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?

(click on the image to make it bigger)

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!