We’re seeing a lot of interesting new health technology companies that are making a few early dollars go a long way. This is healthy for our industry and is now possible more than ever in this digital age. While it sounds good to say, “I’m all in and I’m putting everything I have into this,” the reality of life is sometimes different.
I love when I meet someone who is torn between finishing her MBA and jumping headlong into her start-up that she’s been funding parsimoniously from the savings from her first job. While an overabundance of caution is usually not a key success factor in an entrepreneurial company, being smart is. Getting it right in the shortest period of time, in the least expensive way, is the best way to do it. Staging risk, and optimizing the timing on when to double down, is the way to go.
A key turning point in a start-up’s lifecycle is the beta pilot. We have to get the pilot study right. It has to ask the key questions, get the critical answers, and involve the right partners. This is what is going to convince us as entrepreneurs, and us as investors, whether we’re on the right track – and whether we should be all in.
A common mistake that we see is a “take what we can get and get going” approach. I think most entrepreneurs underestimate the depth of thought that should go into the pilot. Usually, they speak with a potential customer, grab ahold of the mutual enthusiasm, and jump into a half-baked beta pilot. It is exciting, after all of the market research, team building, and coding, to just get started. Who doesn’t want to see if it works?
But a pilot that doesn’t catapult the company into the next phase is not money well spent. Pilots leading to more pilots is like getting stuck in pit lane with the B-team, a symptom of a company transitioning to the “living dead.”
My advice is that the planning stage for the beta pilot is exactly the right time to deliberately downshift. Really do the hard thinking at this stage: Which questions does the pilot program fundamentally need to answer? What are the likely outcomes? Who will care about the results? Do I really have the right beta partner? If I thought about this differently, would my partner actually help me defray even more of my costs? How will the results lead to the next logical partnering discussions or funding event? How close is the linkage between all of these factors?
What we see all too often is that a lot of time and energy goes into the pilot – and a lot is learned – but the end result is simply crisper clarity on how to run a better pilot program the next time. Most of this thinking, it turns out, could have been done the first time around. And that thinking is the most cost effective and critical element of the program’s execution.
Entrepreneurs should gravitate to working with investors who understand how critical this phase of company development is. Maybe in the earliest stages a venture capitalist doesn’t even provide capital, but provides input into how to conduct this beta program and make introductions to the right partners. It turns out, this involvement could be more valuable than capital. This intellectual investment into the pilot allows the VC to answer the key questions that she has, reducing the threshold for a larger or more strategically timed capital investment later.
I’m intrigued when an entrepreneur sets up a meeting with me with the explicit purpose of rolling up our sleeves together and really going deep on how to design and conduct a pilot. This shows a lot of sophistication and I really get engaged. It also puts me in a position where I can confidently take the output from that conversation to my firm’s strategic limited partners — who are important providers, payors, and corporations — to test drive and refine the ideas even more. This will often help determine (and bring to the table) the best beta partner – often one of my LPs.
When it is time to think about a beta program, hit the brakes, downshift. Speak to as many potential partners (and investors) as you can. Think through this phase very carefully. Most important, think about how, on the other side of the pilot, the knowledge you will have obtained will directly drive a set of objectives, like a significant customer relationship or a financing event. Designing the right beta with the right partners often turns out to be the most important investment we make in our companies.