Healthcare investments set an all time record for VC investing in 2007!

Venture capital firms are investing heavily in the healthcare sector. Life sciences (biotechnology and medical device industries) and healthcare services are a trendy investment nowadays… and we have been anticipating the trend for quite a while now, I’m so happy to say so!

Last year was by far the biggest year in health-care venture history, according to the MoneyTree Report. The medical devices and health-care services and information technology sectors have generated an intense deal flow in the past six months here, at the Barcelona Medical Association. From one idea per week last year, we’ve moved to more than one idea per day.

An aging population that refuses to give up its active lifestyle, coupled with evolving medical technologies, are fueling those health-care deals.

Here in Europe, at last, we are seeing new capital being raised by dedicated health-care funds, or even diversified funds with a strong health-care focus. About time!

Moving from academic research to entrepreneurship

There is always some tension between academic research, applied research and entrepreneurship. While academic research is primarily driven by curiosity, applied research and entrepreneurship need to solve a real world problem. Scientists working in healthcare (and I guess this could apply to any field) have an extraordinary desire to test things, curiosity is what at the end of the day makes them go to the lab on a Sunday afternoon just to see if an experiment has proved them right or wrong (where else would someone go to work on a Sunday afternoon?). This is obviously great, and it is a fantastic driver of science, but to help people, ideas need to move to the real world and get to the marketplace, and therefore they need to be able to solve problems.

Basic research pursues an increase in knowledge. More and more knowledge is again the driver of scientists. But this knowledge needs to be protected in order to get to the marketplace, and (whether we like it or not) this is done through IP protection, through patents (see my previous post patents are so XXth century).

And finally, scientists are eager to publish things, to show their accomplishments, to get respected in their academic world. The system rewards or punishes them depending on the impact and number of publications in prestigious journals. Again, this is not good or bad, it just reflects how science is structured, but scientists working in healthcare should be aware that publishing is not the ultimate goal, but commercializing whatever they are working on to help patients and society.

By solving this tension between the two worlds, we will innovate faster and better.

From idea to opportunity

A lot of good ideas are, well, good ideas, but not opportunities. I went yesterday to an international event about technology transfer hosted by ACC10-COPCA-CIDEM, excellent event by the way, and someone from the Massachusetts Institute of Technology (M.I.T) really described the process of identifying opportunities in a very appealing manner. He recommended entrepreneurs to ask themselves four questions:

(1) Who needs this and why?

(2) What attributes are important? (meaning, how should the product or service that I am willing to bring to the marketplace be to become really useful?)

(3) What are the economics?

(4) What will investors need to see in order to get interested?

These four questions can probably be answered in one hour if the entrepreneur really knows what he/she wants to do, and the answers are crucial to define the magnitude of the opportunity.

Keiretsu

The japanese word Keiretsu defines a set of companies with interlocking business relationships and shareholdings. It is a type of business group.

Keiretsu Forum is the world’s largest angel investor network with 750 accredited investor members throughout sixteen chapters on three continents. Since Keiretsu Forum’s founding in 2000, its members have invested over $180m in 200 companies in technology, consumer products, healthcare/life sciences, real estate and other segments with high growth potential. Forum members collaborate in the due diligence, but make individual investment decisions, with rounds in the range of $250k-$2m.

Its Barcelona chapter just opened some months ago. I’ve been following it since then, because it represents a very interesting alternative for raising money for very early stage start-ups looking for a small quantity of money. I’ve participated in all their meetings so far, and I must say I am deeply impressed by their professionality. Interesting companies, interesting opportunities.

Well, two months ago, while advising a very promising team of entrepreneurs willing to bring a new medical device to the marketplace, I suggested them we should present their company to Keiretsu. And we did.

Everything went OK, and after the general presentation, and some “face to face” meetings with investors, last week I received confirmation from the entrepreneurs they finally raised €500.000 with a very competitive pre-money valuation and a very interesting deal structure.

