By William Winkenwerder
In a world where the need for innovative solutions in the healthcare industry has never been greater, it may come as a surprise that starting a health tech startup has rarely been harder, even in a country with as strong a tradition of entrepreneurship as the U.S. From navigating complex regulatory environments to securing funding in a highly competitive market, the challenges facing aspiring health tech entrepreneurs are daunting. News reports indicate that funding for early stage digital startups is very tight in 2023, continuing a trend from 2022, which saw funding take a steep decline from the previous year, according to industry watchers at Rock Health. The dropoff has occurred across all stages – seed, venture and even late-stage growth.
I’ve seen many seasons of feast and famine throughout my decades as a leader in the heathcare space, including my time advising many talented founders who wouldn’t take “no” for an answer and refused to accept entrenched bureaucracy as the status quo. I’m grateful that I've had the opportunity to work with and observe numerous startups in the industry. In recent years, I can’t help but notice that these companies are facing pressures to succeed that those who came before them rarely had to contend with, at least not all at once.
One major factor contributing to these challenges is today’s stagnant economic environment, including rising costs and less available funding. Many of the traditional players among private equity and venture firms that play a key role in funding the next disruptive startups are more focused today on preserving their investments and achieving profitability. The cost of capital has risen dramatically. Therefore, startups must be more selective and strategic in their pursuit of capital and focus on profitability in their business models.
Against this challenging climate, it is essential for startups to proactively create their own ecosystems of support and surround themselves with strong, loyal, and committed partners. The virtue of mentorship and partnerships is that you can benefit from the mistakes that others have made, while hopefully avoiding them for yourself. Moreover, these partnerships can provide valuable resources, expertise, and networks to help businesses succeed.
At the same time, startups need to carefully consider and validate their revenue models to ensure they have a clear path to profitability. This can mean finding ways to monetize products or services in a sustainable way, rather than relying on changing the attitudes or practices of payers or providers. It’s critical that entrepreneurs are spending time alongside seasoned health practitioners – and having some on their team is indispensable. Product expertise from other areas of tech is a strong skill set to have, but only if it’s complemented with firsthand understanding of the unique operating and regulatory environment of the sector and needs of practitioners and patients.
When an entrepreneur asks me for advice before hanging out a shingle to build a great young company over the next five years, I advise them to focus on innovation that truly adds value and addresses unmet needs in creative ways. Avoid the temptation to chase the next shiny object and stay focused on the clear needs that the market is telling you are going unmet. This focus means avoiding the temptation to pivot constantly and instead committing to a clear vision and plan. By staying focused and persistent, startups can increase their chances of success in a challenging market.
Of course, these are just a few of the many factors that can impact the success of healthcare startups. There are many other challenges and obstacles that these companies may face, from regulatory hurdles to competition and market disruptions from unlikely rivals you may have never even considered. However, by staying nimble and adapting to change, startups can find ways to overcome these obstacles and achieve long-term success.
Above all, culture is paramount. A great product created in a toxic culture will fail every time. It's critical for healthcare startups to invest the time necessary to build a strong culture and team that can adapt to change and thrive in the face of adversity. Don’t just talk about it, make it a priority. The dividends are enormous: attracting and retaining top talent, fostering a sense of teamwork and collaboration, and creating a positive and supportive work environment. Let’s face it, the war for talent has gone global and when there are options to choose from, great professionals go to the organizations where they feel welcomed by the culture. By building a strong foundation of talented and dedicated employees, startups can increase their chances of success and better navigate the challenges they may face.
Let’s not gloss over the very real challenges of the moment. The current climate for healthcare startups is certainly challenging. But with careful planning, strategy, and execution, these companies can succeed and thrive in the long term. Do not forget, many of today’s technology titans emerged during significant economic downturns. It will happen again. By sticking first to principles and focusing on empowering teams, healthcare startups can navigate the unique pressures they face and emerge stronger and more successful from today’s economic headwinds.
Bill is Chairman of Winkenwerder Strategies, a board director at five companies, and advisor to multiple startups.