Three lessons for healthcare startups from AOL vet Steve Case

By: Jonah Comstock | Oct 10, 2013        

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Steve CaseSteve Case, the head of investment group Revolution and former CEO of America Online, believes that prevailing wisdom in Silicon Valley isn’t necessarily the smartest way to launch businesses. In a conversation with Joi Ito, director of the MIT Media Lab, at EmTech in Cambridge, Massachusetts, Case spoke generally about entrepreneurship and investment.

However, many of the lessons he spoke about resonate with the healthcare startup space — a space that Case is certainly familiar with, as Revolution has investments in Runkeeper, SparkPeople, and Everyday Health. In addition, Case has personally invested in the latest Rock Health class, according to a tweet by Rock Health CEO Halle Tecco. Here are three big lessons from Case’s talk.

1. You don’t have to be in the Valley

“There are some great firms that have great track records that say ‘We don’t invest in anything more than a 20 minute drive from our office,’” Case said. “Well, not all great companies are in the valley, not all great companies are in California, not all great companies are in Massachusetts, not all great companies are in New York, et cetera.”

Case said that the evolution of options like crowdfunding and Amazon web services have eaten away at many of the advantages of innovating in a hotbed like Silicon Valley. For investors, there are advantages to looking outside that bubble, because companies in other areas are often willing to let investors in at a lower valuation. He pointed out that a lot of leading startups in different industries are from all over the country.

“In athletic wear, the hottest brand is Under Armor, in Baltimore,” he said. “In food, the hottest startup is Chabani yogurt — that’s in upstate New York. Number one in social commerce is Groupon — they’re in Chicago. … These ideas are spread all around the country and people aren’t really fully appreciative of what’s happening there.”

In the healthcare space, this phenomenon is also apparent, and the digital health incubators and accelerators have embraced it. While the initial health accelerators like Rock Health focused on Boston and the Bay area, recent months have seen Healthbox chapters in Florida, Nashville and London and local accelerators like DreamIt Health in Philadelphia and Baltimore, the Iron Yard in South Carolina, or Health Wildcatters in Dallas, Texas. These healthcare startups are springing up in part because of the importance of partnership and pilot opportunities in the healthcare.

“Different regions have different strengths and weaknesses and you have to figure out what works in terms of what is your competitive advantage and how do you create that network effect,” Case said.

2. Work with the government, don’t ignore it

Ito and Case agreed that many entrepreneurs think of the government as something to avoid, or stay out of the way of. But Case, who works with the President’s Council on Jobs and competitiveness, said that especially in healthcare and education, the best thing startups can do is be involved with the government.

“You’ve got to engage with the government to make sure policies are supportive of entrepreneurs,” he said. “Increasingly, you’ve got to engage with the government whether you like it or not if you want to change industries that are regulated and largely funded by the government. So it’s a little naive to basically say ‘We’re going to ignore them and just do our own thing.’ If you want to change the way you learn, change the way you live, change the way you stay healthy, change the way we act when we’re sick, these are pretty fundamental parts of our lives and the government’s going to play a role.”

In addition to being policy makers, Case pointed out, the government is the largest customer in many sectors.

“Normally when you’re creating a business, you want to follow the money,” he said. “Well, the money is often in these government hands in healthcare and education, so it kind of makes sense to engage your major customer, not criticize them or talk like they’re morons.”

Healthcare startups have to interact with a range of government groups, including the FDA and sometimes the FCC, which regulate new products. But many other groups provide opportunities for pilots or funding including the NIH, the NCI, the VA, HHS via initiatives like Blue Button, and the CDC. Events like DC to VC at last week’s Health 2.0 conference highlight how health entrepreneurs are already sensitive to the importance of the government in their work.

3. Don’t be afraid of the long haul

Finally, Case spoke about his own experience with America Online and how, when the company started, only 3 percent of Americans used the internet.

“The internet didn’t just pop into existence,” he said. “It took, for us, a decade — and there were other people doing it for at least two decades — before it got traction. And the reason was because most people didn’t have PCs, most didn’t have a modem, it was $10 an hour to get connected, the software was terribly complicated, once you did get connected there was nothing to do.”

When an idea is potentially game-changing, Case said, it can still be what he called a “slog,” a venture that takes a long time to get off the ground.

“The first decade we got 1 million customers, the next decade we got 25 million customers,” he said. “It was a slog, but by persevering eventually we created a living, vibrant company that changed the world.”

As Jonathan Bush, CEO of athenahealth, pointed out on day one of EmTech, healthcare looks to be changing at a similarly glacial pace. A combination of safety concerns and entrenched systems and attitudes leads to returns that are slower than Silicon Valley VC firms are used to. But the investors and companies that stick with and survive the space will potentially position themselves as leaders in a space as ubiquitous as Internet connectivity is today.

  • http://stayinyourprime.com/ Tyler Hayes

    Working with government can be great for B2B. But as someone building a B2C health company right now I’d generally recommend avoiding working with government.

    The most important thing to do when you’re building a product (let alone a company) is to focus. Working with government can easily become a distraction. Unless there’s a clear sure-thing benefit coming from working with government, treat it just like working with any large enterprise: contracts will take a long time to negotiate and go into effect, if at all. Get in, get out. Make sure there’s a very clear cost-benefit ratio working in your favor.

    Love point #3. Paul Graham had some great thoughts on that; he called it Schlep Blindness: http://www.paulgraham.com/schlep.html