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The Trouble With Healthcare Startups

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US healthcare system costs have ballooned out of control. Bloomberg News predicts that by 2021, healthcare spending will reach 20% of the total US economy. If there was ever a time for healthcare disruption, it's now.

How Did We Get Here

Healthcare insurance started out as a perk to employees who were working high risk jobs. These laborers were working on ships, metals, containers etc. and wanted to make sure that if something happened, they were able to get back to work. Our health insurance system was built around treating acute care instead of a complete approach to healthcare. Now that the US is composed of an army of cubicle dwellers, we face an entirely different problem.

In many other industries, changes to the customer base facilitate new market entrants that are faster and more efficient. We should be seeing major changes that address the change.

But healthcare simply has too many stakeholders to make an impact quickly. I was recently looking at innovative treatments for Diabetes. As we started mapping out the key players, we realized that there are over 24 identifiable stakeholders. This represents a major impediment to any company - even if you have built a 'better mouse trap.'

The Deeper Problem

When companies go through fundraising, the first two rounds are really critical. For healthcare IT startups, a typical seed round is $250k-$700k. While this may seem like a decent amount of money to kick things off, this level of funding just doesn't buy enough runway to break through those 24 relationships needed to really get a new product out on the market.

Then, more critically, you use the seed fund and go for the next round of funding from institutional investors for $1M-$5M. At this stage, Venture Capitalists and even larger seed funds are looking for traction - usually in terms of revenue. Unfortunately, though, revenue typically isn't very high in a healthcare startup this early. Resources have been spent on attorneys, regulation, and partnerships to even get to Series A financing.

At Board Vitals, a healthcare education company that I started two years ago, we have faced Continuing Medical Education requirements, six complex relationships with Medical Publishers and research institutions, and countless more stakeholders to go.

This means that it takes a LOT longer to fundraise, because you have to find an investor who is comfortable with slightly lower revenue, a tough regulatory environment, and a set of complex partnerships.

As an example, I've done two startups now (one healthcare, and one not). Here's the distribution of time spent:

2014-05-26-BoardVitals_timespent.jpg

I've spent 28% of my time at Board Vitals focused on fundraising and relationship building. Recruiting talent for the healthcare industry is just as hard. It hasn't been easy to find a Chief Marketing Officer from a small to mid-sized healthcare company, in part, because most Healthcare startups have failed.

A report by CB Insights showed that 55% of startups that failed last year had raised $1M or less. This puts particular pressure on healthcare startup facing a cash crunch.

Possible Solutions?

There are a few potentially good approaches. One is for startups to find good communities where healthcare investors are more concentrated. Blueprint Health and Rock Health are two good examples. Issuing tax credits is another potential approach http://startup.ny.gov/ has been helping several healthcare startups avoid the heavy tax penalties that exist in a state like New York. And lastly, we hope that larger companies will start to open up more strategically to new innovations that can drastically improve their operations.

Healthcare startups stand to improve key elements of a struggling industry, and we hope we'll have the chance.

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