Again and again I see Founders of medical-device startups with a great idea, a good team, and a history of money-raising campaigns to hire people and get an idea up on its feet. Sometimes they even have a prototype, but, no matter what else may occur, they always have a fully developed exit-strategy.
I’ll sum it up for you:
“I can’t wait to get this to market.”
“Yeah, they’ve never seen anything like this before! We’re going to revolutionize the whole field…”
“Once investors and the market sees what we are offering, they can’t help but see this will be a home run.”
It’s true. They are completely focused on their technology, seeing it as the fulcrum upon which they can lever their value-proposition; it becomes obvious to them that it will lead to a successful exit.
But what are they missing? A good solid market entrance strategy, that’s what! It doesn’t matter whether their ultimate goal is to be acquired by a large strategic or whether to seek capitalization through an IPO. If they don’t have a clearly-defined, revenue-generating plan or strategy in place, they and their investors will not see the kinds of multiples for the business that they had hoped for.
There are product development risks, but those should be all well-considered and under control by the developers. They can calculate difficulty of manufacture; they can estimate costs; they can identify the people that will use their product; they could even provide a parallel product for those countries where it’s illegal to export their technology to.
Where they fail is in monetization or revenue-generation. It cannot be left until the point where the research and development cycle has ended and they are now looking at the commercialization. That is far too late.
Exit-strategies are best planned simultaneously with entrance-strategies. Each one depends on the other; they’re not separate entities and should run concurrently. You need to know who your customers are, how are they going to pay for your product, at what price point and will it be accepted? Will it fit into the reimbursement code? Is it truly vital or discretionary?
If it’s a product for hospital systems, can you show that is going to save them money or that it will it save them time? Can you show that it possesses significantly improved efficacy over whatever they’re using now? Is what you offer able to overcome the inertia of remaining with a supplier that they have used for years and change to a new one (namely yourself)?
Even if your product does match the reimbursement code/rate, will it still be profitable if the rate is decreased? How big of a financial hit can your product sustain and still be profitable enough to support the continued growth of your company, or warrant an acquisition by some outside agency?
You know that your product is better than the competition; you need to be able to demonstrate that. If your product is cheaper than, or equally priced to the competition, you can argue its merits as a superior product. If it is more costly, you need to be able to show that it simplifies the life of the clinician, or it reduces the need for attendant care, or in some tangible way reduces hospital costs to their ultimate benefit.
Having the hospitals’ Clinical Value Analysis Committees on your side is essential to getting through the process of adoption. Therefore, devising a plan to demonstrate your product’s value and sell them on your concept before you seek an acquirer or market capitalization. You have to know all the possible revenue streams that it leverage and be able to show improved efficacy, cost, or outcomes for all relevant parties, whether it is the MD, hospital administrator, patient or payer.
Generally venture capitalists, nor private equity, wish to be involved with companies for the long-term. They dash in and make a capital investment and expect a certain multiple for that investment when it goes public or is sold to a strategic.
The best way to avoid being part of the majority of the startups that fail and be among those that flourish is to understand not only the developmental risks, but the market risks as well. You have to understand revenue-generation just as thoroughly as you understand your prospective exit strategy.
Just remember: 75% of all startups fail due to mismanagement or poor planning. Perform your preparatory work before you mortgage the farm, or your soul. If you can see a clear path to profitability, go for it, but don’t be afraid to abandon an idea whose time has not come if there is no market acceptance for it.
This will require getting marketing involved early in the process and define the positioning strategy, pricing, margin, competitive advantage, who the target buyer is and why should it be acquired by that buyer.
The shift needs to be from the product to the customer.
In most cases the thing standing between you and success is simply information. This is where doing upstream marketing and analysis can be invaluable. That intelligence can have a direct impact on the product development due to market needs and wants.
In our experience, all too often the founding team has a technical orientation, and little or no business development skill. This can be a major gap in the company’s executive team.
It is worth considering when at the seed funding or early funding stages, to build in a budget for staffing senior business development leaders as a vital part of the core executive team.