By DAVE CHASE
Recently ZocDoc had a huge funding round demonstrating the success that they are having. There’s a number of lessons learned from ZocDoc’s experience. Unfortunately, many haven’t demonstrated Zocdoc’s wisdom leading to a large number of healthtech failures. A recent study highlights this phenomena. After interviewing 110 digital health entrepreneurs, RockHealth recently released its study Rock Report: State of Digital Health demonstrating the disconnect between the startups getting funding and what many startups are pursuing. This disconnect is the last and most important reason healthtech companies have failed that are detailed below. The following are the top reasons why healthtech companies have failed or had to do major pivots in order to survive:
Lack of Specific Focus or Adoption point
It’s well documented that a lack of focus kills startups whether they are in healthcare or not but it is particularly prevalent in healthcare. The diversity of opportunities in healthcare is so great that it’s tempting to try to solve it all. These startups are ignoring the old saying about how to eat an elephant — one bite at a time. Too many startups are trying to swallow the elephant whole.
Expected consumers to pay
With the exception of weight loss programs, there aren’t many examples of consumers paying directly for health services. Over time, this is likely to change as more of the burden of healthcare costs gets shifted to consumers as was highlighted in a Healthcare Disruption series (see links below). However, I’d be very cautious about any business expecting to have consumers pay in the near-term.
Expected consumer to enter lots of information
While I believe there was a bigger reason
why Google Health failed, expecting consumers to enter information is one of the big factors in why Personal Health Records (PHR) have failed to gain meaningful traction. Most PHRs rely on the individual entering information and few are willing to do that.
Required huge amounts of money
This tended to happen in bubble periods where there was a grand vision and frothy funding markets threw huge sums of money. Ultimately, they weren’t sustainable franchises.
Require multiple and intricate partnerships
A startup dependent on too many partnerships is likely to run into issues as those partnerships frequently involve established players. Unfortunately, the established players have a dramatically different sense of urgency. Many good ideas have died on the vine waiting for business development and legal departments at established players who didn’t share the startup’s sense of urgency.
Lacked Understanding of Reimbursement Dynamics
This is by far the number one reason why healthtech startups have failed. The findings from
RockHealth’s study highlight an important dimension of this. On a positive note, 77% of VCs think healthcare IT investment dollars will increase in 2011. Already 35 digital health companies having received $2M+ in 2011. The important point is that 80% of those receiving funding are B2B (i.e., selling to either healthcare providers, businesses, etc.) yet the majority of digital health entrepreneurs surveyed think consumers will pay for their product or service. Despite this fact, most early stage digital health entrepreneurs are building B2C companies.
Before it’s too late, hopefully these companies will find a way for someone other than consumers to pay. This could be via an advertising model or by licensing the technology to organizations. In this case, the consumer is the product, not the customer. The customer is the organization.
Dave Chase is the CEO of Avado.com, a Patient Relationship Management company. Previously he was a management consultant for Accenture’s healthcare practice consulting to 25 hospitals and was the founder of Microsoft’s Health business. You can follow him on Twitter @chasedave.
The following is the Healthcare Disruption series by Dave over at TechCrunch:
Nice written article . The only thing is, what is the amount of funding you get when you are a healthtech business.
Recently ZocDoc had a huge funding round demonstrating the success that they are having. There’s a number of lessons learned from ZocDoc’s experience. Unfortunately, many haven’t demonstrated Zocdoc’s wisdom leading to a large number of healthtech failures. A recent study highlights this phenomena. After interviewing 110 digital health entrepreneurs, RockHealth recently released its study Rock Report: State of Digital Health demonstrating the disconnect between the startups getting funding and what many startups are pursuing. This disconnect is the last and most important reason healthtech companies have failed that are detailed below. The following are the top reasons why healthtech companies have failed or had to do major pivots in order to survive:
To Dave and Matthew – two points only:
The difference between ZocDoc and almost every other startup (healthcare or otherwise) is this. It’s the first time that Jeff Bezos, Mark Benioff, Vinod Khosla – and more recently Ron Conway, DST Global and Founders Fund – have all come together collectively AND publicly around a single investment. That’s a very different investment profile – in which the only conceivable outcome is success – by matter of some degree. Dave’s math may be rough – but it’s reasonable, conservative and very compelling. The comparison’s to Open Table may be fair technically – but in healthcare – where a large % of docs are in small practices – the value of each appointment is an order of magnitude different – so the value proposition is very disruptive.
