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Inadvertent Mistakes Digital Health Companies & Their Investors Make

Updated: Jun 21, 2023



Our team at Informed Consulting recently sat down to discuss a number of key topics related to our firsthand experience working with digital health companies. The conversation addresses inadvertent mistakes we see from the venture capital and company perspectives.


We discuss a number of nuanced topics in this including:

  • How VCs should differentiate expectations with digital health companies vs. traditional SaaS or B2C startups

  • Appropriately evaluating TAM in a complex, multi-stakeholder healthcare and benefits ecosystem

  • Understanding the fully insured vs. self-insured market

  • The criticality of data in measuring solution effectiveness and the importance of getting that right from the start

  • How to approach employers if a startup doesn't have a large volume of first-party data

  • Why it's imperative to learn how to play within the existing healthcare system

  • How deep industry expertise can drive success even with "disruptive" technologies

  • Characteristics of successful solutions and finding opportunities

  • Factors that negatively impact the viability of new digital health solutions

  • Common operational issues for digital health startups

We hope you enjoy the conversation, and we've provided a transcript of the video below for your convenience as well!


When evaluating digital health solutions, how should investors or venture capitalists (VCs) differentiate their expectations from business-to-consumer (B2C) or software-as-a-service (SaaS) startups?

Data to measure solution effectiveness, operating within the existing healthcare system, and how pilots can impact success

Michael Krieger: Welcome everyone. I'm here with Jeff Oldham, founder of Inform Consulting, Sharon Bryan, a partner at Inform Consulting, and Anna Torcio at Inform Consulting. Welcome everybody.


This conversation is going to focus on the mistakes that digital health startups make. We're going to focus on the VC aspect and then from the startup standpoint.


Kicking off this conversation, from an investor perspective, how should VCs go about differentiating their expectations from B2C or SaaS startups? What themes kind of quickly emerge in your eyes?


Jeff Oldham, co-founder at Informed Consulting: Particularly in 2023, everyone's well aware of a new investment focus centered around the viability of the products being invested in. 2023 is the year of “show me.”


What that means is that the data itself are important relative to defining the effectiveness of the product. So, it’s focusing on the clinical outcomes of the product, the benefits of the product, and the ROI of a product.


In the old days, if you had a good idea, people would give you X amount of months or years of runway to build it out. At times I’ve seen first-time investors evaluating companies that don't have a game plan around clinical trials or even setting up employer pilots to gather data. That's an inadvertent critical mistake if you’re following the 2023 “show-me” rules.


Second, for first-time investors, it’s smart to invest in products and industries that you have familiarity with. Invest in what you know. Or if you're a member of a VC team with others on your team that have familiarity with the space, that can help.


Again, healthcare is crazy complex. There are great opportunities in healthcare but one of the biggest mistakes a VC firm and or an entrepreneur can make is to build a product and think they can drive success outside of the existing healthcare system.


The healthcare system with health plans, pharmacy benefit managers (PBMs), third-party administrators (TPAs), and more, if you're going to build an effective product you have to think about how that product is going to fit within the existing system. You can't think that my product is so good that I don't need the system. That's just hubris and not practical.


Sharon Bryan, partner at Informed Consulting: B2C is different than B2B, and it’s essentially B2B2C on the digital health side. Specifically with B2C, you can kind of learn as you go. So you can deploy version one of a product and work out the kinks. It’s easier to pacify consumers.


In the employer space, it is much more reputational. Your first pilots will hugely impact your success. You want the employers that you're working with to be able to speak highly of the experience. I would just hesitate with investors who are so quick in wanting to get to market. The employer space is small in that we all kind of know each other and work together. Lots of products have not delivered on their promises in the past. People are apt to ask others, so you need your first impression to be a good one.


For digital health solutions that may require regulatory approval or are so new to the market that it’d be nearly impossible to realize product-market fit, what is the process for evaluating total addressable market (TAM) and demand in those instances?

Appropriately calculating TAM, understanding fully insured vs. self-insured, and being prepared for procurement table stakes

Michael Krieger: For solutions that may require regulatory approval and therefore a more significant investment or solutions so new in their maturation that it'd nearly be impossible to realize product market fit, what is the process for appropriately evaluating both total addressable market (TAM) and demand in those instances?

Jeff Oldham, co-founder at Informed Consulting: It's funny. On the one hand, TAM is third-grade math. It's what industry are you selling into? How many employers are in the industry? How many employees do they serve and or their dependents? Then you multiply by your product, and that’s your TAM.