So, yes, the Barcelona Keiretsu forum is here to stay! Congratulations Keiretsu Barcelona for your second “completed” investment, and congratulations Health Solutions for a well managed fund-raising opportunity.

Healthcare 2.0: hype or reality?

Tomorrow I’m giving a lecture on Healthcare 2.0, trends that will drive the future of our healthcare system. While preparing my slides, it came to my mind that the Internet will end up by rationalizing, and making transparent all of those forces that have contributed to the current health care market failure.

Health 2.0 will be a game changer, wikis, mash-ups, videos, bloggers, and assemblers of user-generated data – all designed to connect health care consumers, providers, and players in a seamless web of data and ideas.

Health 2.0 will provide simple applications allowing the use of information at the site of care by end-users, that is patients and doctors and everybody else connected to health care. A winning combination of evidence-based information, sophisticated algorithms, centralized data repositories, and user-generated data will hold health 2.0 together

Websites such as Sermo or patients like me are gaining speed at attracting physicians and patients. Other European initiatives, such as esanum are coming to the marketplace as well.

Drivers of competition among healthcare services

To be attractive to a venture capital investor, a healthcare service company should fulfil a compelling need with a novel service model (i.e. meeting an existing market need in a new way). It needs to have convincing strategies for customer adoption and sustainable business models that offer significant value to physicians, hospitals, patients, suppliers, or payers.

We have been seeing quite a lot of healthcare services in the last months, and after long discussions with all entrepreneurs, it came to my mind that the three issues that usually draw all the attention are demand, operative margin and the capital intensiveness of the investment at hand.

The more “proved” demand is, the better. Some healthcare services are willing to bring a new service to the marketplace, and sometimes demand is highly controversial, particularly in Europe, where citizens are used to have healthcare for free (obviously, this is not true, we don’t have our healthcare for free, we pay taxes for it, but somewhat we give a large amount of our money each year to those who manage our healthcare, to governments, to insurance companies, hospitals, etc. without holding them accountable for efficiency or quality). Any pilot test to prove demand right is highly appreciated by investors.

Operating margin is a very important issue as well. It is important to see if the business model wants to make a lot of money from a few users, or a few money from a lot of users. As demand is uncertain, a high operating margin model is usually pursued.

Finally, the capital intensiveness of the project is critical, especially if the money needs to be allocated to marketing or brand generation. In case of failure, this "marketing" money has no salvage value, it cannot be recovered easily (it is not invested in something tangible, that could be sold by “pieces”) so it usually scares investors away.

Value for physicians (I)

Physicians and investors have a very different view on value. Physicians tend to focus only on the product (they love to talk about it, to share it with others), and therefore they are concerned about product-related milestones, such as prototyping, patent request or administration approval (FDA/European approval).

(see next post as well)

... and value for investors (II)

(see previous post as well)

Investors on the other hand, think in a more complex way. They are not really interested on the product, they are more interested in all the milestones needed to take it to the marketplace, and capture value. They focus on team building, distribution, manufacturing, market introduction and potential exit milestones. Both parties speak different languages.

The best projects flourish when both sides learn from each other and speak a common language.

Knowledge is slower than innovation

Imaging technologies are nowadays so good at peering inside our bodies they may have surpassed our capacity to interpret the results. Many findings are today what we doctors call “incidentalomas”, that is, false positives; for instance, images that look like cancer but after surgery turn out to be benign. We see “smaller things”, and smaller, and smaller, but we are unable to correlate them so quickly to what is normal and what is not. This should be a concern for healthcare professionals.

The same happens with biotech and diagnostics. The new detection techniques such as proteomics have made great progress in associating particular biomarkers to certain diseases, but we still don’t know how often those same markers turn up in non-diseases outcomes. Knowledge moves forward significantly slower than technology.

A different venture capital model?