RockHealth’s analysis is a great overview – specifically for healthcare. Where I think it falls a little short, however, is in comparison to other sectors. For that – GigaOM’s Infographic in June (The New Startup Ecosystem) had a great graph of investment by sector ( http://bit.ly/qufazd ). It further emphasizes the lack of early startup funding in healthcare. Not surprisingly, the top 5 categories (Discount, Marketing, Social, Storage, Gaming) took 55% of all startup investments. That speaks volumes about investor thinking – which we’ve also heard firsthand (“… just don’t invest in healthcare”). Investor sentiment is changing – and that’s great – but it’s still the very early stages (relative to the other sectors), so it will be awhile before we can actually measure success via exits.
Footnote: EPOC went public in Feb – 13yrs after founding – Market Cap of $260M+.
Most fail because the devices they are producing are meaningfully useless and meaningfully unusable.
The hype about prevention as the bender of the cost curve is exactly that.
These start-ups mostly produce me-too stuff.
If a start-up wanted to make a name for its product, get it tested and have it demonstrated to make a meaningful impact on cost or outcome_and_ get it approved by the FDA.
I actually think Dave is wrong in his impression here. Love ’em to death but the RockHealth crowd is the kids on the outside–the only slightly more seasoned Health 2.0 companies (of whmo Aavdo is one) know that they have to work with the system to get going. Even the ones focused on consumer end users (patients or doctors) like Sermo & American Well have been making alliances and getting customers in the old HC world since before day 1.
And in fact the carnage in Health 2.0 has been very limited compared to (say) the consumer Web world of the early 2000s. Why? because they all started much smaller and most didnt rise so much money but went looking for customers–in the old HC world. Which is why change is slower.
Finally I love ZocDoc, but equating raising money with market success is a stretch. Unlike OpenTable which only had to drop a booking system into restaurants, there’s lots of different systems that an appt booking system has to integrate with in a docs office. And those systems have their own vendors who are competing directly with ZocDocs features.
And of course while I might want to go to lots of different and new restaurants all the time, I’m likely to want to stick to only a few doctors–once I find the ones I want. So I’m not sure a consumer wants a one stop place for every possible doctor, and it’s possible that a doctor doesn’t wnt just a one point solution for appointments. At any rate it’s damn early in the game and I guarantee you that despite the very encouraging progress and the boatload of roubles they just got, Cyrus and his team at ZocDoc know that they’re in for a long ground war and have not declared victory and gone home yet.
Matthew – I don’t think we’re in disagreement. My “carnage” comments aren’t speaking specifically to H2.0 companies. It goes back well b4 H2.0 started – i.e., going back over the last 15 years. Your sample is biased (in a good way) towards those who have learned from the mistakes of the past. I can assure you that many HealthIT companies that didn’t make your cut didn’t follow some of the “lessons” from ZocDoc and others and thus why many investors have been burned. The scorched earth is out there raising the bar for new entrants. That’s not a bad thing but it’s a higher bar than I’ve seen for other sectors (e.g., need to demonstrate more traction to get funding, etc).
On ZocDoc, I’d be happy to make a friendly wager on their future success. I’ll give you fair warning – I’ve never lost a bet…I simply don’t make bets I’m not 99+% sure of 🙂 🙂 I’d say it’s a stretch to think that savvy investors would drop $50M without having seen the unit economics of a business like ZocDoc and seeing that the beachhead they selected is brilliant as it’s one that directly correlates to the doc’s bottom-line and thus has curried their favor unlike various barnacles that have adhered themselves to the docs’ practices over the years and added little bottom-line value.
