7 Reasons a Healthcare Software Startup Should Be Funded by Physicians, Not VCs

11/21/2016 02:17 am ET Updated May 01, 2017
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This is a guest post by Laurence Girard. Laurence is the CEO and founder of the telehealth software company Fruit Street. He was previously a pre-med student in the Bachelor’s Degree Program at the Harvard University Extension School. Fruit Street is funded by 160 physician investors and is a public benefit corporation.

Every year more than 600,000 new businesses launch in the US. Of those, only a few hundred are funded by venture capital. The probability of a new business being funded by a venture capital firm is a minuscule 0.0005 percent (300 out of 600,000). Still, for some reason, many Silicon Valley healthcare entrepreneurs make “getting VC funding” their exclusive goal. Without a single VC dollar, we have raised over $6 million in funding from 160 physicians.

Why did we focus exclusively on physician investors?

1. Physicians Are More Patient Than Venture Capitalists

A VC firm’s sole objective is to provide maximum return on investment for its limited partners. As a result, VCs put inordinate pressure on portfolio companies in the hope that one in 100 will become a billion-dollar unicorn. This approach results in a large number of these companies failing. They otherwise may have been successful had they attempted to grow at an organic pace. Physicians are much more patient than VC investors.

At Fruit Street, we would prefer to raise $25 million of funding if needed from 500 physicians investing $50,000 each while benefiting from their advice, rather than having only a few venture capitalists as investors that gave us the same amount of investment.

2. Physicians Are Smarter Than Venture Capitalists

Some traditional angel investors and VCs I’ve spoken with have said that physicians are “stupid investors,” but this reputation is completely unjustified. In fact, it is the traditional angel investors and VCs who are rapidly earning that reputation. Famous VC Vinod Khosla was asked by TechCrunch founder Michael Arrington which VC is the “most full of shit that you’ve ever heard.” Vinod responded, “I would be offending too many people. Maybe some percentage that’s substantially larger than 95 percent of VCs add zero value. I would bet that 70 to 80 percent add negative value to a startup in their advising.” I strongly prefer an investor with a medical degree than any VC.

3. Venture Capitalists Get Paid Well to Lose Money

A recent Harvard Business Review Article titled, “Venture Capitalists Get Paid Well to Lose Money” explained that “2013 annual industry performance data from Cambridge Associates shows that venture capital continues to underperform the S&P 500, NASDAQ and Russell 2000.” Why would I as an entrepreneur want to seek money from investors who are clearly not generating returns with their business model? The VC model is broken. The article goes on to point out that venture capitalists get paid a 2% management fee paid annually regardless of what returns are generated and they do not invest their own money. I would rather have physicians as investors who are investing their own money and have skin in the game. This gives our investors more motivation than a venture capital firm to help our startup succeed at all costs.

4. Founder-Led Companies Are More Successful and Founders Remain in Place Longer

A leading VC in Silicon Valley, Sequoia Capital, has stated that 45 percent of founding CEOs within their portfolio are fired within 18 months of the initial investment. Yet, according to a recent study conducted at Purdue’s Krannert School of Management, companies at which the founder still plays a significant role consistently outperform those companies at which the founder is no longer active.

5. Physicians Beta Test Your Product

Most venture capitalists will never interact with a patient, much less hold a medical degree. VC investors do not use your product. Our investors commonly use our product with their patients and provide valuable feedback we can use to continuously improve our product.

6. Physicians Care More About Social Impact and Patient Care

Our healthcare software company, Fruit Street, is a public benefit corporation. In addition to being for-profit, we write our social mission into the company bylaws. We chose to work with physicians because we wanted to make a social impact on the industry, not simply turn a profit. It was for this reason that we identified physicians as the optimal investment partners. Fruit Street’s mission is to “prevent and treat lifestyle related disease using telemedicine, wearable devices, and mobile applications.”

7. Physicians Take The Hippocratic Oath

There is no greater honor as a healthcare entrepreneur and founder than being able to learn from physicians who instill these values as the core of their profession:

I will respect the hard-won scientific gains of those physicians in whose steps I walk, and gladly share such knowledge as is mine with those who are to follow.

I will apply, for the benefit of the sick, all measures which are required, avoiding those twin traps of overtreatment and therapeutic nihilism.

I will remember that there is art to medicine as well as science, and that warmth, sympathy, and understanding may outweigh the surgeon's knife or the chemist's drug.

I will not be ashamed to say ‘I know not,’ nor will I fail to call in my colleagues when the skills of another are needed for a patient's recovery.

I will respect the privacy of my patients, for their problems are not disclosed to me that the world may know. Most especially must I tread with care in matters of life and death. If it is given me to save a life, all thanks. But it may also be within my power to take a life; this awesome responsibility must be faced with great humbleness and awareness of my own frailty. Above all, I must not play at God.

I will remember that I do not treat a fever chart, a cancerous growth, but a sick human being, whose illness may affect the person's family and economic stability. My responsibility includes these related problems, if I am to care adequately for the sick.

I will prevent disease whenever I can, for prevention is preferable to cure.

I will remember that I remain a member of society, with special obligations to all my fellow human beings, those sound of mind and body as well as the infirm.

If I do not violate this oath, may I enjoy life and art, respected while I live and remembered with affection thereafter. May I always act so as to preserve the finest traditions of my calling and may I long experience the joy of healing those who seek my help.

-Written in 1964 by Louis Lasagna, Academic Dean of the School of Medicine at Tufts University, and used in many medical schools today.

Healthcare entrepreneurs should strive for these same Hippocratic values. The best way to do that is by receiving funding from the very people that uphold those values.

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