Venture capitalists and corporate venture funds are the often the wind beneath the wings of innovative healthcare startups. Now it is time to step back and learn from the past experiences to make the future associations even more successful.

Healthcare is an industry that has been in transformation for two decades. Some believe it should be further down the innovation path than it is, but this is an industry that moves slowly because of its sheer size and its purpose – keeping people healthy and safe. The primary transformation drivers are costs and technological innovation, and they go hand-in-hand. A multitude of healthcare benefit startups have appeared over the years, funded in the early stages by venture capital investors and corporations investing in pilot programs that may or may not turn into long-term commitments. From these efforts has emerged lessons for limiting risk and enhancing the chances of success in digital health ventures going forward. The lessons include planning for the transition from pilot to a stable revenue model and having the data and metrics that demonstrate success.

There are two perspectives when talking about healthcare benefit startups. One is the enterprise perspective which is focused on delivering higher quality cost efficient healthcare benefits to employees or patients, if a medical company. The other perspective is that of the startup which offers a new product or service, usually based in technology, to healthcare customers with the expectation of revenue growth as the pilot or early start company proves its value. Though the incorporation of technology in the healthcare system and workplace health and wellness programs was well on its way before the 2020 pandemic, there is no argument it has accelerated broad acceptance of new approaches on a wider scale – like telehealth, remote health monitoring and use of technologies like Artificial Intelligence and machine learning to provide better services and predictive analytics in areas like chronic health conditions.

There have been many successes and failures and continued struggles. Stepping back to look at what has worked and what has not worked can help the innovators succeed in the future and the venture capitalists and enterprises better understand what makes a “good fit” for a joint effort.

Healthcare is an intensely complex industry, still disjointed in many ways and thus often discouraging to forms of innovation. Venture capitalists and enterprises see a high risk endeavor. Early stage innovators need capital for products and services that fit particular markets, whether it is hospital patients or employees. Startups are often totally dependent on their partnerships with healthcare organizations, matching mega-sized institutions or cash rich corporations with small innovators. The pilots of new technology products or services are not set up as mutually beneficial arrangements, with the startup believing its partner brings more value than it does to the table. Some pilots are even unpaid with the goal of attracting customers and investors in the future. The result is that the enterprises, wanting to improve outcomes and decrease costs, cause the innovative technology companies to fail. Justin Barad, MD, co-founder and CEO of Osso VR, a Virtual Reality Surgical Training Platform, said this pattern is so entrenched that his company has had hospital representatives tell them to not work with them because it would kill his company.

Rock Health data, a seed fund that supports startups in digital health, says that nine percent of innovators founded between 2010 and 2019 have been acquired or reached the initial public offering stage. New technologies are unable to get off the ground which is an enormous loss of innovation in the healthy industry. In fact, the term pilot-paralysis refers to innovators that conduct endless pilot studies as the bigger institutions keep extending the pilots, and eventually running out of money. The pilot companies never get a long-term paying contract.

How can pilots move to paying relationships and then to steady growth? The first lesson is that changes in perspective are needed on both sides of the arrangement. Venture capitalist that have funded startups have developed greater clarity on what they need to see in the arrangements. One is that the startup’s client and the startup need to agree on mutually beneficial and realistic goals and standards which identify the value created by both entities. The enterprise should not take advantage of the offer of a pilot without a clear understanding of how it can help improve outcomes and lower costs. Also, the enterprise needs to have champions of the innovative products and services in-house and to gain buy-in from operational teams to ensure the new product or services are used. It is important to ensure the pilot is given a fair chance to succeed by allotting necessary resources to departments or function.

Recommendations for health technology companies include the innovator developing short-term metrics that demonstrate progress. There should be measurable ROI on services and products within one to two years. They need to identify how the product or services will integrate into existing workflow and hire people with soft capabilities like sales experience in addition to hiring engineers and other technology experts. It is also very important to identify a specific need or pain-point the startup offers a solution to. If the best tech does not solve a problem, it is not needed. Link the investment to organizational priorities like helping employees prevent or better manage chronic diseases or improving patient care.

The past efforts have demonstrated that better upfront collaborative effort and understanding of each company’s perspectives is needed between digital health startups and funders, no matter what type of funder is involved. There are many factors to consider that include purpose and timing. In the early stages, the startup may focus on outcomes measurement to validate results. Once there is validation, only then can the enterprise and the startup work towards enterprise-wide development. Not all funding offers are worth pursuing. That is understandably one of the most difficult facts for innovative startups to accept.