Three principles for scaling HealthTech startups in 2024. Part I - Who Pays?
Startups need to plan their GTM several steps ahead to scale.
In HealthTech innovation, even an outstanding product, which demonstrably improves health outcomes for its patients, is still a long way from enabling a scalable business. The obvious table stakes of any startup sector apply here too, but with the added complication that go-to-market and payment flows in healthcare are some of the hardest of any industry. Over the next three articles, I’m going to describe the three key factors that enable HealthTech startups to scale into large, successful incumbents – to have the biggest possible impact on the population.
As for the obvious foundations: Startup needs to be centred around solving a strong customer pain point in a way they’d get paid for it. They need the right team and right form of capital to scale the product and the company. And of course they need to adhere to regulations and rules which exist to some extent in any industry. But the stakes in healthcare are some of the highest in any industry. And strangely, even though it’s all about people, the healthcare apparatus isn’t particularly patient-centric most of the time.
To turn a great product into a great business in HealthTech, we need to answer three key questions:
Who pays for the product?
How do we get the relevant stakeholders to trust our claims, with the right validation?
How do we reach the total available market, in what sequence of GTM motions?
The most successful HealthTech ventures nail all three of these factors: The Revenue Sourcing, Validation, and Go-To-Market Pacing. In the first part of this framework, let’s look at why figuring out who will pay for the product – which is quite obvious in most industries – can already become a minefield in healthcare.
Part I: Revenue Sourcing – or who pays?
Expecting someone else to pick up the tab
It’s interesting how we as consumers can be ‘trained’ to expect getting certain services or products for free. For example, after most news media became available for free online, it took years for major news brands to introduce paywalls and some more for consumers to accept them. Even though we value the service, we’re primed to try not to pay for it. In healthcare, this effect is even stronger: With our increasing material wealth, spending more on health is becoming the highest priority and a status symbol for many rich-country consumers. But we’re used to someone else paying. Startups can overcome this reluctance for some parts of the population but to reach scale they need to convince several different types of payers.
Many successful startups in digital HealthTech eventually have a combination of business models, getting paid by consumers, health plans and/or employers. But this is likely to change during the lifetime of a company. And B2B usually follows B2C, rather than the other way around. That’s why it’s important for startups to plan their go-to-market motions two or three steps ahead.
Going beyond Telemedicine 2.0
Most attention in digital HealthTech has been going to the ‘Telemedicine 2.0’ business model, providing services for specific health conditions or audience segments using a combination of telemedicine appointments and digital resources or tools to drive more continuity of care. Some great examples are Pomelo Care, a virtual maternity care platform, and Folx, a virtual primary care provider for the LGBTQ community.
But this space has become so crowded that it’ll be hard to compete for relatively new startups: While consumer awareness is still relatively low for the new generation of services, employer and health plan payers have a large range of startups to choose from. And, they will likely prefer if existing suppliers start adding more services to their offering rather than building new supplier relationships. So those startups that launched a few years ago and are starting to reach scale (and Series B+ funding stages) have a clear advantage. A new offering has to be significantly more clinically effective - and be able to prove it - to have a chance.
Planning future go-to-market motions from day 1
So it’s not enough to get some initial consumer traction for a new kind of service, if steps 2 and 3 of the go-to-market have to be major B2B deals with health plans and employers. Startups need to be more ambitious using tech to build much more disruptive models; find early adopter consumers who are willing and able to pay out of pocket for superior care; and use that traction to validate their model at scale to open up B2B payer deals.
In previous years, especially 2020 and 2021 there was a much larger flow of capital into early digital HealthTech startups, which enabled some of them to build in ‘stealth mode’ for a couple of years to validate their offerings before selling straight into health plans. It seems this model has become much more difficult today with tighter control on investment in the space. So starting with a D2C model in the first phase is likely more promising to get early validation.
‘Point solutions’ still win in the early stages of company building
Convincing early-adopter consumers is its own challenge and mainly requires precisely thought-through validation (which we’ll look at in the next post in this series). It also relies on having a very specific value proposition - so similar to the latest wave of Telemedicine 2.0 startups, this new generation of companies needs to find relatively niche consumer challenges to address, just with more software-driven models, before continuously adding to its offering to reach larger audiences and increase lifetime value. So I’m not convinced that models with generic promises like ‘long term health’ and disease prevention can build strong enough consumer traction to build sticky solutions and show fast enough progress to keep investors on board. (There will likely be exceptions, say startups with celebrity endorsements and investors but it’s not necessarily a reliable approach)
Overcoming the ‘cold start problem’
So in sum: There are some digital HealthTech categories that are purely B2B models (e.g. provider workflow automation, clinical trial tech, biotech); some that are purely D2C (e.g. simpler lifestyle apps or education tools); while the majority should build an effective combination of different payers.
If D2C is an option, it’s a very effective market entry as long as the value proposition is clearly valuable to consumers and has strong proof points. It’s essential to start planning for pitching B2B customers (health plans and employers) more or less from the beginning of developing the business. Including whether to use a more traditional fee-for-service model, or how to move into more value-based payment models including per-member-per-month or capitation models. We’ll go into these models in part 3 of this series.
I’m convinced digital HealthTech innovation is still getting started and there are promising new models driving much more fundamental tech disruption. The shortages in healthcare professionals all around the world aren’t going to get any less serious, so we need order-of-magnitude increases in care effectiveness which only software-first models can provide. If anyone wants to explore some more detailed propositions let me know - and there’s enough opportunities to keep a lot of entrepreneurs busy for a while.