I had a chance to catch up with Anne DeGheest, Co-Founder of HealthTech Capital at the 2014 Digital Health Summer Summit. At this conference, we saw a presentation on how much money some “successful” start-ups had raised from investors. Anne raised her hand to say raising money from investors is NOT a metric of success for businesses that want to be around for the long haul. Rather, she points out, the true metrics for success are 1) revenue and 2) sustainability.
Revenue vs investment dollars
I asked Anne to expand on this and here is what she said:
“My big concern is we are confusing raising money with success metrics, but the real definition of success is revenue. Revenue means people are buying your products, in other words there is market adoption.”
The second metric of success, according to Anne,
“is that your business is sustainable. That means you have enough money to make a profit [so you can pay people and grow].”
Even for companies that have met the first metric (gotten to revenue), it can require lot of added investment to get to the second (profit which = sustainability). After mentioning that Twitter seemed to have a lot of success having millions and millions of people using the platform prior to making any revenue, Anne responded, that it is one of the good things about Silicon Valley. We can learn from our history.
“If you go back to 1998-2003, when [digital health] was called eHealth, companies were going after eyeballs. In fact their valuations were a multiple of eyeballs or even a multiple of the number of people hired, but none of these companies made it. There is a time period in which you can grab the land and get to a critical mass of people, but you have to be able to monetize it.”
Scaling up too soon
Investors often give you only a few years and then they start to say to startup entrepreneurs that they need to “show me the money.” This can cause a young company to fix on a yet unproved business model and start to scale up too soon. Interestingly, says Anne, the panel of 3 CEOs from failed companies that presented at the Summit, were good examples of this – the VCs forced them to scale up when they were not ready. All of three these companies, Zeo, Healthrageous, and HealthRally, were market risk start-ups.
“That means you are creating new markets and you don’t know if you have [the business model] until you have iterated a couple of times. If you scale up too soon, you can scale up on the wrong business model. This is what happened to these three companies. There is,” Anne says, “a fine line between figuring out the business model and knowing when it is time to scale up – and getting enough money to get there.”
The HealthTech Conference is October 14-15, 2014 in San Mateo, California
Anne says the focus of her upcoming HealthTech Conference is how to build a sustainable business. The first day will feature workshops for younger entrepreneurs. Sessions include how to build the right team, come up with financing strategies beyond traditional VCs, understanding board and investor dynamics and scaling up with partners. The second day is all about how to build a stable business. The speakers have all “been there and done that” and range from the CEO of Blue Shield of California, Paul Markovich, to successful startup entrepreneurs, including Jeff Tangney of Doximity, Sean Duffy of Omada Health, and Frank Williams of Evolent Health. If you are in the health tech field, particularly if you are an up and coming startup entrepreneur, this conference should be on you “must attend” list. If you mention that you heard about it from TDWI, you can get a 10% discount by using the code TDWIHTC14. If you are a young company with less than $1 million raised, you can get what Anne describes as a “huge discount! Here is another link to the conference site.