Anne DeGheest, co-founder of HealthTech Capital explains the two most important metrics for health tech startup success.
2014 has been a great year so far for health tech startups with record breaking funding flowing into the sector. According to Rock Health, 143 digital health companies raised $2.3 billion in funding in the first half of 2014. Another notable aspect is that average deal size has risen significantly from $10 million last year to $15.6 million now.
However, there is a real concern- is this explosive growth in funding paving the way for supreme complacence? Is the health tech industry witnessing a re-run of the dot com bubble? If so, then the bursting of the bubble is what awaits us in the near future. This complacence is exactly what Anne DeGheest, co-founder of HealthTech Capital warns against, reiterating that revenue and sustainability should be the success metrics for health tech startups instead of fund raising prowess.
“The real definition of success is revenue”
In her own words, Anne DeGheest explains why she believes revenue to be one of the key success metrics for health tech startups. Revenue indicates that ‘people are buying your products’ and that there is ‘market adoption’, she says. This paves the way for the second metric because it establishes a solid customer base which makes for a sustainable business model for the long term.
DeGheest points out that the dot com companies that survived the burst were those that had developed sustainable revenue models early in their life cycle. Another important characteristic of these success stories is that they tracked their key metrics and constantly endeavored to adapt to the marketplace and customer preferences. The one thing they did not do was assume that their ability to raise capital was a reflection of their ability to survive in a highly competitive market(DeGheest,HealthTechCapital, 6/29).
Another key success metric in DeGheest’s view is sustainability. Sustainability means that the business has ‘enough money to make a profit’ she says. That enables the start-up to hire great talent, nurture it and help talented people grow while enabling the growth of the business itself. Even those startups that have achieved a viable revenue model for the business may not necessarily progress to sustainability. Additional investment is usually required to make sure that the business becomes sustainable in the long term, she cautions.
Another interesting point raised by DeGheest is that startups tend to focus on the number of the customers drawn towards the sales funnel. But unless these customers are ‘monetized’ they do not make much of a difference to the business . The funding by itself or customers by themselves do not make for sustainable profits unless the business starts focusing attention, energy and time on making them valuable assets and utilizing them in the right manner.
Beware of Premature Scaling
DeGheest also touches upon the adverse impact of scaling too soon. In the quest for turning profits, young companies often start scaling up even though the business model has not been tested thoroughly. She explains how many failed start-ups scaled up too soon and ended up ‘scaling up on the wrong business model’.
A 2011 Forbes.com report laid out the facts in much the same way. Premature scaling was defined in this report as ‘spending money beyond the essentials on growing the business’. The author explained how start-ups could fail simply because the order of doing things was out of sync despite the fact that the right things were being done.
So what is the solution?
It is not impossible to overcome these problems and create a digital health start-up that remains profitable and sustains this profitability over the years. DeGheest explains how there is a ‘fine line’ between understanding which business model is viable and ‘knowing when it is time to scale up’. And then comes the task of getting the right kind of funds to take the business to its destination.
A revenue driven business model is what underlines long term success in this industry. This supports the business through the notriously longer than average sales cycle that is characteristic of health care sector and makes sure that the business has enough liquidity and cash flow to see it through until the marketing cycle is completed and fresh revenues generated.