The Worst Investor Advice I Followed

With my focus on helping new health ventures reach escape velocity, I see startups falling into a trap often set by investors giving bad advice [Note: This advice is geared towards startups selling to healthcare organizations although a milder version of it is true across industries]. Unfortunately, many (most?) investor/advisors haven’t actually created a successful healthtech startup and give generic advice or establish investment hurdles that push startups towards trying to land a big health system. Investors are doing them a huge disservice in their early days. Let me be as clear as possible if you are leading a healthtech startup...

Stop wasting your time pursuing hospitals and health systems

Ultimately, the most critical early milestones for a startup are evidence and customer traction. Unless you have three years of runway, focusing on big health systems will crush your startup and soul. There are exceptions* but close to 99% of big health systems will guarantee the line I used for the 10+ years when responding to why I wasn’t doing a healthtech startup given my healthcare background and startup focus — “healthcare is where tech startups go to die”. I expanded on why great products get killed by convoluted decisions processes in Great News: HealthIT is terrible and expensive. Among the factors is that it’s frequently the case that there are 100 people who can say “No” and seemingly no one who can say “Yes”. 

In the time you are going through an excruciating 18 month (minimum) sales cycle to get a foot in the door at a hospital, you could be working with enlightened providers who would tell you the 15 ways that your product is falling short. You would have quickly responded to their feedback and been at least 10 iterations ahead. If you think you have found the exceptional health system that has a rational decision process and agressive rollout mechanism (assuming you hit your objectives), be sure you follow Halle Tecco’s excellent advice to avoid “death by pilot” in her piece on KQED.org entitled A Caution for Would-be Digital Health Entrepreneurs. Otherwise, save your focus on health systems for a later date.

I kick myself for making this mistake even though I knew better in my heart, however I listened too much to investors who thought getting a health system win was important. Even though Avado was ultimately successful, we personally experienced when a win isn’t really a win. While it’s nice to put a large health system on the list of customers, I’ve found they can be soul-sucking with little benefit. In the early days, any startup needs their product to be hammered on. We “won” the business but the health systems we won barely used the product compared to the "shadow health system" type providers mentioned below. Among the reasons was they were going through radical changes themselves and were trying to find their way. Worse, far too many healthcare providers are procuring software just to check a box for Meaningful Use or some program like Patient Centered Medical Homes. 

In the years between leaving Microsoft in the early 2000’s and founding Avado, I was a partner in a revenue traction consultancy working with more than 150 startups across many industries to get them from zero revenue to having a proven, repeatable sales and business model. In the early days, we had a debate about what was a better early customer — a “no name” customer that lived or died on how well your software worked or a “big name” customer that had a nice logo for your website. While there were plenty of exceptions, we came down on the side of the smaller, “no name” customer as the product and learning cycles got radically accelerated. 

Health Systems Need You More Than You Need Them

That previous statement makes the assumption that you have actually built something that fulfills a critical requirement for the future. I’ve seen plenty of healthtech startups that don’t meet that bar. However, having had the opportunity to spend time with companies in programs such as StartUp Health and Rock Health, there are scores of solutions created by these companies that will be imperative to health systems. 

"You never change things by fighting the existing reality. To change something, build a new model that makes the existing model obsolete.” Buckminster Fuller

It’s an obvious point that when there’s a trillion dollar disruption of an industry, there are going to be massive winners and losers. Every organization that I see out-performing against the Quadruple Aim has one thing in common — they are directly attacking the core business model of health systems. They describe it as shooting fish in a barrel to find unnecessary treatment and waste while improving outcomes. 

A successful startup is all about making a bet about how the future will unfold and getting there ahead of the competition. It’s clear that traditional health systems are getting directly attacked and even the vaunted Integrated Delivery Networks show unclear benefits from a cost/benefit standpoint. It’s certainly possible that their oligopolies and monopolies may persist but seeing that health systems are making newspaper industry mistakes, something else will create a new marketspace that will become progressively more attractive for purchasers of health services. Further, when communities and employers recognize playing the healthcare card in Economic Development 2.0 can radically improve the well-being of their communities and employees, this will dramatically accelerate the change. 

The most enlightened providers that are health systems recognize more than anyone that they have to change their approach before it’s too late. However, my experience has been that the fastest way to get a big incumbent to move in healthcare is to work with the emerging companies that scare them. That insight was the central plank in my strategy in the early days of Microsoft’s health platform business that is a $2 billion business today (Note: This isn’t to be confused with Microsoft doing healthcare-specific software years after I left the company).
Back in the day Microsoft was a non-factor in the healthcare enterprise. Healthcare was, by far, the worst market even for Microsoft on the desktop (my primary focus was getting Microsoft’s server offerings into datacenters via 3rd party software vendors such as Cerner et al). I received daily insults from healthcare CIOs and the leading healthIT vendors about how Microsoft was a joke and would never be trusted in the enterprise — funny how virtually the entire legacy server install base today is now Microsoft. 

