Health IT Company Growth: A Sequence of Beachheads?

The challenge of growth and scaling our healthcare IT businesses is paramount. The problems to solve are vast. But the most immediate needs of the customer are often relatively small and well-defined. How do we solve small immediate needs while also paving the way for bigger, more comprehensive solutions that form the basis of a larger company?

It’s all about the sequencing strategy. We have to secure the right beachheads in the right order. No amount of ambition or technology prowess will substitute for the right beachhead strategy.

What we typically see with early stage companies is a demo that shows what their current software can do. Often, the initial product provides a nice solution for a clear customer problem. These companies will usually then walk us through why their technology is really a “platform” and describe how it can easily be expanded to solve a host of other additional problems. This is all good. This shows proper anticipation of future customer needs and good technology breadth.

But this kind of conversation doesn’t usually clearly spell out the company’s overarching strategy for success. It usually doesn’t map the entire market and show a comprehensive strategy for knocking down a sequence of obstacles to success. In most cases, the barriers to growth and scaling with customers relate less to what technology our company can create, but what technology we choose to create — and how, when, and to whom we choose to sell it.

A really rewarding conversation might be less about a litany of customer problems and how a technology solves them and more about the rationale for the sequencing of the roll out. Why are certain beachheads selected? Why are they better than others? Why does the specific sequencing of beachheads matter? Why does this make the most sense as a business strategy for us compared to other potential alternatives?

The more specific this conversation is, the better. For sure, no plan ever matches the subsequent reality of the execution, but the plan has to make sense in advance. At the very least, it shows we have recognized that random efforts against the market are less effective than planned, targeted approaches that build from each other in a stepwise fashion.

All too often we see companies building great initial technology and then taking a trial-and-error approach to driving it into the market and scaling it across a customer base. We need to be very specific about which customers we would approach, in which order, with what solutions, and why. Why is this strategy more likely to fuel the ultimate company growth expectations compared to other strategies? Let’s discuss the pros and cons of each approach and the logic for selecting the primary plan, and why the back-up plan is the back-up, and what the triggers are for reverting to it.

The most successful companies in this next wave of healthcare IT adoption will be the companies that have the best strategies for fueling their growth. Great technology will be necessary but not sufficient. Great teams will build great companies because we will secure the right beachheads — in the right order — as our key to obtaining the pole position in the market.

The Beta Pilot: Bang for the $

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.

Healthcare Consumer Tsunami

I’m forecasting that a new healthcare company will emerge over the next few years that will become as big and impactful as Google or eBay. Or maybe we will simply call it a health company. Or maybe we will just call it technology.

Regardless, this new company will be as defining of the current era of healthcare transformation as Google and eBay were to their sectors. The hallmark of this company will be that it will leverage the power of the consumer in healthcare in a completely unprecedented – and probably currently unimaginable – way.

A recent survey by PwC showed that consumers would opt for new, more consumer-friendly models of care, such as home diagnostics or home cancer care, over traditional ones. In their estimate, this transformation would put at risk over $60 billion in current revenue streams for today’s providers.

CVS Caremark has been moving aggressively to provide new levels of care in novel and consumer-friendly ways. I, for one, prefer getting my flu shot while I’m shopping for routine things that I need in the drug store. It doesn’t take much imagination to think through the list of other medical services that can be conveniently provided at CVS.

Consumers have moved quickly to adopt fitness and wellness products and services. This market now exceeds $250 billion. Savvy consumers get that their diet and exercise habits are as much a part of their medical regimens as they are a way of life – valued as hobbies, diversions, and priorities, despite busy schedules. In fact, consumers understood and embraced this notion long before the medical profession did.

Consumers don’t see themselves as patients. They want to go down an autonomous path of health and wellness and avoid “healthcare” at all costs. When they do have to avail themselves of the healthcare system, they’d like that experience to integrate into the larger picture of how they live their lives. They want to return to being — and remaining — healthy and well. Episodic, traditional medical care seems very disconnected from what consumers have evolved to prefer.

Who will win the hearts and minds of consumers? Who will embrace our seamless approach to health, wellness, autonomy, transparency, and support-when-needed from the healthcare system?

Payers have experience assessing health in populations and offering programs to promote health and prevent illness. So do employers. Provider systems have had their hands full managing the sick patients that flood their ERs and clinics, but they are also turning their attention to the community and the health of the populations that they serve. But no one has invented the magic formula for success and greatness yet.