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Venture capitalists fund insights—that is, they let the magical process that generates new ideas take its course, and then they jump in. I’ve always wondered if a different kind of model could “fly”, a model where a venture capital company makes insights rather than funds them, hiring smart people, coming up with ideas, patenting them and then licensing them to interested companies. Science fiction?

Well, not anymore… Something like that just happened in the US, and I find the idea so compelling. Natahn Myhrvold, a former Microsoft executive, just did that, founding a company named Intellectual Ventures, raising more than $100m. Take a look at the picture to understand the process… He may prove that the kind of insight that leads to invention can be engineered!

Being too picky when reading a business plan?

Some personal points of view today. I am usually accused of being too picky when analysing business plans (BP). Some entrepreneurs feel really passionate when someone from the outside has a critical opinion on their assumptions (I felt that in the past, as an entrepreneur myself, and I really understand it). But if you are an entrepreneur, you should get used to that, because critical opinions are something very useful.

I am very fortunate to see ideas in all stages. I “fish” very early stage ideas (sometimes even still in the entrepreneur’s mind, without a BP) and I’m involved with venture capital investments (where a BP has been analysed to death, literally dozens of times). This is a long continuum that forces me to have very different ways of “reading” business plans.

I will always (believe me, always) find things I don’t like in a business plan, no matter how good it is. And other investors will find things they don’t like in the very same business plan. And we will not agree 100% on those things we don’t like. And this does not mean the BP is wrong, it just means a BP is a highly subjective document.

When I see a BP, I somewhat decide which "mindset" I will use to analyse it:

I may decide to “read it”, and that means just understanding the problem and the solution it brings to the marketplace, the business model behind it, and checking for very rough inconsistencies in it. When using this mindset I’m not really interested in numbers, but I want to see the numbers already there, structured, ready to be tested and changed in a dynamic spreadsheet. This is the mindset I use when seeing a BP for the very first time, or when facing ideas or very early stage initiatives.

Then some other times I may decide to use a “glasses” mindset. Once I feel OK with the general assumptions and the business model, now would be the time to check for minor inconsistencies, look at the numbers more carefully, double-check important assumptions with external sources, and really be “picky” about everything I don’t understand.

And finally, if the project deserves it, and things are moving forward, I use a “microscope” mindset, where everything is analyzed and double checked to death, always having in mind that the BP is just a road-map, I never saw a BP matching the real evolution of a company. This would be more like a due diligence analysis, and as I say, it is performed very few times, only when start-ups are really being considered for an investment.

So far, so good, I guess pretty much everyone would agree. But what I understood after seeing all kinds of projects is that using a wrong mindset can kill an idea. Every stage needs a different level of detail to read the BP. Just "reading" a BP when considering an investment would obviously be a fatal mistake. But more importantly, using the “glasses” or the “microscope” mindset on a very early stage idea could destroy innovation, because entrepreneurs need time to really mature their ideas, you just can’t impose them your views on the subject, you can’t judge them on their first visit. If they feel everything was wrong, they may not come again. They need to remain creative and to find their way.

Anyway, no matter the “mode” used to read a BP, you will always get critic opinions when showing it to an investor, so you better get used to that!

Proof of concept

I was asked yesterday what is a proof of concept, so we are going to get a bit "techie" today. A proof of concept study is a trial to demonstrate clinical efficacy with a small number of strictly selected patients. It basically shows early evidence of the potential clinical efficacy of a new drug. It is an important concept for all biotech initiatives.

The objectives of the Proof of Concept Study are (a) to validate the relevance of novel therapeutic targets and in vivo preclinical models, (b) define potential biological markets for clinical efficacy, and (c) provide an assessment of the commercial potential of “new chemical entities” (NCE).

Proof of concept may be demonstrated sometimes through experiments performed at the cellular level and on animals, resulting in data that can reasonably be extrapolated to realistic predictions of significance and human trial results. Investors feel safer if proof of concept has been established, meaning the biotech start-up has demonstrated, at least in preliminary experiments that the idea will work.