I’ve always had a fondness for startups and emerging companies, so it was natural to see them as an ally to shifting the industry. We mutually benefited as I gave them tremendous visibility and they gave us great validation of our own emerging platform. In the process, it became impossible to honestly say Microsoft wasn’t doing mission critical work. We also bent over backwards to help our early partners win competitive business against the incumbent vendors. 

There is a much longer version of the story but, in short, this led to a wholesale industry-wide shift to Microsoft’s platform. Paradoxically, the fastest way to win with the incumbents was to maintain some polite dialogue but focus 98% of our energy towards helping the companies that threatened them. Before long, they realize they need you more than you need them and come around. 

What is frequently happening today is incumbent organizations are spending huge sums of money trying to retrofit yesterday’s technology for tomorrow’s challenges. In contrast, if your organization spends time today working with the next generation healthcare delivery system, benefits such as the following will accrue to you:

• You’ll get insights on how the model healthcare organizations of tomorrow will operate that incumbents will be hungry for
• You’ll be able to get reference accounts and evidence of your product working instead of spending time educating health systems about what’s possible
• In some cases, incumbents will partner with or acquire the next generation Quadruple Aim out-performers and get you in much more rapidly into the incumbent's organization
• Optimizing your business model can happen with smaller organizations where you are less likely to have a long-term contract that might crush you economically

Shadow Healthcare System is Where the Sun Shines

The future is here. It’s just unevenly distributed.” William Gibson

As the Health Rosetta open source project recognizes, all of the structural fixes needed to address healthcare’s under-performance have already been proven and modestly scaled. Like any massive shift, tomorrow’s health ecosystem will look radically different than today’s. I think of it as the “shadow healthcare system” that is out there but most people don’t fully appreciate. It’s like the emerging next generation digital media companies. During the first half of the 2000’s, the majority of media dollars went to incumbents but the exponential growth of the emerging players quickly over-ran traditional media companies to where digital media has even surpassed TV (it long ago passed print, radio, etc).

If I was starting another healthtech startup today, I’d have a stringent criteria to even consider working with a traditional health system as I know they’d likely suck our time and resources dry. Instead, I’d focus on the vast array of players who are doing things traditionally associated with incumbent healthcare providers. Examples of organizations seeing exponential growth include, but aren’t limited to, the following:

• Retail clinics 
• Direct Primary Care practices
• Onsite clinics
• Pharmaceutical and Medical Device companies extending their services into healthcare delivery and chronic care management
• Telehealth companies
• Digital therapeutics
• Genomics-related companies
• Medical grade (often FDA-approved) devices sold direct to consumers, sometimes with diagnostic capabilities
• Health plans bleeding into healthcare delivery

When I was training sales teams, one of the mantras I’d implant into their heads was “win early, lose early” so they didn’t waste time with prospects that would take inordinate amounts of time. The corollary was that I’d much rather get a quick “no” than a long maybe. Healthcare is filled with long maybe’s. For the most part, the shadow healthcare system organizations I listed have rational decision making processes and timeframes. Like the American healthcare reimbursement system, most health systems have decision processes that look like a Gordian Knot designed by Rube Goldberg. Which sounds like a better place to get early traction? 

As with newspapers in the past, incumbent healthcare organizations have been lulled into thinking that they can take decades to change. The exponential growth of the organizations mentioned above suggest something different. We know that half of what we do in healthcare adds no value (source: PwC). Imagine if Amazon’s head of procurement told Jeff Bezos that half of their datacenter servers didn’t add value. He’d be out on his arse in a minute. Yet, that’s what healthcare purchasers have been doing. But that is changing. 

I wrote about a hotelier who has adopted most of the elements of the Health Rosetta open source project. They have more than 5,000 employees and are spending half of what their peers are spending on healthcare while getting superior outcomes. A byproduct of this success has been their employee turnover is 80% less than their peers and they provide great benefits. For example, they are paying for their employees (most are low-skill jobs) to get a college degree. They take it one step further and pay for the dependents of their employees to get a college education. Doesn’t that sound a whole lot better than paying for waste and over-treatment? Organizations such as this employer who has their own medical facility is the kind of organization an early stage company wants to work with. 

It’s stories like hotelier's that get many of us excited to change the status quo. It’s logical that you assess where you can move the dial most. I hope investors and advisors giving advice to startups and making investment hurdle decisions re-evaluate where they direct startups. Too many are leading the startup lambs to the slaughter by directing them towards a typical health system for early traction. Instead, it's the shadow health system that best illuminates where you should take your company and product. 

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*There are great, well-meaning doctors and decision-makers within health systems but the vast majority of them don’t have the ability to drive decisions and scale within a typical healthcare organization. The more they get into organizations accepting of their desire for change, the greater impact they’ll have. 

Email me if you are interested in participating in beta of a seminar on how to gain traction and market visibility without breaking the bank. Over the course of Avado's pre-acquisition life, we spent less than $5000 total in marketing despite being one of the most visible healthtech startups in the industry including being in TechCrunch Disrupt, feature articles in the New York Times, Wall Street Journal and dozens of other media sites. The seminar would be designed to be a how-to on replicating that success.