FROM A GREAT HEALTHCARE TECHNOLOGY TO A GREAT HEALTHCARE BUSINESS

Combined views and experiences of Alex Stanke and Bern Gilbey

There’s no doubt that the healthcare sector is one of the more fertile arenas for new ideas and technologies to address everything from more effective treatment to better patient management. An immense amount of investment from business angels, venture capital and private equity is pumped into healthcare, enabling new technologies to appear every day, offering the promise of new and better treatments, 24/7 patient monitoring, implants, better surgical tools, digital therapeutics…the list seems endless. 

What, though, makes a great technology into a great business?

There are, of course, many aspects to answering that question. However, having a clear value proposition and a well thought through and suitable go-to-market (GTM) strategy are definitely two of the pillars on which a great business will be built. This article picks up on the combined experiences of Alex Stanke and Bern Gilbey to highlight some of the key elements that healthcare start-ups could usefully think about to give their great technologies every chance of becoming great businesses.

A.   WHAT IS YOUR VALUE PROPOSITION? – CUSTOMER VALUES VERSUS FEATURES

In our view, being crystal clear on your value proposition is one of the most important issues to establish if you want to take a great technology and make a great business out of it. Your value proposition underpins everything you do to create a great business more than any other single criterion. 

The process to developing a new technology is usually reflected in the “how” questions. How do we get this to work? How do we measure X? How do we enable patients to be monitored remotely? How do we speed up patient triage? How do we optimize our payment system? How do we reduce the burden on clinicians? How can this technology be more accurate, reliable, comfortable, useable…

Establishing your value proposition means answering the “why” question. Why does your technology address the pain points for patients, doctors, nurses, care givers, administrative teams, the C-suite…? Why is your technology better than what is currently out in the market and what benefits, or value, will it bring to various stakeholders? Why will customers switch from using existing solutions? This last point is really important. Adopting change within healthcare can sometimes appear glacial, not because you don’t have a better solution but because sometimes, it means that people must change old habits. Your value proposition must be compelling enough to encourage users to embrace the change it represents.

However exciting your technology is from a technical perspective, your business success will be built on the value it offers, the solution it provides, the improved patient outcome it delivers etc. These are the most important aspects to emphasise if you want such great technology to be bought and paid for!

You might be surprised how often a clear value proposition is missing from a GTM, fundraising deck, elevator pitch and so on. One way to start the conversation about your value proposition is to look at the following questions and see which one(s) look most relevant.

From a value proposition/differentiation perspective, does your technology:

• reduce complications, perhaps resulting in cost saving, improved QALYs etc.
• offer information that informs treatment for example, remote monitoring enabling preemptive treatment that is more effective or cheaper to deliver,
• reduce cost,
• provide more accurate information for example, facilitating more targeted treatment,
• improve quality of life, and
• ease an administrative burden for example, lessening clinician burn-out, improving cash flow etc..

Answering these questions will inevitably lead on to the follow up question of “to what extent”. You will, at some point, obviously need to be able to quantify (and prove) the value.

At this point, it’s probably worth taking a step back. Once you are clear that you have your value proposition, ask the question “will someone pay for that”? In reality, a technology that delivers value is only a basis for a good business if someone will pay for it and, all too often, the fact that the technology delivers benefits doesn’t mean that someone will pay (or pay enough) for it! This is where a health economic analysis becomes important. The value proposition should be validated by an economic analysis which supports the economic benefit of the technology. Certainly, in the US, and increasingly in other jurisdictions, any sales to hospitals will need to be approved by a value committee of some sort. The health economic analysis is the basis for corroborating your value proposition. Equally, if the technology delivers benefits more directly to patients, a health economic analysis will be vital if you are going to convince payers to reimburse you.

B.   WHAT IS YOUR Go-To-Market (GTM)

Four of the key objectives of your GTM should be:

• Speed to market – the well-worn phrase of ‘time is money’ is never more true than with an early stage company with a cash runway, the end of which always seems to arrive unhelpfully quickly.
• Costs of distribution – finding the balance between keeping the costs of growing a customer pipeline and distribution as low as possible without inhibiting growth is a perennial problem and will be directly informed by establishing an optimal GTM.
• Capital efficiency – raising equity is expensive (from many perspectives) and different GTM strategies will require different capital requirements. If some of the approaches significantly improve cash flow, they may be more attractive simply by virtue of reducing the capital needed to succeed.
• Margin – finding the mix between achieving a strong gross margin and scaling unit sales fast enough to become relevant - meaning to become a provider of choice

One thing that will inevitably become apparent when you look at your GTM strategy is that the same approach is unlikely to be universally applicable, whether you judge that by reference to the particular market (for which read jurisdiction) or by reference to time; what is right today may not be the best approach three years from now. You’ll probably also find that there’s conflict between achieving all these objectives. That’s not unusual and it’s why you need to find the best alignment available.