When undergoing a proof of concept study, it is essential to have well defined criteria for decision-making according to its results. Among the things you would be looking at in a proof of concept study you may find:

• Safety
• Tolerability Bioavailability/Pharmacokinetics (PK)
• Biopharmaceutics
• Pharmacodynamics (PD)
• Duration of action
• Relationship between dose and PD
• Efficacy
• Patient acceptability
• Commercial viability in the indication at potential time of launch

Some personal stats: Entrepreneurship growing among healthcare professionals

Some quick thoughts today about entrepreneurship in healthcare. Every year thousands of healthcare startups are created around the world. Unfortunately, only a small percentage of healthcare professionals participate in the process. Why?

Two years ago we started a program in the Barcelona Medical Association (COMB) to support entrepreneurship among healthcare professionals (biotech, medical devices, services). I saw one entrepreneurial idea every two weeks.

Today, after two years, I’m seeing one idea per day… Physicians are getting used to entrepreneurship, they are finally learning the language of innovation. Healthcare professionals are tired of innovating and seeing their ideas exploited by others. They want to capture the value they generate (and I am so happy about it).

But there is so much potential to capture. For the industry to achieve its full potential we need to attract even more physicians and healthcare workers to the task. As I said in another post, we need more culture, more analysis, and more investments. But the trend is so clear to me. You can take my word for it… Entrepreneurship among healthcare professionals is here to stay!

Some thoughts on personalized medicine

Personalized medicine could be seen from an economic point of view as delivering “mass customization” to people in a healthcare context at an affordable cost. Personalized medicine has attracted a lot of hype and is often perceived as a far-future initiative that is not yet ready for useful value delivery to real-world patients.

Personalized medicine uses an evidence based approach, maximizing efficacy and the best therapeutic outcome, while minimizing adverse events. So far, so good, who could say no to that?, but this utopic vision will need to overcome several barriers to become a reality. There are at least 4 problems to address:

#1 Personalized medicine is more expensive. Who will pay for the incremental cost? Why should payers pay for this without compelling and clear evidence of superior therapeutic outcomes in patients that can be delivered cost effectively? Our current healthcare systems pay for volume rather than for value, we cannot measure quality of delivered healthcare, and this is going to slow down personalized medicine adoption if we don’t solve the problem.

#2 The blockbuster model does not work here. The economics of delivering a large number of molecules targeted at smaller patient populations will demand a radical transformation from the current model predicated on the discovery, development and commercialization of a very small number of molecules targeted at large patient segments. How can we define viable business models of “targeted therapeutics” to very small populations of patients while assuring profitability? This will be clearly the age of biotech (small size, high speed, more adaptability), and pharma companies will suffer.

#3 Drug approval is so XXth century… It is so slow (7-10 years to market), it is so expensive, and more importantly it is so flawed when analysing drugs for very, very small populations of patients… Fundamental rethinking of the regulatory regime to assure safety and efficacy will be needed to be agile. Additional periods of exclusivity may be imperative for targeted therapeutics to be rendered viable.

#4 Protection of the patient’s privacy and non-discrimination laws need to be in place for personalized medicine to become a reality. Whether we like it or not, this is something that worries patients, and we need to be prepared to offer solutions to it.

Identifying lies in financial projections

One of the most dangerous mistakes an entrepreneur can make is to seek confirmation of his actions rather than seeking the truth. They want to do something, so they talk about it with people who work for them. They talk to their families and friends. But they're only looking for confirmation; they're not looking for the truth. They're looking for somebody to tell them they're right. But the truth always comes out, especially in financial projections.

Entrepreneurs usually “lie” to themselves (without knowing it) when preparing the financial projections. This is not “technically” their fault, they are just too excited about the opportunity and they usually end up by setting wrong assumptions when building their numbers. Sometimes is excessive demand, sales, time to market, market share, speed of growth… you name it. Some get mad at me when I point out their inconsistencies (it happened to me again yesterday, and it will happen many more times in the future, I am used to it now).

