Digital Health Survivors & Innovative Incumbents Must Team Up for True Disruption

Opinion

Xconomy Raleigh-Durham — 

Editor’s note: This is Part 2 of a two-part post about innovation in digital health, co-authored by Rob Coppedge, CEO of Echo Health Ventures. Read Part 1 here.

The Path Forward

Between Echo Health Ventures and Blue Cross and Blue Shield of North Carolina, we work deeply on both sides of these partnerships and have perspective that accelerate their development or shut them down. Our advice to startups wanting to ensure Digital Health Survival always includes:

1. Don’t confuse marketing with sales.

All of your Twitter followers, conference keynotes, and grand theories about disrupting our industry are great, but will only get you so far. Focus on proving your expertise, be specific about how you helped navigate challenging implementations, show us the money, and be clear about how you delivered actual value. Your tweets become far more interesting when they articulate something you’ve done instead what you want to do.

2. Build a strong, high value investor syndicate, board and advisory team—and use them.

While VC mega-rounds drive great early press releases, it is earnings, outcomes and a right-sized cap table that will drive your digital health returns. If you are lucky enough to be able to choose, make sure you pick quality allies, co-developers and distribution partners over even the “smartest” capital. We are seeing the lack of demonstrable proof points, solid outcomes studies and references stand in the way of accelerated sales across digital health. In the early stages of building your business those are priceless. As you scale, investors that can help open doors and drive growth play the same role. Prioritize true strategic value over the brand name on your fleece vest every time.

3. Do your homework and understand the priorities of all of your partner’s stakeholders.

When you come to pitch us on a strategic partnership, show that you actually know what we need. Who at the table will benefit from a strategic partnership with you? Who fears losing autonomy and influence as a result of your partnership? You need to sell a personalized strategy and use case for each and every potential stakeholder at the table. Entrepreneurs must understand the context for the “disruption” they plan to bring to market, which requires a keen understanding of the gory details of workflows, productions systems and financial flows that underpin the broken systems.

4. Be honest about your competitors. You have them (and they’re also pitching us).

In the rare times where there is literally no one else doing what you are doing, your primary competitor is human behavior. What are your customers doing now instead of using your product? Be prepared to share your detailed plan on how you will outplay, outwit, and outlast the competition.

5. No matter what race you think you are running, prepare for a marathon, not a sprint.

Realistic valuations and investor expectations remove barriers for downstream fundraising, strategic pivots, or exit options. You need investors and partners that not only understand this, but who can also help you learn faster—and support your agility in making these decisions earlier.

Of course, partnership is a two-way street. For legacy companies seeking to build their capabilities as an Innovative Incumbent, it requires a top down commitment to adaptation. In particular:

1. Get commitment from your board.

Strategic partnerships between Innovative Incumbents and Digital Health organizations have very high upside, as they can combine the incumbent’s track record and institutional capability with the digital health company’s expertise and energy to drive meaningful change. But those very same qualities can offer downside too. Bringing together the best of these two worlds starts with ensuring both organizations are in complete strategic alignment, both philosophically and financially. This is not just among leadership, but all the way up through the board as well.

2. Strategy trumps investment.

Value for the Innovative Incumbent is likely in the commercial arrangements (i.e. through lower cost of care or enhanced market opportunity). Be aware of this and ensure the relationships deliver. Taking an equity stake, and even potentially a board seat, with the partner should further align incentives but should not be a goal in and of itself. (We joke regularly that there may be more near-term financial return for a health plan in mail room optimization than startup investing—but the strategic value of the relationship with startups can be transformative.)

3. Culture eats strategy for lunch.

Incumbent health insurers are in the business of managing risk. You should get more comfortable with taking some. This might mean making decisions and moving faster than feels comfortable and rethinking your technical requirements to deal with more nascent companies and technologies. Remember you are entering into a partnership, which means compromises must be reached. Yes, your legal department is larger, but you don’t always need to bring a bazooka to a knife fight.

4. Measure. Iterate. Move on.

When it comes to partnerships, things will go wrong. Therefore, it’s critical to subject everything to exhaustive evaluation. This means testing hypotheses empirically, learning, and improving (and when necessary, standing down or starting over). Don’t give up, but also don’t fall into the sunk-cost fallacy. While some startups may push back at first, the smartest less mature companies realize they can benefit greatly from the structure and experience that working with incumbents can provide.

5. Play the long game.

It’s easy to get caught up in the issues of today, making decisions year-by-year or quarter-by-quarter. It’s also easy to judge the digital health startup on what they can do today versus what you can do together over time. That kind of tactical thinking is where mistakes are made too often. Don’t make them. As the old saying goes, someone’s sitting in the shade today because someone else planted a tree a long time ago.

Partner or Die

Twitter went aflutter with excitement when CB Insights named the “Digital Health 150” (a list of the most promising startups)—which we are proud to say includes several we have invested in and/or work with closely. Certainly these companies stand out among their peers and have a better shot at growth and longer term success. However, there is a long road ahead for all of these companies and their digital health siblings.

When we look at this list and attempt to predict which are best positioned to be a true market leader in five years, we apply an additional filter: which companies have demonstrated the ability to attract, execute, and expand partnership with Innovative Incumbents. There is no better way for these innovators to efficiently access channel and achieve scale. There is likely not enough capital in Silicon Valley for the Digital Health 150 to get there any other way.

We believe strongly that if we are ever going to stop talking about impending disruption and instead get on with sharing the results of a system reorganized to enable patient and family affordability, access and experience, it will require true, scaled partnership between the Digital Health Survivors and the Innovative Incumbents. Both sides need to do their homework, rethink their approaches and approach these partnerships with the requisite humility that will allow each side to leverage its strengths (and not be anchored down by their limitations).

At a not too distant conference, we look forward to celebrating these true digital health success stories where finally, there will be something truly worth tweeting about.