THE INGREDIENTS OF YOUR Go-To-Market (GTM)

1.   IS YOUR TARGET MARKET CLEAR? – SEGMENTATION AND TARGETING

Determining your optimal GTM requires that you understand which market segment you are focused on. This is more difficult than you might think if the end user is the patient. Yes, healthcare is being increasingly democratized, and patients are more informed and have greater influence on their care than ever before. However, while the patient might be the end user and have a significantly greater say than was true a decade ago, how much influence does the patient really have over the medical devices used? In some cases, it is quite considerable (for example, ostomy products). In some cases, it is much less (for example, whether or not a continuous glucose monitor is required). In either case, it is not usually the patient who has all the decision-making powers. Whether within a single payer system like the NHS or a more fragmented system like the US, the purse strings are held outside of the patient’s control. Which, then, is the right ‘segment’ of the market to focus on from a GTM perspective?

You will see the close link here between the value proposition and market segmentation.

2.   IDENTIFYING THE OPTIMAL ROUTE TO MARKET – THE RTM

There can be a surprising number of routes to market:

• direct sales to patients
• direct sales to providers (hospital, doctors’ practices etc.)
• direct licensing (for SaaS or PaaS technology)
• sales to distributors
• partnerships (of various forms, contractual, joint ventures etc.)
• out-licencing (often useful when the technology is used in conjunction with a third-party’s product or services)

When the value proposition is clear and it has been validated for the chosen market segment the different RTM should be considered against the four key criteria identified earlier in the article, i.e., speed to market, costs of distribution, capital efficiency and margin optimisation.

Each RTM will have different results for your technology. Looking at the other alternatives and trying to establish the costs of the RTM, the return on investment and the risks associated with each option usually leads to the best decisions. Too often, building your own sales force is seen as the best way forward when, in fact, it can be quite capital inefficient, slow down speed to market and payment, and be riskier than working in conjunction with a distributor, partner, licensee etc. Yes, you will likely be giving up some of the margin on the technology. However, you will likely have exchanged some reduction in margin for lower working capital requirements, quicker revenue growth and reduced risk.

3.   CASH OPERATING CYCLE

As your CFO will no doubt tell you, the thing most likely to kill your business is running out of cash. It is worth looking at the cash operating cycle, i.e., the number of days it takes from buying your inventory to the date that you receive cash from your customer. If your payer is a government body or a commercial insurer it is likely to take meaningfully longer to get paid than if you can use a distributor on ‘net 30 days’. When you model your forecasts, how much difference does it make to your capital requirements to expect payment in 30 days rather than 90 days or beyond even if you are giving up margin for the reduced cash operating cycle? 

Equally relevant is the question of holding inventory. Having working capital tied up in unsold inventory, particularly if that capital is equity, is not great use of funds for an early-stage technology business looking to maximise the return on every dollar spent. New or better technology increases the value of the business and that’s where the capital should be focused. Tying up working capital in inventory has the reverse effect. With that in mind, which RTM offers the prospect of holding the least inventory? There is also the residual risk of unsold inventory becoming obsolete, either because of the shelf life of the technology or because you release newer/better generations of the technology.

4.   BARRIERS TO ENTRY

What are the barriers to entry? For example, do you need to become an approved seller

• to the hospital/provider and does this require approval from a value committee; or
• to the payer, be that the NHS in the UK or the commercial insurers or CMS (which manages the Medicare and Medicaid programmes) in the US?

This can slow down your speed to market considerably, whereas, working with a distributor which has already been through this approval process will be much quicker.

It is important to know which ‘buyers’ can acquire your technology in the short-term and which will need to be on a slower burn because of existing contractual obligations. 

