Hey fellow healthcare innovator, have you been risk stacking lately?

About two years ago, I found myself on a video conference pitching my diagnostics startup to a seasoned Silicon Valley investor. When I finished, he gave me a short but thought-provoking reason why he wouldn't invest: "You're risk stacking," he explained.

It took me a while to digest that. I believed that with enough determination and innovation any obstacle could be overcome and that it was important to tackle problems one step at a time. We all know the thinking behind the 'riskiest assumption test' so popular in the start-up world. It teaches you to focus all your efforts on eliminating the riskiest assumptions first, before moving on to the next. In medicine, we say "treat first what kills first". Instead, this investor was suggesting that I find ways to address all the key risks in parallel, without overwhelming resources.

So I had to think more deeply about his feedback - might there be a different, smarter approach to navigating the complexities of bringing a healthcare product to market? After thinking about it for a while, I now see risk everywhere in my role as a founder, as an advisor to innovators, and when evaluating pitches for investment. I realised that risk stacking is a critical concept that every innovator and investor should understand - because once you see it, you can't unsee it, and I find it extremely helpful.

So what is risk stacking?

On the journey from an idea to a successful product, especially in healthcare, we encounter various risks. These aren't just hurdles, but significant challenges that can derail a project on their own. Risk stacking occurs when several high-level risks are present at the same time, increasing uncertainty and making the endeavour daunting for investors and stakeholders.

Here are just a few examples of the main types of risk involved:

• Research and development risk: Will the product you're developing actually work? In healthcare, this often involves unproven science or technology that requires extensive validation.
• Regulatory risk: Can you navigate the intricate web of regulatory approvals at a feasible cost and within a reasonable timeframe? Healthcare is heavily regulated, and for good reason, but this adds another layer of complexity.
• Adoption risk: Will the intended users - clinicians, patients, healthcare institutions - adopt your product? Changing established medical practices and behaviours is notoriously difficult.
• Reimbursement risk: Will insurance companies or government programmes pay for your product? Without reimbursement, even the most groundbreaking healthcare solutions can fail commercially.

When these risks are approached in sequence, they don't just add up, they multiply. Each risk reduces the likelihood of success, and when stacked, they can make an innovation project virtually uninvestable. It's like flipping a coin and having it come up heads several times in a row - the odds decrease exponentially. Even if you are confident that you can manage all these risks - how confident are you that you can manage them in a reasonable timeframe and with the funding you can secure, so that your business doesn't die halfway through?

Strategies to mitigate risk stacking

Understanding risk stacking is the first step in mitigating it. Here are strategies that can help navigate this complex landscape:

Reduce R&D risk through incremental innovation: Rather than developing an entirely new technology, consider building on existing, proven platforms. This approach can validate your concept more quickly and with less uncertainty. Sometimes starting with something less groundbreaking can be a great step into the market and help cross-fund the more innovative work you plan to do.

Navigate regulatory pathways wisely: Engage with regulatory experts early to identify the most efficient regulatory pathways. For example, pursuing 510(k) clearance in the US for a device similar to an existing product can significantly reduce regulatory hurdles. Also, consider initially narrowing your value proposition and intended use to reduce regulatory complexity.

Validate market acceptance early: Conduct thorough market research and pilot studies to gauge acceptance. Engage with key opinion leaders in the medical community to build advocacy for your product. LOIs are largely worthless, so try to find reasons early on why people should pay for your solution - and then get them to pay for it.

Clarify reimbursement strategies: Investigate existing reimbursement codes or pathways that your product can align with. Too many founders leave this as an afterthought. It shouldn't be, as you can easily find out how reimbursement is regulated, what reimbursement codes exist, etc. Early discussions with payers can provide insight into potential coverage and pricing models, and what evidence they require (often you need to show cost savings to facilitate reimbursement). And you can always consider other revenue streams, including those coming directly from end users.

Explore alternative markets: Consider less regulated markets or applications as stepping stones. Industrial or research-only use cases can provide valuable data and revenue while you navigate the complexities of the healthcare sector. There's a case for a disease diagnostic device that analyses the sound of your voice to derive diagnostic insights. The founders quickly discovered that the same technology could help detect machine failures in manufacturing, leading to a massively profitable use case.

The importance of awareness

Recognising when risk stacking is occurring allows innovators to make strategic decisions. It's easy to get caught up in the vision of the end product and overlook the practical steps required to get there. By breaking down the journey into its constituent risks, we can methodically address each challenge.

I know this may seem counterintuitive to all of us obsessed with focus, but it's important to think about when risk stacking makes an innovation unaffordable. This isn't just relevant for founders and funders, but also for innovators in corporate environments. A good rule of thumb is when you can see a way to survive without relying on massive additional investment for a relatively reasonable period of time until you can realise your big vision.