How To Avoid 5 Common Mistakes Healthcare Startups Make

It’s a well-known fact that a staggering 90% of startups fail. In my healthcare strategy course at Stanford’s Graduate School of Business, I remind my students that the probability of failure in the medical field can be even higher.

Interestingly, failures in healthcare innovation rarely arise from the products themselves. Instead, they result from missteps taken by founders early in the process, long before any product launch or clinical deployment.

Entrepreneurs lured by the $5-trillion U.S. healthcare market often believe that their past successes in different sectors will seamlessly translate to healthcare. However, the unique structures, cultural nuances, and implicit guidelines within this industry frequently create obstacles they hadn’t anticipated.

Here are five recommendations to help mitigate the risk of entrepreneurial failure in healthcare:

1. Approach Healthcare With Fresh Eyes

When former President Donald Trump met with governors in 2017 to talk about the potential replacement of the Affordable Care Act, he famously exclaimed, “Nobody knew that healthcare could be so complicated.”

This realization is not uncommon. Many outsiders presume that the issues within healthcare can be addressed using the same methods and strategies that have proven successful in other industries. Yet, the complexities of medicine are deeply personal and varied. What may work effectively in a controlled laboratory environment often flounders when faced with the realities of clinical practice.

For instance, several years ago, I received numerous inquiries from CEOs who had integrated voice recognition technology and AI to automatically generate medical records from doctor-patient discussions. Each claimed their tool could save physicians two to three hours daily, but they were perplexed by sluggish sales.

They diagnosed the problem as a lack of awareness among clinicians and sought my assistance in connecting their sales teams with doctors. I had to break it to them: if their tools genuinely saved physicians that much time, they wouldn’t need help with sales; the challenge would lie in managing overwhelming demand.

I advised them to start anew: test their tools in real-world clinical settings, identify shortcomings, and re-engineer their solutions. All declined. None of those companies went on to succeed.

It wasn’t until the recent advent of generative AI that the concept of ambient listening began to reach its potential. This technology adapts to each physician’s unique style and delivers summaries requiring minimal edits—leading to a much higher acceptance rate among doctors and hospitals.

2. Identify a Problem Before Developing a Product

A primary reason startups fail is the tendency to create a promising technology and then seek a medical application for it. This could be a device, software, or service.

However, in healthcare, even the most technically advanced innovations will not take off unless they fulfill an urgent clinical need recognized by doctors and hospitals.

Take the story of Dr. Tom Fogarty. In the early 1960s, while training as a surgical resident at the University of Oregon, he faced a common yet perilous challenge: removing clots from arteries without sending fragments downstream, which could obstruct blood flow to vital organs.

His ingenious solution: a thin catheter equipped with an inflatable balloon at its tip. By threading the catheter past the clot, inflating the balloon, and retracting it, he could retrieve the obstruction intact.

This design was straightforward yet highly effective, demonstrating that starting with a significant clinical problem was essential for creating a device that garnered immediate acceptance from surgeons and hospitals.

3. Understand the Doctor’s Perspective

No matter how groundbreaking an idea is or how beneficial it could be, medical professionals will not adopt tools that complicate their workflows, add to their responsibilities, or reduce their earnings.

A pertinent example is the recent surge in wearable health monitors. These sleek devices can continuously measure vital signs and transmit countless data points regarding blood pressure, glucose, or oxygen levels to a physician’s office. Many entrepreneurs tout their potential to revolutionize the management of chronic diseases, touting expected improvements in clinical outcomes.

Nonetheless, this is not how healthcare providers view these devices. The idea of receiving a deluge of data every week from numerous patients can feel daunting. Overwhelmed by the volume of information, they may struggle to balance work and family responsibilities.

Through a physician’s eyes, a more viable solution would go beyond mere measurement. It would analyze available data, identify patients at highest risk, and recommend necessary adjustments in treatment.

Consumer wearable manufacturers, including giants like Apple, seem to assess the opportunity from a corporate standpoint rather than a clinical one. This disconnect means their devices typically collect data, which may be beneficial for general wellness but lack any substantial clinical impact for patients with serious medical issues.

The result: limited enhancements to health outcomes and minimal enthusiasm among physicians outside of those companies funded by these tech developers. Without viewing these devices through a clinician’s lens, real transformations in healthcare will remain elusive for companies like Apple, despite lofty aspirations for their impact on health.

4. Pursue Financial Viability Relentlessly

Healthcare leaders frequently discuss the shift toward value-based care: linking payments to patient outcomes rather than service volume. Nevertheless, in practice, over 90% of care in the U.S. continues to operate on a fee-for-service basis.

This means that hospitals tend to shy away from technologies that primarily reduce costs. More often than not, they invest in solutions that draw in patients, increase revenues, and enhance profits.

Consider surgical robots. These high-cost machines require significant investments and operational expenses, extend procedure times, and do not necessarily lead to better patient outcomes. A comprehensive review of 39 independent research studies indicated no notable improvements in outcomes or survival rates. Nonetheless, hospitals continue to purchase these systems.

Why is this the case? Because surgical robots attract patients and convey prestige, which helps in marketing efforts and surgeon recruitment.

As we anticipate a sharp rise in premiums next year, along with the growing capabilities of generative AI, the landscape for developing cost-saving technologies may become more promising. However, entrepreneurs must remain realistic: unless financial incentives evolve, many savings-driven innovations will struggle to gain traction.

5. Clarify Who Will Pay Before Launching

Often, entrepreneurs discover after intense labor over a couple of years that they have created a product or service that offers genuine value to medical practices. Medical professionals, insurers, and hospital leaders may all agree it could greatly benefit patients. However, when it comes time to finalize deals, entrepreneurs find a lack of willingness to bear the costs—each stakeholder assumes another party should take financial responsibility.

As an illustration, imagine you’ve developed a telemedicine program where nurses guide diabetic patients in managing their blood sugar and promoting healthy lifestyle choices. Your clinical findings demonstrate that it effectively reduces the risk of serious conditions such as heart disease and kidney failure. Your financial assessment reveals a favorable 3-to-1 ROI.

However, when attempting to secure insurance coverage, you hit a roadblock; insurers argue it falls under the doctor’s purview. Doctors, on the other hand, are reluctant to incur costs themselves as they cannot bill for these services. Meanwhile, patients often lack the financial ability to pay out of pocket.

This disconnect recurs frequently—whether with email consultations, text-based follow-ups, or telehealth appointments. While they present a lower-cost, more efficient option, without transparent financial accountability, even the most innovative solutions remain underutilized.

In Healthcare, Effective Solutions Don’t Always Succeed

Innovation in healthcare presents unique challenges—not solely due to the complexity of medicine but also because the system often lacks rationality.

The individuals receiving care are not typically those managing the costs. Those providing care frequently do not choose the tools at their disposal or dictate their compensation structures. Additionally, prices rarely reflect the actual value delivered or received.

This context explains why even excellent products or services can fail to find their place in the market. Successful entrepreneurs approach the healthcare landscape differently. They don’t accept the established system as logical; instead, they dive into the intricacies of it. They seek to understand monetary flows, influential players, and the pressing problems clinicians strive to resolve. Only after thoroughly assessing these factors do they take the next steps.