In 1848, the California Gold Rush began, and with it, came dreams of wealth and prosperity. In seven short years, more than 300,000 people made their way to “The Golden State” to stake their claims. But for the majority, the hope of striking it rich never materialized. The truth was that California simply had far more dirt than gold.
In the end, the merchants and traders made all the money. Levi Strauss & Co. serves as a good example. As for the prospectors, failure wasn’t due to a lack of vision. What they did lack, however, was the experience and knowledge needed to make their dreams come to fruition.
The lure of the trillion-dollar healthcare industry
For entrepreneurs, especially those working in technology, the healthcare system might seem like an endless city of gold. After all, research suggests that the global market for healthcare IT sits at around $167.4 billion in 2022. And it’s expected to expand at a compound annual growth rate (CAGR) of 29.3% through 2030. That means the market could eventually reach more than $1.3 trillion in revenue.
That’s roughly the entire gross domestic product (GDP) for countries like Spain and Australia. And that has a lot of entrepreneurs trying their luck in the world of medtech.
“The allure of the healthcare industry can be hard to resist,” said Shannan Epps, president and CEO of Brightwork Health IT. “There is a lot of money within the sector, and it’s in critical need of transformation. These are two things every venture capitalist and tech entrepreneur look for when entering a market. But looks can be deceiving.”
Brightwork Health IT is a Seattle-based consultancy that helps healthcare organizations with large IT implementations, digital transformation initiatives and technical resources. And having been in healthcare IT for more than 20 years, both in-house and as a consultant, Epps has an industry insider’s perspective on startups.
“The reality is that most medtech startups fail,” Epps said. “By nature, entrepreneurship is a risky endeavor. As such, not every business will make it. However, there are some fundamental things medtech startups can do differently to improve their chances of success.”
CB Insights found that 70% of all tech startups fail, usually with more than $1 million in initial funding within 20 months of their first raise. So, regardless of the sector, bringing innovative technology to market is no simple task.
One thing that makes the healthcare market more difficult for tech entrepreneurs is that it’s extremely rigid. It’s one of the most highly regulated sectors in the world. Because of this, technology’s model of finding use cases and quickly putting out a minimum viable product is often met with resistance. This can make beta testing and pilot programs difficult.
“When you enter the healthcare market with a product, you have to put your best foot forward,” Epps said. “Few healthcare organizations will participate in beta programs or pilot new technologies. Healthcare organizations are extremely risk-averse and rarely take a chance on new technologies that aren’t aligned with established players.”
Navigating the complex healthcare ecosystem
Despite the healthcare industry’s massive size and robust growth prospects, only a small number of players serve its software needs. Microsoft, Cerner, Oracle, Salesforce and Epic Systems are five of the largest IT vendors working within healthcare. And their license agreements and contracts can make it hard for smaller startups to gain a foothold. Alphabet, Amazon and Apple are also quickly accelerating their pursuit of the healthcare market.
“The first priority for medtech startups should be learning how to navigate the healthcare industry’s complex maze of interconnected players and regulations,” Epps said. “Hospitals, pharmacies, government, insurers, doctors, manufacturers, technology platforms and more are all part of the giant ecosystem. Knowing where and how your technology fits into that puzzle is key.”
One of the fastest ways to bridge the gap between concept and reality is by joining a healthcare innovation incubator. Cedars Sinai Accelerator is one example. Based in Los Angeles, the three-month program provides companies with $100,000 in funding mentorship from more than 300 leading clinicians and executives, access to Cedars-Sinai, and exposure to a broad network of entrepreneurs and investors. The accelerator announced its seventh class in September 2021.
Optio3 is one of the eight companies accepted to the accelerator’s recent class and serves as a good example of the types of medtech startups health systems are considering. The company uses cloud-based software to aggregate and analyze data from a variety of smart devices in the hospital to identify areas that could be more efficient at a facility level.
In a written statement, Anne Wellington, managing director of the Cedars-Sinai Accelerator, said, “We’re learning what the ‘new normal’ looks like for hospitals, providers and patients, and are excited to welcome these companies to our accelerator. The solutions they are creating allow health systems like Cedars-Sinai to support our diverse patient population, offer innovative treatments and diagnostics, and keep our facilities on the leading edge of technology.”
Managing startup capital is essential
In addition to understanding the complex healthcare landscape, medtech startups also need to know how to manage their capital wisely. Typically, tech startups and early-stage investors are under the assumption that a company will scale quickly. Many expect their portfolio companies to reach $1 million in annual recurring revenue (ARR) within 12 months. However, that can be complicated for a medtech startup.
“The sales cycle within healthcare IT can be extremely long,” Epps said. “And because of that, some medtech startups have already exhausted their funding by the time they are at the final stages of negotiating a contract. Those that cannot afford to wait 12 to 18 months to close a deal should rethink their entry into the market.”
Cash flow problems are common among startups, and eager investors often fail to reinvest in a company if they don’t see quick progress. According to CB Insights, the number one reason startups fail is that they either ran out of funding or could not raise funds. A whopping 38% of founders said this was why their startup didn’t make it.
So, if you’re an innovator eager to go prospecting for healthcare gold, three things you should definitely do are study and fully understand the industry, join a healthcare IT accelerator and make sure you manage your funds wisely. From there, it’s all about the product and delivering on what the industry needs. Do all of that well, and you just might have the next medtech unicorn on your hands.
About the author
Jay T. Ripton is a freelance healthcare, technology and biomedicine writer out of Scottsdale. He loves to write to inform, educate and provoke minds. Follow him on Twitter via @JTRipton.