Financial projections usually tell a great deal both about the start-up and the entrepreneur. One gets very fluent at identifying “lies” in financial projections by seeing a lot of them. Healthcare entrepreneurs should be aware of what an income statement says, and what it hides.

Investors are looking forward to investing in start-ups that offer a very large opportunity (which could become 1st, 2nd or 3rd in the market, could generate long term competitiveness and, let’s say, a 10x return on investment). Every entrepreneur knows that when looking at the numbers, investors will be trying to anticipate how much total financing will the company need, how probable is liquidity and how long to get there, when does profitability occur, and milestones and fundraising events.

But there is much more information hidden in the financials besides that. For example, does the business model “scale” well? Do revenues increase at greater rate than expenses? Are sales projections realistic? Is the total amount of financing needed realistic? Have the costs of growth been factored in?

When analyzing 5-year projections, I usually look only at the first three years to learn about the start-up. Anything longer than that is just science fiction, the entrepreneur just does not know. But years 4 and 5 offer very useful information as well, not necessarily about the start-up but about the entrepreneur himself… Is he ambitious? Is he consistent? How aggressive is he? What is his vision of the company for the future?

Strategy 101 for healthcare start-ups

Healthcare professionals are not used to strategical thinking. Strategy is about choosing a future for your idea and about defining how to get there. Strategy is about choice, which affects outcomes. Healthcare start-ups can survive for short periods of time in conditions of relative stability and little competition. But, guess what, in the real world there is no such thing as stability or little competition. So, you need to have a strategy.

Strategy is more a science than an art. It is difficult to encapsulate in just one post how to design a strategy, but from a conceptual point of view, strategic thinking should follow these steps:

#1 Understand the drivers that influence your future profits. Any variable that will affect your profit and loss and therefore can create or destroy value for your start-up needs to be deeply understood. Your future profits depend on what? The objective of this first step is to learn why can we have better or worse results.

#2 Understand your environment, both the general environment (economic, social, technological…) and the healthcare one (healthcare value chain). Who is your competitor, who is your provider, who is your client? Are there trends that could change the marketplace in the near future?

#3 Understand your scope, where are you competing, from a geographic (where do you want to sell?), product (which products?) and segment (to which clients?) point of view.

#4 Understand the resources you use, and your capabilities. Can you develop a future capability that could give you a competitive advantage over your competitors?

#5 Where are you then? At this point, by combining what you learnt from the previous steps you can build a Strengths, Weaknesses, Opportunities and Threats (SWOT) matrix. Strengths and weaknesses are internal characteristics of your start-up (#3 and #4), and opportunities and threats are external issues from your environment (#2).

#6 Formulate your strategy. After detecting the opportunities and threats around, and knowing about your capabilities today, you can define how you should compete in the future. Is what you do today sustainable? What do you want to be when you grow up?

At the end of the day, a strategy chooses a position for your company, that is, a scope and a set of activities able to benefit from your capabilities and able to protect you from the “forces” that will try to limit your profits. Obviously, when choosing this positioning, you are forced as well to decide what new resources or capabilities you will need in order to compete in the future. And this is strategy.

Strategic thinking has no end. Once you define a strategy, you need to anticipate again future changes and go back to #1 to dynamically rethink your strategy again and again.

What is value in healthcare?

Value can be defined from an economic perspective as outcome divided by cost. Value in healthcare services is often defined as clinical excellence, and that means that receiving the best medical treatment at the lower cost would be the best value scenario. Right?

Wrong. There’s a lot more in value than its economic perspective. Some healthcare initiatives are failing to see this and are betting on the excellence dimension as the only dimension that really matters. I am not saying that excellence is not important, I am just saying that in a world of “excellence inflation” (everybody is excellent), there are many other dimensions of value that really make a difference when the patient chooses to stay at a hospital or pay for a service.


Here’s my list:

(1) Personalization: Patients want their healthcare their way. They want healthcare to be aligned with their preferences and personal needs.

