This seems to be the decade for entrepreneurship. Savants encourage the development of startups and, if that startup fails, it is part of the learning process. I guess I come from the old school in developing business strategies – identify a growing market and analyze the business model to see if it can be profitable. If income is the lifeblood of a company, does it deserve to survive and prosper? After a whole week of meeting healthcare technology companies, I kept asking some of the founders and CEOs, what was the “business model.” One healthcare company stood out when I asked that same question, although this service, the founder claimed, seems to be growing in popularity: when an outpatient left the hospital, a standard, short SMS series of questions would inquire the outpatient as to his/her condition so that it would alert the doctor whether the patient had to be readmitted. Still my standard question remained unanswered by the founder.
First, let me think about the macro-environment of the healthcare universe. It is an industry in which the costs have been growing 4.4% annually every year (the only higher one being university education). The genesis for Obama Care had been promulgated to control costs and to cover the non-insured. That should mean an expansion of healthcare facilities, reduced revenues for the healthcare givers, and a larger population of patients. Recent news have reported that the demographic population for Obama Care registrants lean on older applicants, a demographic profile that is less cost effective for insurance carriers. Why? Older demographics require more care than a younger one. So the economic pressure to reduce costs should be greater than anticipated.
Second, the medical industry is a unique market which relies on the medical insurance industry to be compensated. In other words, unless the insurance carrier includes the medical procedure or advice in its billing model, the doctor does not get compensated. For example, the strong barriers to growth for telemedicine has been the ability for the doctor to be compensated for his medical advice by the insurance carrier. Another is regulatory – states demand local licensing for the medical profession. A California doctor cannot practice in New York, which creates an insurmountable barrier for telemedicine. Therefore the insurance carriers will not pay out various components of the medical profession.
Going back to this SMS startup the first analysis would be to review what are the underlying fixed and variable costs of transmitting the questions and their answers. There are the negligible incremental costs of the telecommunications transmission by the patient and the doctor for receiving the SMS and replying to them. Then there are the operating costs for the startup company. Someone in the company has to get paid, some revenues must roll in to keep the lights on. And, of course, the doctor has to be compensated for his/her time invested in responding to the SMS messaging.
What is the benefit of this service? The responses determine the level of post-operative care without a quick admission to the emergency room. And the emergency room, in terms of comparative analysis, is an expensive process.
My first doubt to the business model stems from a previous IT startup in the banking industry with similar model. The NY startup had a patented technology for online banking that strip data from different databases and integrated on the personal online banking screen. The CEO told me that the company was valued at $1 million dollars even with zero sales. I asked how he determined the valuation: the valuation was dtermined by the law firm that filed the patent. Yet they did not prove to me the business model, which should determine the true valuation.
What can be the business model for this company? A royalty fee for every use of its technology on a website? However, every time a banking client accesses his bank account online, not one customer is being charged. How can the bank charge to a client for online website access. A quick analysis in that specific industry revealed that this type of business was never profitable. I even met the Private Equity firms from Goldman Sachs and JP Morgan as they had invested in similar companies. And they confirmed that the rationale for investment in such companies was to use their technology, which is never profitable and treated more as a long term internal acquisition for banking services. So the business model just does not exist outside of being acquired quickly to be integrated in a more profitable model.
I see the similar characteristics in this particular healthcare technology. I see a macro-environment reluctant to compensate for this service, given the pressure to reduce to costs. And even if some compensation can be established, the revenues must be small – how much can one charge for a SMS? The total addressable market here must again be limited since the service is attuned to outpatients recovering from a major condition.
If the company’s valuation is determined by its business model, then this healthcare technology value will be measured more upon acquisition costs integrated to a profitable enterprise, not upon its potential revenues. And the ROI will be less than the expected value from a company with a potential IPO. So the business model for this healthcare technology is to operate at a loss until acquired by a larger company.