Unlike the vast majority of restaurants where you can get a reservation (“appointment”) the same/next day, that isn’t the case with doctors. This is a key difference with OpenTable. Note how ZocDoc docs are adding ZocDoc widgets to their websites as it makes it easy for their patients to find an open slot and not have to wait months as can be the case with finding doctor appointments.
There’s two key items that will put more wind at ZocDoc’s back – 1)32Million Americans joining the insurance rolls in 2014 (see what it’s done in Mass. for a preview of coming attractions on difficulty of seeing a doc with fixed supply and increased demand) 2)state/fed/business budgets getting squeezed will inevitably lead to more squeezing of MD compensation so they’ll want great yield management (a la hotels/airlines wanting no empty seats/bed).
In that environment, if I was a doctor who had bought into v1 of ZocDoc, I’d be open to logical add-ons such as appointment reminder service to ensure patients don’t miss appointments or insurance verification services – i.e., both items that could mean lost revenue. Chances are ZocDoc could become world class in that and deliver it more effectively than in-house staff. Like other H2.0 startups, their pricing model is much more favorable than legacy vendor systems/services and there’s probably a dozen other ZocDoc extensions that demonstrated the further potential to investors.
I’d agree that Cyrus/ZocDoc haven’t declared victory and gone home but with the dots I’ve connected from anecdotal feedback, Cyrus interviews, etc. it has all the signs of a juggernaut. As one who is in the middle of investor discussions, it’s a breath of fresh air to have examples like ZocDoc to reference.
Dave–No question ZocDoc has huge potential–as do some other Health 2.0 companies who’ve raised similar or bigger amounts–Phreesia, Sermo, Castlight, American Well, Healthline, Healthcentral, Practice Fusion–but aint none of them yet got out the other side with an IPO, or massive market share.
Believe me as the guy who co-runs the conference for this sector, nothing would make me happier than for a string of successes like that. I just don’t think you can say raising money is the same as making it! (By that metric Webvan was a success!)
How about this napkin math? Let’s say there are ~60k MDs in the NY area (NY metro is about 6% of the US population which gets you to this #). After 4 years of honing their model, I don’t think it’s inconceivable they’d be approaching 5% of the MDs in NYC being on their system. At ~$200/MD/mth, that’s over $7M in revenue per year just in NYC. I really doubt they are spending that much in customer acquisition. A solid marketing team should spend way under $1000/customer on acquisition. Ideally, more like a few hundred dollars once you hone a model. That’s some nice margin just in one market.
Retention should be good if they keep supply and demand in balance. A doctor can probably justify paying the monthly fee with just one new patient per month. No brainer if it’s 3 or more. That leaves out some cost savings the doc may ultimately realize making it more compelling.
Obviously, there’s some upfront cost in opening each new market (and thus the fund raise). However, once you prove the unit economics in 2 markets which I’m guessing they have done, investors will throw money at that all day long especially with the other factors (add’l revenue streams, growing demand expectations, etc.). My bet is that they have moved beyond *potential* and living in the reality of the challenges of scaling a model that has proven itself with real revenues/profits. I think that is what is separating them from most others.
So my guess is that most of those docs dont have another system (easy to use PMS or EMR). But they increasingly will and the market price for those is $400-600 per month. Almost all of those will incorporate an appointment booking system which will make Zocdoc’s $200 a month for that system come under pressure (although as you point out they’ll have the consumer brand and the consumer search reach). Some time around then I suspect ZocDoc will pick up some more applications to add to what the docs get.
But we’re both noodling here and obviously Cryus and his team have thought through all this. It may well be that they think there’s so much open field on the “non-automated” docs that they can expand the current model in 50 cities and be profitable and unassailable in most of them.
In any event, this type of thing is why we love this arena because as we all know there’s huge potential for both making the consumer (and physician) experience better and also building a business.
Excellent. Agreed on all points except, in part, #4. Partnerships are inevitable. Even ZocDoc has to work with all the docs who are willing to put their data in the ZocDoc system for appointments. I would agree that you want to avoid “intricate” partnerships if possible, and yes, the big players have a different speed of decision-making and implementation. I wouldn’t say it is always because they lack a sense of urgency, but because they have layers of bureaucracy and large internal constituencies to mobilize.