But again, healthcare is incredibly nuanced. It's important that you know what product you're building and to which market it should be distributed. If you are building a product for small employers in the healthcare space, well, small employers are fully insured. That means they don't bear any risk because they're part of a pool of small employers. Yet, it also means that the majority of small employers don't buy digital health products because they expect their health plan to offer what they need as a fully-insured customer.


So if you're doing a TAM, you can't just assume you’ll be working with employers of all shapes and sizes. You have to know the difference between fully insured and self-insured. Who owns that decision-making process in either market? That's critical and it's a common mistake that we find in working with new companies.


If you get TAM wrong as a digital health solution, is it possible to course correct that?

Evaluating TAM, course correcting TAM, how deep industry expertise can drive success even with “disruptive” technologies, and understanding selling nuances

Michael Krieger: From a startup perspective, if the TAM is being looked at the wrong way, how fatal of a misstep can that be? Or is there still an opportunity to course correct?

Jeff Oldham, co-founder at Informed Consulting: Common miscalculations of TAM that we see with entrepreneurs stem from a misunderstanding of the differences between how small employers, large employers, fully insured, and self-insured actually buy solutions.


Folks need to be cognizant of this, in particular, when you're raising for the first time. You may calculate the TAM of a particular industry or limit it to a particular industry. Either in advance of the raise or quickly after the raise, if you don't work with organizations that can actually go and assess the market to validate it's the right industry that is most prone to adopt your product early, then you could have inadvertently been doing the TAM on the wrong industry.


There are seven or eight different ways that a digital health company can distribute its product. One of them is health plans. The other is employers. There are a number of others. Say you’re raising for the first time, and you’re limiting your TAM to employers. Well, once your product is in the market you may find that employers weren't ready for this solution or expected their health plan to be able to manage that service, then again, your TAM will need adjusting.


Can it be course corrected? It certainly can be but this is where it all goes back to entrepreneurs working with investors and hiring people that know the market really, really well. You can overcome and adjust, but you have to have the right people and insight to know that your TAM could be wrong in the first place.


Yet, there could also be good news. Maybe you're selling it to a bigger TAM than you originally realized. That doesn't suck.


Get people who have been there and done that. There used to be this old adage of, “Why would I hire people that are coming from the system that I wanna disrupt? Those people don't get it. If they did, they would have figured this problem out a long time ago.”


Again, it's like building a product for a government contract and not hiring ex-government contractors as executives or investors. Selling into that market is crazy complex. It is a very narrow focus with lots of different layers. Multiply our healthcare market times ten. So, TAM can be fixed, but it’s really difficult to fix a board that doesn't know the space. If you've hired people who don't come from the space because your perception was that the people already in the space are the problem and I'm the solution, that’s shortsighted. You need a mix, but you definitely need people who have been in the trenches and can help grow your company.


Anna Torchio, consultant at Informed Consulting: This is a rare industry where the TAM is going to be somewhat cyclical. There are going to be points in time throughout the year when your TAM is completely unavailable.


So, if you didn’t previously know that for your sales projections, it’s going to be upsetting to learn that your target market is completely unavailable to meet with you between the months of September and December, let alone make a purchasing decision.


There are all kinds of nuances. For instance, maybe an insurance carrier just bought a solution similar to yours. Now, any member of your TAM that uses that same insurance carrier is out of your TAM because they already have that solution for free through their carrier. Never make assumptions. Again, always validate and learn about what it's going to be like to sell your product before you actually begin to sell it.


How should investors or venture capitalists (VCs) approach measuring the effectiveness of a digital health solution that they may want to invest in?

Obtaining clinical outcomes or pilot data, the importance of getting your product in front of members, and understanding that you’re competing against the status quo

Michael Krieger: From a market perspective, what's the approach to trying to measure solution effectiveness in the digital health space? Is it that once a solution is implemented, it’s purely utilization based or are there empirical outcomes that are looking to be met to measure effectiveness?


Jeff Oldham, co-founder at Informed Consulting: Whether you're selling to a health plan or a large employer via a consultant or a broker, having clinical outcomes validated by third parties and signed off on is crucial. The adoption of digital health companies by large self-insured employers isn't because they think it's simply a good idea. The internal validation for investing in a new product is that it's going to deliver a return on investment.


If there’s a product out there that's managing high-cost drivers or drivers of productivity or presenteeism, maybe you can find your way in the door. Really, it's incredibly difficult, if not impossible, to ask organizations to spend six to seven figures on a product if you don't have the ROI math to justify it. You've got to do right out of the gate. You have to figure out how you are going to obtain these outcomes. So, are you going to partner with another health plan to do it? Or employers pilots?


