What Not To Do
We can learn from our wins, but it’s often the things that went wrong that have the potential to teach us the most. Each year we see hundreds of startups pull the plug after trying to build the next winner. There are some patterns to the failures and we will share some of them in a series of posts.
It’s also true that the characteristics that make for wins and losses in medical device are different than those in therapeutics, diagnostics and digital health.
This post will focus on medical device lessons learned and is not intended to be exhaustive. We will refrain from using specific company names because there is no value in being that specific.
Adjacent to the previous point, we never want to embarrass or downplay the efforts of a team that didn’t work out. We know a lot of work, stress and pain comes with losses…for all parties. Investors typically lose some or all of their money, but the teams behind the companies lose far more than that. They often lose their health, relationships and most importantly, time. To the extent that gained wisdom comes from these failures, we want to recoup some value.
This post was inspired by a very promising medical device startup that we have worked closely with and is for all intents and purposes in a holding pattern at best. The challenges of this company closely mirror a much larger failure several years back. What’s really disappointing in these particular cases is that on the surface they were clear potential winners from the start. They had all the characteristics to be breakout products in sizable categories. Investors were eager to embrace these ventures, but hindsight reveals some flaws that should have been addressed earlier in the company building process.
Lesson 1 – Strong Team Does Not Always Mean Strong Team for This Space
It turns out there is very little actual correlation between entrepreneurs who had a first successful exit and future exits. In fact, one of the most prominent physician device entrepreneurs in our community shared that his “final” company (after a half dozen major winners) was going to be his worst. Was he and the team dumber than their previous efforts? Was the idea deficient? Did they work any less hard? No. It turns out timing and luck are critical factors and entrepreneurs and investors who minimize this element are kidding themselves.
In the case of both medical device companies we are using as templates for this post, they had very smart founders who were very successful in their prior lives. However, their prior lives were not specifically in the space they were now building. While this isn’t a deal-breaker, it does need to be addressed. At some point, sooner versus later, teams in this position need to shore up the management with talent specific to the space. This isn’t to say they need to place these specialists in a particular position. Each situation will be different. But they do need to be in a position of some reasonable authority or their voice will likely be too small to make a difference.
Lesson 2 – Advisors, Board Members Etc. Must Also Have Some Expertise in The Category
Good management teams want to be challenged by their Advisors and Board Members. This isn’t antagonistic, it’s about making sure ideas have been properly thought through by people who know what they are talking about. It must include voices who have been in the space before. A Board that has no specific expertise is not useful at all. They are checking off a box and kidding themselves that they will help navigate the journey.
Entrepreneurs are learning on the job in almost all cases. Most successful companies are led by someone who has not done whatever it is they are doing before. However, if you look at the people they surround themselves with, it includes people who do know the nuances of the space. Orthopedics is not the same as Cardiology. Care Delivery is not the same as Device Development. Sporting Goods are not the same as Medical Device. Enterprise is not the same as Consumer. Specialization matters with Advisors and Boards…not just management.
Lesson 3 – Less Is More
In many cases, products experience “scope creep”, or they are overly complicated from the start. Anyone with engineering expertise knows you need to break products down to their smallest common denominator and focus on a minimally viable product to reduce the opportunity for error and expedite time to market. Time to Market cannot be underestimated. Delivering the Taj Mahal in 10 years is a disaster if you could have built the first two rooms and launched in 2 years. This is a weak metaphor, but you get the point. Ready Fire Aim. Obviously you don’t want to deliver sloppy work and we all want perfection. This is human nature. But, time is the enemy.
Another device company we know well was literally killing people early on. Mind you, patients were already terminal; but use of the product was accelerating death. They kept improving it and it eventually turned a corner. Today, it has saved millions of lives. If they had waited to launch with a perfect product, it would still be on the bench.
Lesson 4 – Early Exits
We have stressed for years the critical importance of selling companies earlier versus later. Too many failed entrepreneurs thought they would get to an $X exit and died on the runway when the company could have been viable at ¼ of $X. At ¼, everyone could have made money and the product would likely be improved and circulated by a larger player who acquired it from the startup…but egos and lack of reality kill the venture.
The company is worth what the market is willing to pay, not what the insiders think its worth. This is not to say you cant have some patience and continue to build toward something bigger. It does mean you need to balance this persistence with strong self awareness. Easier said than done. Most of us are not as self aware as we think we are.
Basil Peters has captured this critical Early Exits concept in his book of the same name. If you deviate from this guidance, you had better have a very strong reason for doing so. Don’t fight math…you rarely win. Just look at the cash made by the “house” in Las Vegas. The math is on their side.
Lesson 5 – Sales
In the final lesson for this post, we are going to list the most common failure for medical device startups and it comes later in the life-cycle. They fail to sell. A very successful physician entrepreneur-investor once shared that the number one reason companies in his portfolio failed over a 4 decade career was inability to sell.
While technical failures happen when building product companies, the bigger challenge usually comes from the fact that technical founders are not sales people. They assume the world will beat their door down to get their genius new product. We have never seen this happen. Nothing happens until something gets sold. Critical to this point is the fact that sales skills are usually not in the DNA of a technical founder. Rather than try and become something they are not, they are better off bringing in a person who can compliment their skills. It doesn’t really matter what title each carries, every team can adjust to their needs, but usually CEO, President, VP Sales are the roles the head sales expert carries. Moreover, when a technical founder (often a physician) refuses to give up the CEO role, its usually a bad sign.
Physicians are almost always better off moving into a Founder/Chief Medical Officer or something similar once a product is ready for commercialization. This isn’t a 100% rule, but development stages of a company are very different from commercial stages and you want to adjust accordingly. On that note, Founders are almost always personally better off stepping into the product role and freeing up some of their time for new projects, clinical work etc. They gain nothing financially by remaining in the cat-bird seat and more often than not reduce enterprise value versus add to enterprise value at this point.
There is no such thing as a hard and fast rule when it comes to investing and/or building startups. Each of the lessons above has exceptions, variations etc. The point is not to be dogmatic, but instead use these lessons as a sounding board. Is the venture at risk for one or more of the issues? If so, discuss a plan to mitigate. They can all be addressed.