Sometimes, a complicating factor can be the degree to which you need to be directly connected to the buyer or user. For example, how much training is needed to be able to use the technology. This, of course, opens up another question about whether training should be a paid-for service, but we’ll leave that question for another day! The relevance for your GTM strategy is the nexus to the customer you need. The closer to the customer you need to be, the less likely that a sale through (or with!) a third-party will deliver the optimal GTM strategy.

5.   WHAT’S YOUR EXIT STRATEGY?

Your GTM strategy should be informed by your exit strategy. For example, if your technology is likely to be bought by an existing strategic before you grow revenue too much, why would you incur the costs of building a sales infrastructure that is not likely to return much on the investment before you sell, and which is unlikely to add value to the business for a buyer that already has its own infrastructure in place? Indeed, should you be looking to utilise the existing infrastructure of a strategic from the outset? Can you establish a licence, partnership or joint venture with a strategic?

Linked to this is how best to structure a licence, partnership or joint venture if that is the best GTM strategy. Should it be exclusive? If so, on what basis and should it be limited by geography, time, product line? What performance criteria should the ongoing relationship be conditional on? Will the relationship include any co-development opportunities (and is that a good or a bad thing!)? Will you look to include an option to sell the business? These questions are important and have a significant affect on value. If you find yourself discussing these issues it would be wise to bring in some experienced outside support from people who know your sector and can help you achieve a better deal structure.

6.   THE SPEED TO MARKET ELEPHANT TRAP!

We have already noted the critical importance of speed to market for a cash-guzzling start up, but can your GTM be too ambitious, and you fall into the elephant trap of trying to grow too fast and too aggressively?

It is possible to rush your GTM at considerable cost. What happens if your technology doesn’t perform in the field as expected? What will you do if you haven’t built the infrastructure to sustain higher levels of sales? In reality, you can end up with some expensive problems, or even business failure, if you push your GTM too hard and too fast.

•  Reputational damage can be very expensive (and time consuming) to recover from. The old saying that you only get one chance to make a good first impression is as true with medical technology as anything. If it doesn’t work as expected and you’ve sold a significant number of units to patients, providers, physicians etc. you will spend a lot of time (and money) recovering from having made a poor first impression.
• It is also very uncomfortable if you find yourself needing to reduce headcount having hired ahead of the curve. This creates a challenge to any company’s culture that holds itself out as looking after its team members.
•  You can easily end up with surplus and/or obsolete inventory, the cost of which you will have to swallow.

It is worth planning the timing of your GTM carefully because, even though you will no doubt be under pressure from investors to grow revenue quickly, you can always remind them that it has to be sustainable. After all, while people often don't seem to have the time and money to get it right first time, strangely they do seem to have the time and money to do it a second time!

7.   THE POWER OF DIGITAL!

As you operationalize your GTM strategy, don’t forget to take advantage of the power of digitalising your sales processes from the outset, from opportunity identification to delivery and customer care. It is well worth the investment utilising inside sales and commercial excellence management tools.

Equally, it is helpful to look to digital customer communication and education to generate emotional customer engagement and drive lead generation through digital campaigns and integrated IT sales tools. To provide value to your users, there can also be opportunities to introduce gamification tools into your education programme

It is also recommended that you look to execute a rigid launch process using digital tools, considering all relevant aspects not just product promotion. Ideally, you should standardise the process while keeping it agile at the same time. Ultimately, try to make business-data based decisions and monitor the progress of ramping up based on KPIs.

KEY TAKEAWAYS

The key takeaways in taking great technology and creating a great business for us lie in the answers to the following questions:

1. What’s the value proposition is – this is a mirror of the benefits and value of your technology, not its features!
2. Have you got the optimal go-to-market strategy, i.e.

• Are you targeting a clear and appropriate market segment?
• Are you choosing the best route to market, including both the cost and execution risks in building your own sales force?
• Can you afford the cash operating cycle you’ve chosen?
• What are the barriers to entry?
• Is your GTM strategy consistent with your exit strategy?
• Include in your GTM the best timing for your growth curve – that won’t necessarily be growth immediately if you need to ensure everything is reliably in place to support your sales.
• Have you made the most of the digitalisation opportunities for your sales and marketing processes?

Taking the time to answer questions like these will give you the best chance to turn your great technology into a great business and to do so in the most efficient way possible.

Alex Stanke - alexander.stanke@gmx.de

Bern Gilbey - bernhard.gilbey@gmail.com