(2) Transparency: Patients increasingly want to know more about their diseases, they want to have intelligent conversations on how a course of treatment will impact them. Building trust through transparency is becoming essential.

(3) Simplicity: The old “kiss” rule (keep it simple, stupid) applies more than ever. Patients are stressed, worried, they really value simple processes of admission and discharge, information request and many other minor things that at the end of the day can make their lives so much easier.

(4) Human interface: A lot of doctors are not good at bedside manner, the human relationship with patients. And excellence is no longer enough. Patients need a human interface to communicate with. A caring staff can make again a difference.

(5) Time: Anything that saves time is greatly appreciated. Waiting lists, queues at emergency department, weeks to know the diagnose… All these matter too when citizens are making their healthcare choices.

If you are building a healthcare start-up willing to provide healthcare services, try to compete in all the dimensions, and not just the “excellence” one.

Some politically incorrect thoughts about healthcare

The more I work with hospitals, the more I believe hospitals are uniquely positioned to benefit financially from discoveries in the medical field. This is not only true for cutting edge research but as well for any operational or management related initiative. Hospitals may be an outstanding partner for start-ups willing to enter the marketplace.

But the more I work with hospitals, the more I see they don’t get it. They don’t see the potential and they do nothing to capture it. Why?

(1) Most healthcare managers still see innovation as a task. Most physicians still ask questions such as “I am already seeing patients, doing research, teaching… and you you want me to innovate as well?”. Well, innovation is not a task, it is not something that has to be done, it is a state of mind. Innovation is a permanent questioning of how we can do things better. You can innovate while you see patients, while you do research, or while you teach. But you need to see things differently, you need to be constantly looking for needs.

(2) The idea that hospitals should be promoting and funding healthcare start-ups that are designed to have a profit is still politically incorrect. For most CEOs, nurturing healthcare innovations should be directly tied to a nonprofit's mission… Well, I am afraid this may be politically correct, but from an “efficiency” point of view, it may be totally nonsense. Improving healthcare should not be a cause, but a “business”. If it is just a cause, many start-ups won’t flourish, and important innovations that were meant to save thousands of lives or make patients lives better won’t never reach the market.

So, if you are a hospital CEO, a medical director, a healthcare manager, I beg you to see the innovations around you as potential venture capital (VC) investments… Try to see reality with a different mindset. VCs aren’t dreamy idealists. They are indeed ruthless realists. They’re pragmatists, looking for returns on investment, and a piece of the future action. Successful VCs try to define the risks they have to take and to minimize them as much as possible. They’re not risk-focused but opportunity-focused. They are looking for unfilled niches. And when they find one, they invest in it, and they profit from it.

Nurture and invest in the innovation that flourishes at your hospital trying not only to do good, but to capture value as well. Innovation is a for-profit business if you want to do it well. Sophisticated hospital executives are increasingly realizing the potential benefits of such an investing philosophy.

"Free" business models in healthcare

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Yesterday I was invited to give a lecture at the “Instituto de Empresa” in Madrid, Spain. The topic was innovation as a driver of healthcare in the XXIst century. I shared the floor with two amazing healthcare professionals from the New England Journal of Medicine. I want to thank both medical economics and instituto de empresa for having me.

One of the most interesting things we discussed was “free” business models in healthcare. I am sharing with you one of my slides on the topic. Is it possible to give away something for free in healthcare and still make a decent profit out of it?

Well, in my opinion it certainly is. Free or “low-cost” will come to healthcare in the coming years. Free is what citizens want — and free, increasingly, is what they are going to get. But free does not mean no profits. The start-up that is giving away the good for free can make a living by “capturing” the client and charging him/her for different things.

As you will see on my slide, in healthcare there are at least six different strategies to capture value when giving away something for free. If you want to go deeper into the subject you may find very interesting to read Wired magazine's article about “Free”.

