Healthcare entrepreneurs should prepare for an upcoming VC/PE bubble

While many industries are taking a major hit due to the ongoing pandemic, the healthcare technology market continues to grow. In fact, total healthcare-related innovation funding for H1 2020 hit $9.1 billion, up nearly 19% compared to the same period in 2019, according to StartUp Health’s 2020 Midyear Funding Report.

As the virus continues to pose new challenges for the industry, investors are rushing to pump money into startups addressing healthcare sub-sectors ranging from telemedicine to patient financial engagement.

The inefficiencies and frustrations of the U.S. healthcare system make it a tempting target for disruption-oriented VCs. But here’s the hard truth: Healthcare is unlike any other industry. It has a morass of regulations that a “move-fast-and-break-things” startup can’t handle over the long term.

Healthcare is also a sensitive, personal issue. As such, patients are inherently reluctant to adapt to new technologies, even when they’re dissatisfied with the status quo. Consequently, it’s crucial that startup technology leaders in this space understand how to wade through these unpredictable waters in order to thrive and deliver a strong ROI for investors.

But here’s the hard truth: Healthcare is unlike any other industry. It has a morass of regulations that a “move-fast-and-break-things” startup can’t handle over the long term.

Entering health technology

VCs are seeing all the latest headlines about COVID-19 and spying a potential money-making opportunity to invest capital into innovative startups. However, they must overcome barriers to entry when offering patient-focused, technology-centric solutions before they can compete with legacy players. As the saying goes, “Luck is what happens when preparation meets opportunity,” and, within the healthcare startup space, COVID-19 presents an opportunity for those who stood ready to offer a solution to the market before the situation became a crisis.

Therefore, VC and PE investors should focus on the problem the potential startup is trying to solve as recent times have rapidly refashioned the need for certain solutions. Are there other key players leading the market, or is the startup a duplicative offering that is currently available? If the value proposition is unique, it may be interesting. If it’s not, investors may want to think twice.

Solving a unique problem is the key to success for an innovative startup company. For example, when I joined this industry 10 years ago after seeing how frustrating the billing and payment process was after the birth of my first child, I knew there was a challenge. Our team braced for the hard work that would go into creating a successful solution that delivered improved experiences for patients and providers within the healthcare industry.

Since I was not from the healthcare industry, I came to the table with the traditional technology mindset I learned from starting my previous software business: to disrupt and improve an industry’s “status quo.” However, I discovered there was a different learning curve to healthcare in America. The endless policies and regulations within the industry meant we had to build and engineer a robust product that could viably weave through all the red tape. It also needed to accomplish this in a compliant way, with the goal of delivering a better patient financial experience. This meant I also had to recruit a strong executive team who understood the nuances of this particular space and include leaders who shared my vision for growth.

Speaking of executives, it is vital that key executives within a startup have deep relationships and connections within the target industry. As entrepreneurs, we’re always looking for opportunities to network, but pay attention: You never know when your company’s value proposition can come in handy in the most peculiar of situations. I never realized the true worth of my “elevator pitch” until I was literally riding in an elevator one day and a fellow rider asked me what I did for a living.

After I explained, she shared that she was the COO of a major medical group trying to solve the same problem we recognized in the market. Long story short, we ended up with a contract with that medical group, and we were off to a great start. Because of this great “luck” (opportunity and preparation), we were able to realize the start of strong momentum, and continued to build our business with more clients recognizing our value. As a result, Patientco has not had to raise further than a Series B round.

Deploying capital effectively

Many entrepreneurs fail because they did not spend their capital efficiently. As a startup, companies can raise money two ways – from clients or from investors. A struggle many newly funded startups face is how to deploy investor capital effectively and manage it – well before you expand your client base. One important lesson is to always prioritize the client, which ensures your survival and growth as a startup. While press releases for new partnerships or awards may seem exciting to share over LinkedIn, the true value in deployment of capital is realized when signing on new clients and keeping them satisfied through renewals.

Sometimes the key to survival is also the ability to be agile. It is important that startup leaders pay close attention to new state and national policies being debated in legislative bodies, and the ramifications they may have on their business. This is true for healthcare, especially as legacy payments players are delving into new healthcare microsegments, attempting to take market share from emerging startups. Startup leaders will need to quickly pivot business models and thus deployment capital strategies in order to survive. The biggest barrier to startup success is often leaders not thinking about the long-term vision. There are no shortcuts to success in the healthcare industry.

Creating a long-term growth and innovation strategy

Building a long-term growth and innovation strategy in healthcare technology is often at odds with the traditional VC model that wants to see early success and immediate ROI. To ensure investors and other stakeholders are pleased, startup leaders must dedicate resources and time to map out how the business grows over the next three to five years; they should constantly reflect on these plans every quarter with the company and the board of directors to ensure alignment.

If the current innovation and product development strategy for the next 18-24 month horizon isn’t aligned with goals in the near and far needs of the industry, leaders need to quickly refocus. The opportunity gaps that exist in healthcare, today and tomorrow, should always be top of mind for startup leaders who want to effectively compete with the existing market players.

Now’s the prime time to create a healthcare startup — potentially. However, the road ahead will not be an easy one for emerging solution providers. It’s critical that VC and PE-backed leaders focus on investing their time and energy in understanding the complexities of this sector. Otherwise, they risk biting off more than they can chew and may find themselves hemorrhaging money while VCs who do not understand the challenges apply more pressure than they can endure.

By ensuring there is enough capital to create a viable product or service that has a tremendous growth path in the healthcare industry, and having investors involved who understand the nuances of healthcare, startup leaders will more likely experience success with the long-term viewpoint in mind.

The best bet in today’s COVID-19 world is to recognize that we are all in this together — and we can do better than the status quo.