aptitude to work with small health care businesses.

Another classic problem is raising money from the wrong investors. There are enormous numbers of pools of capital for startup companies — ranging from well-meaning individual investors, to venture firms that focus on early-stage companies, to potential corporate partnerships — all of whom may be willing to put up money for your company. But that isn’t always a blessing.

It’s easy to end up with investors who really don’t understand your business or don’t understand the risks or don’t understand how long it will take for your product to develop. Then you find yourself spending increasing amounts of time managing your investors. This means you’ve got the wrong investor pool and you’re also not getting work done in your company.

A final notable health care startup pitfall stems from the workings of academia. A lot of staggeringly good ideas come out of our nation’s universities. But licensing agreements to pull those ideas out of those settings vary widely.

Oftentimes, a new entrepreneur will get that license agreement wrong. The terms may be too difficult when translated to practice or may require payments at times that are impossible for a startup to manage. Or they could be terms that a future acquirer of the company will simply find unacceptable. Understanding how to get a good license deal (and working with the right attorney) is always key in settings where you’re licensing intellectual property or technology out of an institution.

So there are many ways that a health care startup can falter and fail. But more importantly, there are also ways to navigate those pitfalls to increase your potential for success.

Sound advice

To start a business, you need to understand is what kind of intellectual property you have. Do you have something that is valuable, something that you can raise money around, something that will stand the test of time and stand the test of competition?

If so, the first thing you want to look for is a good partner, and that doesn’t necessarily mean the person you already know or you’re already working with. I’ve yet to meet someone who’s good at all the aspects of building a company. So you really want to find somebody whose skills and experience complement yours.

For many health care startups in the past, that type of business partner may have come from a legal background. Back in the early days of Silicon Valley, law firms like Wilson-Sonsini developed good technology background and solid life-sciences expertise and became particularly good at helping health care innovators. Nowadays, the ideal business partner may come with regulatory expertise you lack. It may be venture capital know-how and networks. The point is to seek a partner who strengthens your weaknesses to mutual benefit.

You’re also going to need some money. All startups require resources, personnel, technology, etc. If you aren’t independently wealthy and can’t bootstrap your venture, you need to be able to raise funding to get your idea off the ground, hire the appropriate people, and reach the milestones of healthy growth.

The amount of money you need will depend on the resources required to achieve your particular milestones. With biotech companies, for example, you may need to establish that your experimental drug works in an animal model. Maybe that means a substantial outlay up front, but you have to consider the value of reaching that milestone for securing future resources, attracting future customers and talent, and acquiring additional finance down the road.

Beyond money, you need to examine the environment in which you’re going to operate in moving the business forward. That will determine the right investors, the right law firm, the right advisors and consultants — and prioritize bringing all of those cultivation elements to the table. Most of the time, it is also really important to engage with customers as early as possible, even if it’s selling an alpha version of your product or letting customers do a pilot. To get to that point, depending on your business, it may really only require a few people. But it’s very important to establish that core to functioning unit to crystallize potential and value.

The growth of incubators over the past 20 years has really had an impact on the ability of entrepreneurs to speed this process. Entities like Y Combinator have been incredibly successful in helping launch ideas into businesses. You get the benefit of expert advice, working amongst and knowledge sharing with peers, small infusions of cash to obtain consulting resources, file patents, etc. The truth is that building a business on your own is hard. It is a road lined with potholes. Finding a partner with skills beyond your own is extremely difficult. Finding resources requires time and effort. Incubators do all that for you.

Health care startups can seek out similar acceleration programs focused on their particular space for strategic and tactical support and advice. Maybe you need to know how to create a HIPAA-compliant product or get your product through FDA clearance or connect with physicians who will be your end users. Or maybe you need to track public policy and forecast the next five to ten years to see assess health care impact. You don’t have to do it alone.

Most importantly, feed your passion. In spite of all the hurdles to success, modern health care is hungry for bold innovation. Whether your startup is based on a biotechnology breakthrough or an AI-enhanced imaging system or a novel diagnostic product — know that there are people in the industry who also recognize that there are big problems that need solving, and they are eager to engage. Your passion for your startup can draw their attention and assure them that your solution is worth supporting.

Mark Bagnall is an Executive in Residence at Health2047 - an American Medical Association founded business accelerator in Silicon Valley targeting nascent opportunities to address chronic disease. As an entrepreneur and business manager specializing in the health care industry for well over 20 years, Mark had had the opportunity to found a few startups and advise and invest in many others.Mark is also ​CEO of Phenomix Sciences, an early stage startup providing healthcare solutions that will enable personalized management of chronic diseases (supported by AI) with better efficacy, fewer side effects, and lower costs.