The science is the business

Science plays an important role in the XXIst century. In other sectors of the economy, the science behind any product is increasingly important. In biotech and medical devices, science is even more important, in fact, here science is the business. This might scare some venture capital firms that are generalists (non specialized in life sciences). Educating the non-specialized venture investors is therefore essential to gain more “visibility”.

If you present a project to a generalist venture capital firm, you should have in mind why biotech is a great market to invest in:

Pricing power and high margins
The administration has tried for a long time to reduce prices on older drugs (generics). They have been successful indeed in cutting prices on the old drugs, but never on the innovative drugs (their cost-effectiveness is usually very well documented). The classical supply-demand law does not apply in this sector. This means a new drug can potentially achieve margins of more than 90%, and even drugs targeting reduced communities of patients (rare diseases) can create a multimillion business.

Monopolistic market
Barriers to entry are enormous. Know-how and investments create indeed big barriers to entry, and the 20 year protection from patents and the Orphan Drug legislation usually give new drug developers a monopolistic market to exploit.

Market target clearly defined
Biotech companies selling drugs have access to markets that are clearly defined by physicians and by patient registers in hospitals. The demand structure is therefore highly predictable, which is rare in other sectors where markets need to be created.

Revenue stability
Unlike other markets, drug sales are stable on not subject to sudden loss of consumer appetite.

Managing risk in healthcare start-ups

Venture capital investors focus on risk and how they can decrease it. They want to make sure the entrepreneur knows about the risks ahead, and how is he planning to cope with them should he need to. Some entrepreneurs are not willing to talk about those risks, as they think maybe the investor will factor them and therefore the start-up will receive a lower valuation… Right?

Wrong. Well, if the investor does not hear about the risks, he will quantify them himself pretty ruthlessly, usually with a bigger impact on the valuation. The message you want to send to the investor is that risks are under control, and you are ready to face them. It is therefore useful to include in the presentation:

• What are the risks?
• When are the deciding events going to occur?
• What are the chances of those events occurring?
• What is the upside versus the downside of the event?
• How can you prevent them?
• How much does it cost to prevent them?

Risk in healthcare has five dimensions:

Operational risk
Can the people in the company deliver? Do they have the skills and the energy to execute the business plan? Is there a clear path to market?

Technological risk
What if the technology does not show itself as feasible? What if our product does not work as expected, or a competitor introduces a better product on the market, with superior technology?

Intellectual property risk
Healthcare relies heavily on intellectual property. The nature and size of the investments required for many start-ups, specially those related to life sciences or medical devices, needs some sort of market protection. The risk of not receiving a patent is therefore an important issue.

Regulatory risk
What if the different administrations don’t approve the market launch of our products?

Financing risk
What if at some point in the progression of the start-up the entrepreneurs cannot find more capital needed to grow, and the present investors don’t want to throw more money at it? Will the company need several rounds of financing? Is it possible to stretch the lifetime of the current capital by taking the burn-rate down?
(*burn-rate is the speed at which the start-up consumes its money, If the shareholder capital is exhausted, the company will either have to find additional funding or close down)

Reward success and tolerate failure

Innovation has become synonymous with survival in the current healthcare environment. Hospitals, however, tend to be conservative, hierarchical, conforming and risk-averse. And they don’t reward innovative physicians.

To innovate, there’s always a risk. For physicians or healthcare professionals to assume the necessary risks of innovation, they must have some confidence that their hospital will reward success and tolerate failure. I don’t see that very often in our healthcare ecosystem. A climate of trust is so much better than a climate of punishment. The carrot is so much better than the stick.

Innovation, for hospitals, means economic survival. Market pressure from the administration, patients and the rest of the healthcare value chain induces hospitals to (a) try to be perceived as better than their competitors and (b) to reduce health-care costs through efficiencies. Today’s best hospitals are the ones that have been very active at innovation, and this trend will continue in the future, as innovation will be the most important differentiator among hospitals. Excellence will no longer be enough.

