Two ways digital health startups often fail

By: Aditi Pai | Dec 9, 2013        

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ElliotMenschik

DreamIt Health’s Elliot Menschik

It’s not uncommon for startups to fail, but DreamIt Health’s Managing Director Elliot Menschik and Psilos Group cofounder Lisa Suennen have noticed that some failures are more common than others. Specifically, the two investors said a poorly set up team or a startup that isn’t willing to change with technology leads to problems later on.

While Menschik focuses primarily on early stage startups at DreamIt Health, Suennen’s firm generally invests around $20 million in late stage startups. Still, the investors noted that failures of startups had similarities across the board.

Menschik said DreamIt Health doesn’t consider a company unless the team looks promising.

“We’re betting on jockeys, not the horses, so we really care a lot less about the idea, we care a lot more about the people,” Menschik said. “We want to see a well-balanced team, complementary skill sets, founders typically with a technical background. Oftentimes IT is being outsourced and that is not ideal. And a team that has a history of doing something in the past, not necessarily together, but a history of execution.”

To set these teams up for success, Menschik tries to advise them on how to structure the company and ownership. What he says many startups don’t realize is that dividing the company equally may not be the right way to set up ownership. While Suennen deals with teams that are fully formed, she said her issue with startup teams is that they also don’t properly structure the ownership in the beginning in case the team splits up.

“I can’t tell you how many CEO transitions and other transitions I have participated in, often the hard way,” Suennen said. “And when those corporate matters aren’t really done well and thoughtfully, with a lawyer and with an eye towards the worst thing that could happen, it’s disastrous for these companies.”

These incidences were far from the biggest failures that Menschik and Suennen have seen. Suennen recalled a case in which she thought a startup, which provided a set of ancillary services to cancer patients, had started off on a promising foot. The company set up clinics to help patients with cancer through treatments like nutritional training, physical therapy, and psychological therapy. While she said the concept was good, the startup didn’t ultimately grasp the bigger picture.

“What happened here was that it was good for the patients and it was probably also good for the payors, but the providers, who really have to promote this and sponsor it to the customers didn’t make enough money,” Suennen said. “So they just forgot about it.”

Suennen also said she always hopes startups have a backup plan — that they understand they not only need to have a way of providing services clinically in today’s healthcare world but also tomorrow’s.

Menschik called this phenomenon the iron triangle in healthcare — the relationship between the payor, providers and patients. For a system that includes these players, all three must benefit from the system for it to work, he said. Menschik added that a way startups can work around this issue is to “collapse” the system and only focus on a product that involves two of the players instead of all three.

Startups also lose sight of the big picture when they don’t offer investors proof of concept. Suennen also suggests startups talk to at least 100 potential customers before finalizing their business model because she said it’s critical to involve buyers of a product in the design process.

Despite all the failure due to these organizational issues, the bottom line for Suennen is her clients — her fund’s investors.

“One of the things entrepreneurs don’t realize is how our business works,” Suennen said. “How our business works is other people give us money and we need to give them more back than they give us.”

  • Bill Prenovitz

    This article makes several excellent points, but I hope everyone recognizes that these are the same points which have always been relevant to start-ups in new markets: its about the right people and the right mix of talents, a realistic view of the ecosystem to be entered, and the flexibility to pivot when plans meet reality. And timing; a big factor in success is surviving until the new world can be effectively monetized.

  • Tami

    I would add that the definition of the “team” needs to include the early investors themselves, especially if/as the entrepreneur cedes more control. It’s critical that the entrepreneur understand that the investors that are in control are actually a large part of the evaluation of future investors. BEFORE you cede control, here are some relevant questions: How well do you know them? Do you like/trust them? Are your values/goals aligned? Do they understand the business model, and what experience do they have with it? Do they understand the industry, and can they challenge you from a position of knowledge? If you don’t do your due diligence as the entrepreneur, you’ll end-up with “experience” or a “lesson learned” – which is what we get when don’t get what we really want,