Note: this is a series on making a digital health startup. The first post is here.
Last week we talked about failure rates within startups. This week we’ll shift to the business-to-business side of digital health, and we’ll talk about the difficulty of B2B.
Many startup CEOs are tantalized by selling to a large business (“B2B” or “enterprise”), such as a hospital or insurance company, for a few reasons. First, with a very small number of sales, one can immediately reach massive scale. If you get a contract with United Health, for example, you have the potential to reach millions of individuals across the US practically overnight. Second, B2B sales sometimes feel more rational and economics-based than having to deal with the whims of the fickle consumer. If you show your product works, the theory goes, an enterprise will buy…whereas the consumer cares about annoying things like branding and buzz, and how can anyone build a business based on such fragile things? Third, consumers have not traditionally been direct purchasers of healthcare products for the past 50+ years (because generally folks buy insurance and then the individual products / services they consume are “covered” by the insurer), so there’s a general feeling that consumers are unwilling to pay for healthcare…which means startups must sell B2B if they want to be successful. “Consumers don’t pay for healthcare” is a common refrain in the medical technology world.
All of these are true, but selling B2B also has its disadvantages. The first major disadvantage is the length of a sales cycle. The traditional sales cycle (the time from first contact to closed deal) can be as high as eight to 12 months, and rarely is it fewer than six, unless the company is small or the need is urgent. Eight to 12 months can be a lifetime in startup years, so it’s difficult to rest one’s future success on a B2B contract.
Second, big companies tend to have numerous layers of management, and many of these layers need to support you in order for you to get a contract. Further, these layers often disagree with each other, often by design. For example, an innovation office might want to pilot a new app, but the financial office doesn’t want to pay for the pilot. The call-center team might want to test a new software that improves efficiency, but the operations team doesn’t want to be responsible for integration. The surgery team might want to experiment with a robot that does anesthesia automatically, but the anesthesia department doesn’t want to lose jobs, and the medical office is worried about lawsuits from botched robot-anesthesia. And while most of these departments will need to support you in order for your technology to get approval, almost any can singlehandedly sink you. See Regina Herzlinger’s brilliant Six Forces framework for more details.
Third, big companies in general don’t want your product. In healthcare there’s sometimes an assumption that if a product functions, enterprise customers will buy it. For example, let’s say someone’s invented a new stethoscope that’s internet-enabled and syncs with an iPhone. From the perspective of the entrepreneur, it’s a slam dunk: the device can plug directly into a hospital’s EMR, and images can be saved and analyzed over time. Eventually heart analysis can become automated, saving the healthcare system tremendous money and improving care. It’s a win-win; why wouldn’t every hospital want it?
Well first of all, overworked MDs are probably happy with the stethoscopes they’re used to, and they likely won’t want to switch unless you give them a compelling reason, or force them, or both. The operations department has to deal with another integration. The legal division needs to make sure data is routed appropriately and that there aren’t HIPAA violations. The financial office doesn’t want to pay the extra cost of the internet-enabled stethoscopes. And the procurement office has an existing relationship with the current stethoscope vendor, and now they have to set up a new billing plan. As an entrepreneur you think you’re making a product that will make the world better, but in fact you’re just creating a bunch of problems.
People are always trying to sell things to hospitals and insurance companies. You think you’re the only internet-enabled stethoscope and so competition must be limited, but in fact you’re competing with every other product the procurement office sees that quarter, from new gauze to an improved fMRI machine. A company has limited capacity for experimentation (because, for example, there are only so many operations people who can handle integrations), so you are fighting with all these other companies for one of these limited resources.
And then the Board of Directors meeting happens. It turns out the Board is becoming impatient with these new pilots and experiments in the Research & Development division, and they state that they want to see financial results within two quarters. Now the division chief evaluates every project according to its projected return-on-investment (ROI), and she abruptly cancels every project that can’t demonstrate its ability to general meaningful revenue increases or cost savings within six months.
But you’re an early stage company! How can you demonstrate ROI within six months if your clinical trial needs 12? We’re sorry, they say — we just can’t take on that level of risk at this moment.
So selling into large companies is often a scary thing.
Next week we’ll go into a little more detail about why selling medical treatments is hard.