Four Red Flags for Digital Health Investors

Opinion

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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.

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John Sung Kim is the founder of the cloud software company Five9 and founder and CEO of the digital health company DoctorBase. Follow @johnsungkim

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8 responses to “Four Red Flags for Digital Health Investors”

  1. Great insight into the complex world of healthcare innovation. To add to what you said, everyday there is another savvy MD and their cunning nephew engineer throwing another promising product into the mix. They sound great, they address a certain problem, and some even have scalable potential and market size.

    However, as you touched upon, we’re in an age where there is a surplus of great ideas and MVPs (minimally viable products) and a dearth of companies able to navigate the complex healthcare environment. Hospitals, IPAs, ACOs, HMOs, MSOs, healthcare systems, individual practitioners, group practices, multi-specialty organizations, medical societies, payors, and vendors all have differing and complex needs. If the company doesn’t understand how vastly different (in terms of culture, complexity, costs, revenues, sales cycles, etc.) each niche is, then they’re likely in for a rude awakening.

  2. Tom says:

    Definitely forwarding this article to anyone I hear say “I think I have a great idea and I am going to get in the start-up game.” Not to crush their dreams, just too give them a realistic look into what it takes to do it right.

  3. Mike says:

    Although the doctor/office manager usually makes the decisions, at the end of the day, the office staff are often the front end users. If the service doesn’t fit into their work flow, problems ensue. Emgerging health-tech start ups must take this into account… an amazing product is useless without users… better make sure yours is office staff friendly!

  4. Jamien says:

    Successful startups, no matter the industry, learn very quickly that success is heavily dependent on sales, marketing and user experience. When you have as fragmented an industry as healthcare, this is even more relevant.

  5. Excellent article. Each point you made, especially the first and the third, I have seen violated numerous times. (I do believe the fourth gets violated by most start-ups no matter what the market is because they love their idea and cannot see the reality of the market.) On my own journey in a couple of healthcare start-ups, I will refer to this post repeatedly. Thank you.

  6. jim kean says:

    Great article John! I think the other aspect of the current seed stage scene is that the current capital structure of Silicon Valley has vast stage gaps. A decent enough seed stage idea can land funding. If you can get to cashflow breakeven there is also Series D expansion capital (lots of funds in fact). The problem is expansionary capital for the arid capital desert from early expansion (Series A) to late stage but pre breakeven (Series C) is sparse. Most healthcare VCs that are left in that portion of the capital structure are either relics of the 90s (can’t spell IT), biotech or med-device investors (barely know what a computer is), or are inexperienced VCs from the consumer tech side (unknowledgeable about Healthcare). On top of that, the number of hungry mouths (e.g. the graduating seed stage companies) are all competing in this limited environment.

  7. Keith Streckenbach says:

    Spot on John! As a veteran with successful HIT exits, I’ve the scars to prove you’re 100% correct. Thanks for succinctly sharing the wisdom.

    Keith Streckenbach