9 Things Every Healthcare Startup Should Know About Business Development
In this edition of Healthcare Pizza, I write down all my strategy and business development knowledge in healthcare and organize it into the top 9 commandments for selling as a healthcare startup. I think everyone from the founder to the most junior person on the team should know these pillars because all startups must grow. I should also note these tenets are most applicable for selling into large enterprise healthcare incumbents (e.g., payers, providers, medical device, drug companies). Although I appreciate the direct-to-consumer game, these slices are less applicable for that domain. If your startup needs help developing or implementing your business development strategy, shoot me an email and we can discuss a potential partnership. Enjoy!
- Understand Everything About the Product and Market
In the world of healthcare startups, you must understand the market from top-to-bottom. If your customers are payers, which line of business are you focused on (e.g., Medicaid, Medicare Advantage, Commercial)? Even within the commercial line of business, are you talking about commercial exchange, small-group, or self-insured large group? Be specific. For providers, is your product best suited to help large integrated health systems or small independent medical groups? What specialty area of medicine are you focused on and is that group typically independent or employed by hospitals? Even if they’re independent, are they generally part of a larger independent practice association (IPA), clinically integrated network (CIN), or accountable care organization (ACO), that typically makes administrative decisions on behalf of them?
You must also understand the competitive landscape, who else is in the marketplace and how they appear differentiated? What has been their preferred go-to-market approach and is your startup capable of replicating a similar strategy with your current team members? Also, do you understand the federal and state policy that most affects your vertical, whether that be pharmaceutical or medical device (e.g., FDA), health plans (e.g., state insurance commissioners), or providers (e.g., CMS)? For example, if your company is focused on “value-based care” and shifting payment structures of physicians to downside risk, do you intimately understand The Medicare Access and CHIP Reauthorization Act of 2015 (MACRA) and the requisite CMS Demonstration Models from the Innovation Center (e.g., MSSP, BPCI-A, etc.)? Make sure you do or at least hire someone to explain what is important now and in the future.
- Create A Compelling Pitch
In my opinion, creating a startup’s compelling pitch to an incumbent healthcare entity requires satisfying three factors: strategic, financial, and clinical. Surely, your healthcare startup’s machine learning, AI-backed, blockchain-enabled data analytics platform may someday deliver better clinical results in some way, however, if it has no monetizable value for the incumbent healthcare entity, your idea is not going to sell. Also, you cannot just focus on financial benefit, without weaving in some tangential use cases to further the clinical mission and receive buy-in from the medical community. These are complicated entities with a variety of stakeholders and macro environmental challenges that must be somehow improved by your product.
For example, a hospital is not equipped to move 100% of their payment into a full downside risk value-based care contract just because you have a care management platform and iPhone app. These entities employ tens of thousands of workers and operate on very slim profit margins and continual reinvestment into building new facilities. They also employ a ton of nurses performing care coordination, discharge planning, and bedside care, who have their own opinions on what works best for their local community. At the end of the day, these providers receive payment from private and governmental health plans, at varying negotiated rates. If your healthcare startups business model is predicated on keeping commercially-insured patients out of the hospital and instead, treated at home, you are literally cannibalizing the hospital’s highest margin revenue. Therefore, how do you suppose to improve their financials and support their recently opened new hospital wing by keeping patients out of the hospital? You better have a very compelling reimbursement argument and concept that satisfies the CFO’s concerns.
- Organize Stakeholder Outreach
There are a million different ways to engage with prospects nowadays. If you use email campaigns, be sure to obtain verifiably accurate contact information. You can scrape information from online sources or publicly available lists. You can ask conferences to provide attendee lists if you sponsor a table or event. You can work with trade associations to obtain contact information on members who are most relevant to your product. Whatever you do, make sure you’re sending simple, yet compelling emails through an automated mailing system to track engagement and follow-up. Try different subject lines or sender names. Don’t include attachments or external links unless you’re willing to risk being diverted into the spam folders.
Regardless, don’t just rely on email blasts. That’s lazy thinking. You need to think multi-level marketing to crack through that executive ceiling. Are you attending the right conferences with a set list of individuals to target? Maybe you need to pay someone who has the right connections and is willing to make introductions in-person? Are you providing free content in the form of webinars or podcasts that is co-produced and therefore advertised by independent organizations that have already garnered the trust of a particular audience? Are you willing to sweet talk office managers at a local medical practice to get 15 minutes of the founding physician’s time? You need to find creative ways to engage your target audience, without ridiculous tactics like sending gingerbread houses during Christmas season to multi-billion dollar health system executives or solely relying on targeted Instagram ads. Remember, healthcare is hyper-local. If you need a meeting with the head of a single cardiology practice in Atlanta, GA, go find the head of the former board chair of the American College of Cardiology’s local chapter.