Then if you've got the math, how do you get your product in front of the members who need to use it? Because folks think it's B2B, they often try to sell the product and think that’s the end of it. Our world should be looked at as B2B2C. A lot of digital health companies now derive their fees from utilization and not per employee per month. So what does that mean?


In the per employee per month (PEPM) world or per member per month (PMPM), you're paying X amount of money per head per month for a product. But in doing so, from an employer's perspective, the digital health company may not have any kind of incentive to drive greater engagement, and we know greater engagement leads to greater outcomes. In a utilization model where a digital health company doesn't get paid until people use the product, the decisions around the product then become different.


Sometimes you interact once with the product and take some form of a comprehensive exam. From there, may get into a protocol to manage your condition. So on and so forth. Or to use a behavioral health example, if you know anyone that's suffered from stress or anxiety you know going to a psychologist for 30 minutes doesn't solve your issue. You have to go repeatedly and you have to be compliant in order to manage that condition. The point is that digital health is the same way.


You have to think about how you're going distribute your product, yes. But then once members have it, how are you going to keep them coming back and using your product? At the end of the day, it’s the engagement and utilization that drive the clinical outcomes. The clinical outcomes drive ROI, and that’s why employers buy these products.


Sharon Bryan, partner at Informed Consulting: With selling into the employer space, companies are often so focused on being the first to market. Your competition is always going to be status quo. By remembering and recognizing that it's always going to be easier for them to just stay with what they have, it can help position your product correctly.


When evaluating digital health solutions, are there characteristics or guardrails that you look for in relation to a solution’s long-term viability or success?

Operating where solutions exist, the pitfalls of being first to market, addressing mid-market needs, and constantly validating decisions

Michael Krieger: When evaluating digital health solutions, are there characteristics or guardrails that you look for in relation to a solution’s long-term viability or success?

Jeff Oldham, co-founder at Informed Consulting: The first thing is what problem are you solving relative to the condition that your product is going to hopefully help the members improve upon their livelihood? How many existing vendors are there already in that space? There are pros and cons.


If you're going into a space where there's already a number of different vendors, then on the one hand you can say it shows that employers need the product. They validated the market application or need. In trying to enter that market, you've got to immediately be able to differentiate yourself from others that have been in the market for a few years. And in the digital health world, a few years is a long time.


On the other side, if you’re the first one in a space it can be incredibly exciting. But when you're selling to a health plan or employer, they have to justify to their leadership why they need to buy your product. If there isn't empirical proof that your product works, proof that members will adopt it, or no provable ROI yet, then you have some real work to do.


Sharon Bryan, partner at Informed Consulting: So often, startups and their boards or VCs are focused on large employers. It’s those 50,000 life cases. The reality is that those companies have all the leverage. They have all the power, and they're bombarded with solutions. They can negotiate deals. They're so popular and everyone is calling on the same people.


If you think deeply about how to distribute your product, there's a great opportunity in that middle market space to help employers find solutions. That's an excellent space to grow. Don't always copy what everyone else has done.


Anna Torchio, consultant at Informed Consulting: Always continue to validate your choices. Not only yourself and your board, but with who you're going to be selling to in terms of employers, brokers, or health plans.


It’s critical to engage with them to ensure there’s an appetite as you continue to make product development choices or target market choices. Don't ever make assumptions. You have to constantly validate your choices.


What are the factors that negatively impact the viability of new digital health solutions?

The value of experience, understanding sales expectations, the value of clear expectations, and gathering your own data.

Michael Krieger: Let's get into the solutions more specifically. What are the factors you commonly see that negatively impact the viability of a new digital health solution coming to market?


Jeff Oldham, co-founder at Informed Consulting: Of course, the product has to work. The product needs to be tested. The product needs to be validated.


These are things that we've discussed, but the people you surround yourself with need experience. Sometimes inadvertently people surround themselves with people who are just going to say yes to them. You do need to hire people that have maybe different perspectives and applicable experience. They won't just sit there and nod their head every time the entrepreneur says something.


Then there are fundamental things. In our work with early-stage companies, if they're coming off a seed round, one of the first questions we ask is about how they made revenue projections for the first three years. This helps us understand the expectations that have been set.


As Anna said, if you're selling something to the large self-insured market, around 86 percent of American employers have a January 1 effective date. You're going to sell a lot. You're going to sell during the summer, but Q4 and Q1 are relatively quiet. Do your investors know that? Does your sales team know that?