It’s coming: a massively transformational business that rocks the foundations of healthcare. It will empower us to adopt new levels of health and enable us to integrate with providers of care in ways that make sense to us. I’m thinking hard about what that breakthrough approach is going to be like. My fund is currently being flooded with ideas from amazing entrepreneurs. Some of these ideas are shocking. Some seem silly. Some are mind-boggling. I have a feeling that the most outrageous, brazen, and counterintuitive of these may be the ones that fuel the tsunami. Exciting times.

East Coast vs West Coast Health Technology Innovation

Warning:  The following post makes crude oversimplifications for illustrative purposes. If you are prone to taking blogs too seriously, or are offended by generalizations, there is no need to read on. All characters appearing in this work are fictitious. Any resemblance to real persons, living or dead, is purely coincidental.

There seems to be some fairly consistent chatter in the circles I travel in that draws a distinction between the way West Coast health tech entrepreneurs and investors differ from their colleagues on the East. It is a vague notion, but let me see if I can tease it out.

If I understand the sentiment, it appears to relate to the idea that the West Coast views consumerism in healthcare differently from the East. To oversimplify, the idea is this:  Silicon Valley will disrupt healthcare in the same way that it disrupted other major markets, perhaps coming at it with something completely new, without regard for entrenched thinking or infrastructure, and with a specific intent to disrupt the status quo.

When you disrupt like this, the thinking goes, a perfect business model coming out of the gate is less important, because in new markets this gets sorted out later.  What is more important is to capture the hearts and minds of the consumers, to build a network effect, and to use this momentum and energy to topple the barriers in the system that are standing in the way of progress.  If you take it to the extreme, I think the logic plays all the way out to something like, “My cellphone with this super-cool app that measures this or that bodily metric and connects me to something or other will prevent me from becoming ill and help me pay less to see one of the 80% of doctors who are soon to be out of business and replaced by my app.”

The East Coast rebuttal views this West Coast mindset as, not surprisingly, a little less grounded than it needs to be.  The East coast “sensibility” is that left-coast pie-in-the-sky thinking and “if we build it they will come” attitude are flawed when applied to such a complex system as healthcare, given its many entrenched and influential stakeholders.  In other words, it’s great that there is an app that does some kind of whizbang thing that consumers dig, but despite all of the engagement generated, we will still be faced with illness — and lots of it.  And, there’s already a massive, well-intended, and frankly quite exquisite system in place to help deal with that illness.  The East Coast thinking struggles to understand how that wellness app leverages the existing healthcare infrastructure, how a real and sustainable business is going to be built, and how the innovation becomes adopted not just by the consumer or the network, but by the totality of the system.

The West Coast response, in return, is that such thinking is too conservative and incremental.  After all, Twitter and Amazon would not exist if we took just one baby step at a time building off the existing and flawed infrastructure.

The East Coast, fighting back, says:  just because Twitter and Amazon are great companies doesn’t mean that every health IT company with a big idea and little or no revenue warrants investors pumping cash into it at an inflated valuation.  They then get into a discussion about a recent health tech IPO with a valuation of 100X revenues and debate whether it is a buy or a short. And the debate continues, on script: You don’t understand the power of the consumer (West).  But you underestimate the power of the system (East).

I work at a national technology venture capital firm, grounded by key limited partners across the country — in the Midwest and on both coasts — who are global leaders in healthcare.  Our view is neither East nor West.  We’re coast-agnostic. We’re confident that youthful consumer apps and big-industry healthcare will act in concert to drive meaningful transformation.  We are catalyzing collaboration between the twenty-somethings in hoodies and the fifty-somethings in suits.

For example, Cleveland Clinic has publicly stated that they will bring unprecedented levels of transparency to healthcare and that they will compete for the healthcare consumer — not just with the best clinical outcomes, but also with the best prices, connectivity, and customer satisfaction. We believe that this kind of unifying voice, from a healthcare giant, is where it is all heading. We think the best innovations will involve consumers, cool apps, great underlying technology, existing infrastructure partners, physicians, hospital systems, and health plans — all working together. The magic happens when all of these stars are aligned and each stakeholder knows what needs to happen. And they are all now trying to make it happen.  Innovations that bring all of these elements together will lead in driving the transformation.

At my firm, we are investing in the best entrepreneurs, who view their solutions as solving multiple facets of the equation by bringing together multiple stakeholders.  Our strategy is to leverage the widest possible network of those diverse resources to help our companies innovate, grow, and make the biggest possible difference. We believe that the battle is not about toppling the system from the outside or about gradually tweaking it from the inside:  It is about fueling the massive transformation, happening right now, with inputs, contributions, and collaboration from all involved.  This is where the big ideas are heading.  And it is happening across the entire country.