Building Healthcare IT Companies: 11 Insider Insights

This blog post was a collaboration with my Venrock colleague Bryan Roberts, who in addition to being a great bio-tech and medical device investor, was also an early lead investor in athenahealth, and currently on the Board of Coderyte and Castlight, two really hot HCIT companies.

Having participated in healthcare IT for the last 10+ years, we decided to collect and share some lessons learned. The list is by no means exhaustive, so let us know your thoughts – where you disagree, what you would add, etc.

1. The product must be a true “have-to-have”, not a “nice-to-have”. Any healthcare IT product needs to solve an important problem for a defined customer base (providers, payors, patients) and this is where lots of companies go astray. The product needs to help someone enough for them to be compelled to adopt it, while they are busy worrying about a lot of other things, and it is not enough to have a product that helps out the “system”. If you can’t convince yourself that it is one of the top three things that your specific customer is concerned with, forget it.
2. Healthcare is actually an aggregation of many small “markets”. While the overall healthcare market is measured in billions – if not trillions – very few needs, ideas or businesses can span the entirety. Many companies/ideas are only applicable to a subset (breast cancer, arthritis, heartburn, etc.) of healthcare or require significant re-work as one moves from one disease area to another – think content for different diseases. This dynamic also substantially impacts some of the revenue stream opportunities and the critical mass needed to make a business viable. For example, pharma advertising for a given drug is targeted at patients with a specific disease, not all healthcare consumers, and so the number of overall users needed to amass a specific target population and access that ad revenue, is many multiples of that target market.
3. Start-up revenue streams and value propositions are elusive. There are lots of potential revenue streams in healthcare, but many are only accessible to a business that has hit scale (perhaps $100MM revenue) and critical mass creates an ecosystem such that the network has value above and beyond the interaction between the individual customer and the product. This is especially true for advertising and data revenues, but also for lead generation and others. It is much simpler to create viable revenue streams when your business reaches a substantial size than it is to find the revenue stream that gets you from $0 to $50MM… So think hard about the value proposition and revenue stream for the start-up phase of your business before you hit critical mass and dominate a space.
4. Customers must have more money with your product, than without it. There is no room for broad adoption of products that are a financial drain. Remember that every participant in the healthcare system is strapped for cash – hospitals are lucky to run a profit, doctors’ earnings have decreased consistently over the last decade and patients are used to “free” healthcare. You have to offer hard, demonstrable ROI. You can get away without it for a small number of leading edge customers for a while, but the primary goal of those customer engagements must be to get the ROI data that will be necessary to support broader customer engagement. Adding another cost, even with a long-term ROI is very hard.
5. Businesses with strong network effects are gold mines. Given that healthcare has complex problems and customers are tough to secure (long sales cycles), a network effect can solidify a first mover advantage and continually decrease sales cycles, as well as afford sub-5% annual churn rates. Happily, the healthcare industry is ripe to create businesses with network effects given the historical underinvestment in the space and the proliferation of “big data” business opportunities. Every customer should benefit from the cumulative customer base, with each subsequent customer deriving and creating more value than prior customers.
6. The customer is mobile. Unlike many verticals, most health care providers do not sit at their desks all day; they are doing rounds and moving between exam rooms or even buildings. Meanwhile, consumers are making decisions that impact their health (eating choices, exercise, lifestyle) while out in the real world, living their lives. This situational complexity cuts both ways. On the one hand it makes some traditional enterprise strategies more difficult, while on the other, especially when combined with the proliferation of smart wireless devices, it creates opportunities for a new breed of mobile healthcare applications not seen previously.
7. Expect to have a service component to your business, but avoid becoming a customized consulting shop. Healthcare is complicated and confusing, and although technology may solve a multitude of problems, it will require some handholding and take time. There is nothing approximating shrink-wrapped software in healthcare – and you want to use the service component of your business to help improve your software product. There is a virtuous cycle between the software and service. On the other extreme, the technology infrastructure should not be stove piped or custom-built for each individual client, even “marquee” clients. In healthcare, for a variety of reasons, there are significant pressures to bring your technology infrastructure directly under the thumb of the customer—the servers, the code, the management of the upgrade schedule, etc. Try to resist these pressures and ensure that you build a common chassis that you own with “plug-ins” for individual clients as needed.
8. Beware of businesses dependent upon heroics…Make it easy. The healthcare sector is a notorious technology laggard, and for good reason. The environment can be chaotic, collaboration is complicated and staffing is convoluted. Simplicity is key with user interfaces and alerts are essential. For businesses targeting health systems, if your business depends on the brilliance, creativity and bandwidth of hospital IT, think again. Hospital IT is massively overworked and understaffed and has a list of number one priorities a mile long. The perfect solution for hospital IT is one that requires little or no effort on their part. For business targeting consumers, it’s dangerous to assume that consumers will wake up and start taking better care of themselves. Consumers will eventually start taking better care of themselves, but it is unlikely to occur before you run out of cash.
9. Know your domain. Healthcare IT is neither healthcare nor IT. Concepts and actions that traditionally work in each of those established spaces can run afoul in Healthcare IT. Navigating this sector is complicated – from a regulatory perspective, privacy, relationships, etc.
10. Secure customer references and studies. Winning “lighthouse” accounts, such as the prestigious clinics and teaching hospitals (Mayo or Johns Hopkins), can be great validation for your product or service. These customer references will earn you respect, but unfortunately many customers will look at those institutions as fundamentally different from their own situation (whether based on size, financial resources, scope, etc) and thus not relevant as case studies. Often you will need multiple, credible local references in each geography before you can enjoy the efficiencies of reference selling. Same goes for ROI and effectiveness studies.
11. Do well by doing good. Healthcare can be viewed as a business or a calling, but the most successful ventures view it as both. It is hard to beat an entrepreneurial team that is powered by the dream of both financial and social rewards. So strive to create value across the board (customers, investors, community).