Over the past few years, a ton of digital health startups have focused on the self-insured employer market due to contracting flexibility. If you focus on self-insured employers, think about the pros and cons of working with channel partners. There are a couple giants that own the entire employee benefit design and health insurance broker game, including Willis Towers Watson, Aon, or Mercer. Typically, brokers receive a healthy 3-6% commission fee off the total premium covered for all employees. If you want immediate distribution of your product or service to millions of employees across the country, you might have to pay one of these brokers an extra fee to offer your goods. In addition, the brokers will be looking for your startup to benefit their clients, employers, to save medical spending and improve employee engagement.
- Identify Early Themes During Initial Pitch
We all have great ideas. They sound good on paper, and the team is bought in. You even received executive approval from the founders to initiate your sales process. The only problem is that during the first few meetings, which were 30-minute introductory calls with non-decision makers, the pitch hasn’t resonated. It feels like you’re selling an Apple Watch when the buyer only wants to talk about sun dials. I thought healthcare was ready for innovation?
The reality is that your product, back to lesson #2, is not satisfying their strategic, financial, and clinical needs. Or you’ve done a poor job clearly articulating the vision and how your small startup will be able to meaningfully improve a problem the healthcare incumbent encounters. Perhaps you’re pitching a $5,000 per month SAAS solution that could yield 3 times the ROI in savings to an organization? The problem is, the same company just spent $500 million on an Epic electronic medical record (EMR) installation and is concerned about losing $10 million this quarter because of contract disputes with a large payer. Sometimes your product just isn’t big enough to garner an executive audience. In that case, think about positioning your product with flexible pricing or partnership terms in a way that a middle-manager won’t need executive approval to sign.
Maybe you’re talking to a health plan about reducing dermatology spend because you have the latest and greatest technology, but the entire healthcare market is focused on providing cheaper transportation benefits to patients to reduce missed appointments (i.e., Uber, Lyft). That’s all anyone ever talks about at conferences you attend. If you’re the 10th most important thing that a Chief Medical Officer (CMO) is thinking about, either create a more compelling reason why they should change their list or find a different size stakeholder who is more immediately affected by your service.
- Maintain Interest Level and Dig Deeper
Now that you have initial interest, continue to build momentum. It is incredibly easy to walk out of an initial meeting, with both parties having enjoyed the 30- or 60-minute conversation, but never move forward. Life is complicated and people get busy. You might think your healthcare startup is the next best thing since garlic knots, but that healthcare executive has 5 more pitches this week from other companies in your space. They also have budgets, HR issues, and bosses to deal with themselves. After a while, your follow-up emails and phone calls seem akin to your ex-boyfriend’s pitiful attempts. Reassess your strategy before further annoyance.
Can you introduce them to compelling referenceable clients that will speak kindly about your startup? Not in a way that seems cheesy, but able to articulate the good, the bad, and how your startup remedied the bad so it never happens again. If possible, these should be peers. A vice president at a fortune 50 drug manufacturer likely doesn’t want to talk to a junior-person at a small biotech startup. Know your audience and adapt. If the references don’t exist, are there other things you can do to “wow” the client? Do you have a demo? Can you analyze some of their data? Is someone on your team able to answer one of their questions via a mini-consulting project? Do you have an invite to a closed-door event that features some interesting topic area? At the very least, you have a Board of Directors, management team, and investors. Hopefully one of those can help build rapport at an executive level, in addition to your individual efforts.
- Develop Detailed Partnership Terms
I am a strong proponent of protecting the company you work for during partnership discussions, but sometimes startups need to acknowledge the importance of closing a new partnership deal. You need to be flexible. You are a small healthcare startup negotiating against a large, bureaucratic organization with tons of legal representation. Don’t waste time debating term sheet after term sheet. It doesn’t matter if its non-binding. Discuss and agree on the high-level key structure, and then propose a draft of your definitive agreement or master services agreement with all the bells and whistles. This is going to take a while, so buckle in and try to set expectations on closing. By this time, if you’re good, you will have likely already signed an NDA and perhaps, a letter of intent (LOI) discussing the spirit of your partnership discussions with appropriate confidentiality and expectations around timing of a go or no-go decision.