Clear expectations and getting everyone in agreement can also help a lot. That's tough. I don't mean to give the impression that this is super easy. If you're doing well and obtaining capital over more rounds, that means new board members typically come into play.


These are things to be cognizant of when taking money from folks that either don't have the experience. Misalignment of the expectations that are being set can put an unbelievable amount of pressure on the entrepreneur, and his or her executive staff. You can look to avoid that by communicating transparently about expectations from the outset.


Lastly, if I'm an entrepreneur and I'm looking at first-time VCs, it’s important to vet that appropriately. Just as the VC would interview a founder about a product, company, and how much it will take to fund the company, founders also need to interview the VC. So for a founder, how can you get a sense of other investments a VC has made in the space? Can I talk to other CEOs that you've worked with in the past?


At the Seed Round or Series A sometimes I find that because first-time entrepreneurs are so anxious to obtain money, they don't realize that this is a two-way street. They have every right to ask investors questions about their experience. Ask for references. Investors vet a business plan, and founders need to know what they are getting into with investors.


Sharon Bryan, partner at Informed Consulting: With a lot of solutions we've looked at recently, there’s been a clinical component to it. So, when you're starting off, you may not have your own clinical data. You may be using third-party data, but don't let that stop you from gathering your own.


I’d also really recommend that you utilize people that have experience in the space to help you understand the type of data you want to be reporting on. You can't really go back if you don't capture the right data, so that will be critical to correctly positioning your product with employers.


What operational issues face digital health solution startups?

Investing in operations, scaling beyond what the CEO can do, and preparing for larger-scale sales

Michael Krieger: From an operational standpoint, whether it’s a lack of management experience or immature processes that aren't scalable, what common operational challenges do digital health startups face?

Jeff Oldham, co-founder at Informed Consulting: We commonly see an initial investment that is heavily focused on product, and that makes sense. From there, once the product is ready, investment in sales and marketing. That's terrific. It's the next step is often skipped and overlooked. It’s, “How are you going to operationally support your product?”


Whether it's a health plan or employer, and you get someone to say yes, does your team know how to implement it? Do they know how to work with a variety of different stakeholders? Employers? Different third parties? Health plans? Do you know how to manage the employer to ensure that they stay on track? Oh, by the way, how do you distribute and deliver your product? Then when employees are calling in for questions, how are you gonna manage those?


It’s unwise to think that once the product is sold that the rest will take care of itself. Because the digital health space is more mature, employers have a more prove-it-to-me attitude. Your smarter employers are going to ask as much about the operational strategy and the support as they will about the product.


Why? If a CHRO or a VP of Benefits investing in a new product, they've had to obtain some form of internal approval for the product. There is a budget or line item. Two, they need to deliver that product. Three, they don't have a large team. Unfortunately because of the pandemic and economy, HR and benefits teams are getting smaller. They're not getting larger. So, you are putting a lot of faith into a company and a team that they're not going to mess up.


Not to be melodramatic, but there are people who lose their jobs by writing really large checks to companies that can't deliver. They may not have questioned the operational capability of that company.


So, those pillars, of course along with managing cash flow as the foundational element, but product, sales and marketing, and operations are equally important.


Sharon Bryan, partner at Informed Consulting: A founder has the type of personality that is interested in starting their own company and growing this company. There's a certain skill set that's required and it's often a different skill set than is required to manage a team.


Recognize that if you've never managed a team before, it is a skill. Then, providing feedback and training for employees, companies really struggle to get those right. You have to be able to hold on to good people and learn how to scale beyond what the founder themselves can do. Prioritizing that person as a hire can be really beneficial for a lot of startups.


Anna Torchio, consultant at Informed Consulting: In terms of encompassing what Jeff and Sharon have shared in detail, it’s understanding that you're going to bypass the crawl, walk, run, and sprint process.


Sales are not going to solve all your issues. You have to think about launching on smaller scales, working out the kinks, and preparing for unexpected interruptions to deployments. Solve for those as you go. If don’t, there's no way that the product is ever going to reach larger-scale sales because you haven't solved those unexpected nuances yet.


Sharon Bryan, partner at Informed Consulting: When you're selling to large employers, you're just like any other vendor for this large employer. So, you have to go through the procurement process. It’s also recognizing that you're going to need all of the legal pieces and the security pieces around technology like any other vendor would need to do to work with that large employer. Those are also the kind of table stakes that people don't always fully appreciate.


Michael Krieger: Thank you so much for everybody's time. That was incredibly informative.


Jeff Oldham, co-founder at Informed Consulting: Thanks, Michael.

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