UPDATED! HOT! 4 pitfalls for healthcare entrepreneurs and how to confront them

When entrepreneurs go to market with their flagship product, it is an exciting achievement for their company. But the pathway is fraught with pitfalls, any one of which could undermine or even ruin the chances of success for the business. That is especially true of the healthcare sector where the sales cycle is longer and the number of regulatory concerns makes payers and providers especially cautious when it comes to adopting new technology. In an interview, Sheppard Mullin Partner Michael Orlando highlighted some of these pitfalls and what entrepreneurs can do to avoid them or navigate through them.

  1. Launching the product only after it is full featured

Entrepreneurs, particularly in healthcare, are passionate about their ideas. But one of the biggest mistakes they can make is to build a product or service and launch it with numerous features before making sure that this is what their target users want.

“I would advise not to focus on developing all planned features and functions before the launch,” said Orlando. “You need to include potential customers earlier in the development lifecycle to find out what they need and what’s useful for them.”

He advises startups to focus on basics, the core functionality and start with clients from there. Make sure that the features that are added actually have value for target customers rather than what the vendor assumes they would value. Also, startups should balance the customers’ desired specifications with what is achievable.

Orlando recalls a client who developed a software product and only learned at the pilot stage that their customer didn’t really use the features the entrepreneur had worked so hard to develop.

“They had to abandon a few features because they were too costly to maintain. They could have gotten to market faster if they had done it differently. But they spent a lot of time and venture capital money on all these features the customer didn’t need. Sometimes new entrepreneurs feel like they can’t ask potential customers for input until the product is finished when they should be working with them at an earlier stage.”

  1. Vetting the customer (identifying the correct point of entry, identifying if customers have the budget to buy, whether customers have a need or intention to purchase, etc.)

It’s an important moment for healthcare startups when they find a clinician or insurance company exec to be a champion for their health IT product or device. But it’s important to make sure that they can connect the business with the people who would actually be using the product and, equally important, with the people who make the decisions about whether to greenlight that product for adoption.

Companies frequently start working with someone at the institution that they have a connection with and that person may have the pull to get them into the organization for a pilot but isn’t the person with approval authority to take it further or who can get traction for a purchase.

“I’ve seen this so many times. The sales cycle gets prolonged because the business is not speaking to the right people at the organization in charge of procurement of these technologies.

“A medical device company was able to get a lot of names and contacts at a trade show, and soon after they demoed their device and they set up pilots with some of these potential customers. But after several months, no one bought the product. They spent a lot of time with these people who were only interested in learning about the product but were never in a position to buy it.”

Instead, Orlando noted that the company should have done a better job of vetting their customers. He advises startups to concentrate on high-value customers. Entrepreneurs can save themselves a lot of time and can burn through their funding much more slowly by having the courage to say no; their business will be stronger for it.

  1. Pilot study design (identifying clear and focused objectives, timing and decision making) 

Set clear expectations and objectives upfront on what will be a successful trial. Is the intention behind this pilot to get validation for your product? A sale? Both? Then make sure you and the collaboration partner are clear about that. Communication is key.

“A lot of problems can happen when startups are afraid to ask the right questions,” he said.

If your company achieves the desired objectives of the study, both parties need to know what the next step is, otherwise there will only be uncertainty and frustration.

  1. The contract
  • Understanding revenue recognition rules and customer needs in designing payment terms

For health IT startups in particular, they can create problems for themselves if they devise a payment model without getting input from an accountant or lawyer.

“We had one customer who had their own contract. When they were poised to go to market, their first large customer wanted the payments to fit into its capital expense budget rather than the operating expense budget. The agreement had to be revised to reflect a brand new payment model and the sales process was delayed by several months. In addition, the startup had to figure out how to structure the new payment model with its accountants because of revenue recognition rules.”

If a company changes the revenue structure to account for milestone payments, maintenance, and support, and other payments over time, it needs to check with its accountants to ensure it does not create any revenue recognition problems.

  • Navigating the healthcare provider’s contracting and regulatory compliance approval process

Orlando noted that startups need to be cautious when they are negotiating a contract with healthcare organizations. Entrepreneurs might make the mistake of thinking that certain people in the organization who are championing their project have more leverage within the organization than they actually do. If a startup has identified potential weak areas in its product offering, or its regulatory compliance program, such as IT security, it needs to address these upfront and not expect the organizational contact to be able to push the project through despite these problems.

With the contracting process in general, there is a tendency for startups to be hesitant in pushing for their own forms of agreements with health systems. Health systems often try to use a one-size-fits-all approach to contracting that is not tailored to technology licensing, maintenance, or support and improperly allocates risk to the startup. It is much better to begin with the startup’s form of contract that is specific to the technology and services being provided and then negotiate from there.

On the one hand, some health IT vendors have potential liability as business associates, for example under HIPAA (Health Insurance Portability and Accountability Act). Certain obligations are based on statute and can’t be mitigated by contract terms and startups need to be aware of these risk management issues. On the other hand, it is important for them to try to advance their interests as much as possible, which is why getting advice from a lawyer experienced in health IT contracting will ensure that these young businesses get the fairest deal possible.

Photo: Getty Images

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