Now you need to actually put pen to paper and define what your startup will provide to the healthcare company. They will want more details on data privacy than you have to provide. They will want to know detailed clinical workflows describing your process. They will want a detailed step-by-step breakdown of all the resources and time required by their staff and management, in order to be successful. Worst case scenario is that your product requires more time to be successful by the client’s team, than the benefit your product provides. You need to just survive and answer all their questions to the best of your ability. If you hit a brick wall, at some point just tell them honestly that you’re working on addressing a few of their concerns and they will be finalized before go-live.
- Be Flexible Yet Confident During Negotiation
How important is this deal to you and the startup? If this potential client is your Moby Dick, then be prepared to make some adjustments to your base terms. Nothing in life is 100% favorable, nor should it be since a partnership includes two parties. One good referencable client can help make a splash in media, attract new investors, improve morale of the team, and light a fire under other potential clients who are dragging their feet. However, at some point the deal doesn’t make any sense for your startup. It pays too little, with too many requirements, and too low a probability that the partnership will expand by the time you need it. If this is the case, I hope your creative top-of-funnel strategy has successfully opened the doors of a few different clients at the same time. You should be moving down the funnel with as many prospects in parallel as possible. Don’t get sucked into focusing all your time on one pursuit, because Murphy’s Law exists.
Is the contract value of a new deal significant after go-live and highly sticky in terms of client retention? Meaning, once you sign this new partnership, do you have this healthcare incumbent locked in for a few years that drives significant revenue for your startup? If yes, then don’t die on the hill over fighting about implementation fees. Sometimes the cost of doing business in the medium or long-term requires short-term pain. If you need more funding to build functionality, think about managing your burn rate to account for this potential scenario. Does it feel like the liability section of the contract grew twice as large and shifted most of the responsibility to your tiny startup? That’s probably going to happen and you can’t do much about it. When you’re first starting out, the healthcare incumbents have the most leverage. It’s not a perfect scenario, but make sure the key fees and services are reasonable, and unfortunately accept the rest as the price of doing business.
- Set Clear Expectations for Implementation and Go-Live
I love closing deals. But don’t set your implementation team up for failure. If they physically or technologically cannot meet the standards you’ve promised to the healthcare incumbent executive, and you’ve placed accompanying service level agreements (SLAs) with financial penalties owed by your startup, this is a bad deal. If you sign a deal that so drastically exaggerates the profitability of the partnership by limiting the minimum operational expenses required to perform, this is a bad deal. Don’t leave the account lead and operational teams out to dry, because there are real reputational risks associated with a bad deal in the healthcare industry. Executives all grew up together, hang out with one another, and move from organization to organization. If your startup is known as the one who can’t deliver on its promises, that will likely come back to bite the business development efforts and certainly impact churn rate and likelihood of harsh renegotiations with existing partners.
Overpromising and under-delivering in healthcare has real consequences. It won’t result in just someone’s food arriving late or e-commerce store unexpectedly shutting down, healthcare startups could meaningful harm a patient’s life. This of course represents the constant tension between sales and operations. I do believe that business development teams should do a better job at explaining the intricacies of the deal-making process to ensure the rest of the company understands the need for some flexibility. If everyone else feels like the sales leaders are the dumbest people at the company, you should remind them that everyone gets fired if the company doesn’t grow. Just don’t be an awful human being while discussing this matter.
No matter the outcome, a good business development team should celebrate the large and small wins. I’m not talking about trips to Hawaii, but you need to infuse some degree of optimism in your startup. Lack of growth causes a lot of problems. Sometimes you will get lucky, and the incumbent healthcare entity will take a chance on your product or team, despite lack of case studies or sophistication. However, that is increasingly becoming rarer each day. Therefore, any new partnership that will further the mission and grow the startup should be rewarded both financially and publicly across the company. With that being said, don’t act like your business development skills and compelling personality single-handedly closed the deal. Your team members across a variety of other departments all played a part, directly and indirectly. The engineering team built the product that was ultimately sold. The marketing team helped elevate the brand in the marketplace. The operational teams satisfied existing partners expectations so that they would provide positive reference calls.
In addition, the business development lead oftentimes has significant support in putting together materials, prepping for meetings, setting up logistics, managing subject matter experts, and reviewing legal contracts. I can bet that certain business development leaders think they’re Michael Jordan. Except, they forget that the Chicago Bulls didn’t beat the Detroit Pistons without Scottie Pippen and the rest of the team. Basically, if you’re the head of business development, show your team lots of love for the hard work and hours they’ve put in for far less financial reward.