So, yes, innovation provides competitive advantage, and failure to innovate will be very dangerous in the XXIst century. What’s the first step? What’s the single most important thing to foster innovation at a hospital? Develop a climate of trust.

Milestones

I had a very nice discussion today in a board of a company that is looking forward to raising venture capital. We were talking about milestones, specific goals and tasks that the start-up was willing to accomplish in order to succeed.

The milestones slide is usually one of the most difficult slides to define when preparing a VC presentation. Venture capital investments are usually "staged." A certain amount of money is invested right away and additional money is invested later, as certain milestones are reached. From the company's perspective, it's important that these milestones are clearly defined and reasonably obtainable.

Investors love to see different things in the milestones slide. For me (I love simplicity, maybe different investors would think different ways of structuring this slide), a milestones slide should try simply to structure the future of the company into two or three stages, and define for each stage three things:

• What is the company going to do (where is the company going to spend money)
• How much will it cost (and therefore, when does the company need the money and how much is it for every stage)
• What would be the end result of it (goals accomplished, providing a good framework to evaluate the progression of the start-up)

It is as simple as that, but it takes a lot of perspective, clarity of goals and commitment from the start-up, as it establishes compromises that will be probably linked to the investment.

10 thoughts that could kill your idea

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I’ve seen hundreds of healthcare ideas in the last years. I keep a database with all of them. I’ve been going though it this weekend, and while doing so this decalogue came to my mind. These are mistakes healthcare entrepreneurs make very often. Hope it helps!

#1 If my idea is great, I will find money very quickly
False, your idea is worth nothing… if you execute it, it may be worth a lot, but its value comes from its execution. Without an outstanding team to execute it you won’t get very far, even if your idea is a phenomenal breakthrough.

#2 Scientific founders should continue as CEOs forever
False, healthcare entrepreneurs with a scientific background should be aware at some point in the future it is in their best interest to bring experienced management to the company.

#3 Dilution is a bad thing
False, it is indeed better to have 20% of a company that has €10m profits than 95% of a company that is still losing money. Growth needs capital. Success comes in hand with great investors and shareholders. You need to be prepared to dilute in order to grow.

#4 My success in the market is totally based upon the quality of my product/service
False, false, false… there are many other issues around. Is there a market in the first place?

#5 Everybody will love me when coming to the marketplace
False, some incumbents will try to crush you totally, you better be prepared. There is no such thing as a “neutral” arrival to the marketplace. You need to know who will be your friend, who will be your enemy. Study the healthcare value chain very thoroughly.

#6 I will be all things to all people
False, a big niche, does not mean a greater chance of dominance. Quite on the contrary, a small niche is usually synonymous of success.

#7 It is not the right time to launch my start-up
False, there is never a perfect timing to launch. You don’t need the perfect product or service to start… Every idea has a window of opportunity, waiting for too long could kill your idea.

#8 It is important not to tell my idea to anyone, they could copy it
False, there is much more to gain—feedback, connections, opened doors—by freely discussing your idea than there is to lose. If simply discussing your idea makes it indefensible, you don’t have much of an idea in the first place. No matter what you think, don't be paranoid, trust me on that one.

#9 I will negotiate an “I win, you lose” deal with VCs
Wrong. Negotiation with VCs is always a cooperative negotiation, never a competitive one. You will have them around for a long time, you better have a great relationship with them and allow them to help you.

#10 if I build it, they will come
False. Never bring to the marketplace a solution in search of a problem. The best start-ups I know are always built by entrepreneurs that identified first the problem and then offered a solution to it

+1 (extra one) I prefer to aim low, I am afraid to fail
That's the worst one... Wrong, wrong, wrong. You can always learn from your failure and finally succeed if you persist. We tend to stigmatize mistakes. Most potential healthcare entrepreneurs are too frightened of being wrong. And if they are not prepared to be wrong, they will never come up with anything original. I like people that aim high and miss, they usually learn and succeed. Aim high!