Steve Barsh of Wharton Highlights Five Common Pitfalls in Healthcare Startups

Steve Barsh

Editor’s Note: Steve Barsh holds a bachelor’s degree in computer science from the University of Michigan and currently teaches in the MBA program at the Wharton School of the University of Pennsylvania. He also serves as Chief Innovation Officer and Managing Director at Health for Dreamit. With over 30 years of experience leading early-stage ventures within multinational corporations, Barsh has helped establish dozens of companies with a combined market value exceeding $400 million. Recently, Barsh published an article on medcitynews.com, discussing several common misconceptions prevalent among today’s healthcare startups and providing a detailed analysis of their underlying causes.

Every startup is built on certain assumptions, and undoubtedly, some of these ideas will prove incorrect. At Dreamit, I have always emphasized the importance of accurately identifying these assumptions early on and mitigating their associated risks.

Here is a simple example I often use: the e-commerce footwear company Zappos, which was founded on a series of assumptions, one of the most critical being that people would be willing to buy shoes online. While this seems perfectly natural to people in 2015, it was not the case in 1999. Zappos’ founding team conducted early market tests and confirmed that there was demand for such a service. If this fundamental assumption had proven false, everything the company subsequently built upon it would have been nothing but a waste of effort and resources.

We often see startups blindly charging toward their goals without fully understanding the market’s most critical assumptions, their competitors, or the implications of the problems they are trying to solve, only to end up failing. Entrepreneurs must learn to accept feedback and respond accordingly. This can be particularly challenging for medtech startups, as many players in this field have already achieved considerable success in their respective domains. Smart, successful individuals must be willing to bear the consequences of poor decisions, acknowledge that they too can make mistakes, and pivot when necessary.

Below are five common pitfalls for startups and the reasons behind them.

1. Understand the true market that represents actual users.

Scenario: Mobile-Based Gynecologist App

“Can you believe it? There are over 55 million cervical Pap smears performed annually!” Initially, the situation appeared highly promising: this is a screening test covered by health insurance and regularly undergone by 55 million patients. If the app charges $5 per test, its potential annual market value would amount to $275 million.

However, one might ask: Is this app suitable for all patients? The answer is no. It is only useful when a patient’s cervical smear test results are abnormal, which accounts for approximately 6% of all patients. Consequently, its addressable market naturally shrinks to 3.5 million patients and $17.5 million.

However, further investigation revealed that the app could replace follow-up procedures for only half of the patients; in reality, only about 1 million patients would book the service. Consequently, after the research, the app’s potential market size plummeted from $275 million to approximately $5 million. Regardless of the technology’s actual efficacy, a market sized at just $5 million is unattractive to venture capitalists.

2. Understand your target customers. Keep in mind that the person paying for the solution is not always the one who benefits from it.

Situation: Aesthetic correction devices suitable for infants and young children

A physician-entrepreneur has come up with a better solution for common cosmetic defects in infants and young children. As an expert in this field, he speaks confidently about how to bring his product to market and is already preparing a prototype of the device for commercial release.

But later, as we began discussing how to supply the equipment in his busy pediatric clinic, I realized that the physician had not yet considered the critical factor of the supply chain. He simply assumed that there would be market demand for such devices, that pediatricians would purchase them, and that they would offer corresponding services to parents at a price of $2,000 (as it was not covered by insurance). In his envisioned model, physicians would act as salespeople. However, after a few brief discussions, he came to understand that the vast majority of people were opposed to this approach.

3. Only by understanding the problem can you solve it. Does the pain point you are trying to address have enough momentum to drive the change you need?

Scenario: Mobile-Based Patient Skin Condition Monitoring App

The startup spent a considerable amount of time developing this app, yet it has not been tested by the market. They blindly assumed there would be demand for such an app without seeking to understand user needs, only realizing this after they had already built a working prototype. It was only after we communicated with several physicians that we identified the underlying issues.

This lesson is thought-provoking: most patients suffering from skin conditions either self-medicate or seek help from their specialist physicians. When asked how often they might use this app, respondents indicated once or twice a week. The app is priced at approximately $1 per consultation, a model that holds little market value worth investing in.

4. Understand the degree of your own competitive set.

Situation: Devices for Detecting Pediatric Emergencies

Some physicians believe that pediatric emergencies are often difficult to detect, with accompanying symptoms such as mild fever appearing without warning. This high-sensitivity detector can identify problems without subjecting children to X-ray scans. However, due to the ambiguity of symptoms, X-ray scanning remains part of routine check-ups. This would represent a significant change to a process that has long been taken for granted.

The startup spent months building a basic prototype before even speaking with physicians. Yet the very first doctor they consulted stated that in his more than 20 years of clinical practice, he had never encountered such an issue. Other physicians offered similar feedback. Furthermore, the doctors noted that if they deemed it truly necessary for a patient, they would simply order an X-ray scan. This means that the device’s existing competitor—X-ray imaging—is readily accessible and covered by insurance, raising serious concerns about the device’s competitiveness.

5. Differentiate yourself and your product.

Scenario: 3D Imaging Software for Plastic Surgery

This software is designed to help surgeons plan and rehearse their procedures in advance. Undoubtedly, this makes it a highly useful tool, so why has no one put it into practice until now? A simple search reveals that similar products are already available on the market. Even with a unique pricing strategy, the startup’s product lacks sufficient differentiation to stand out from the competition.

Errors of this nature are quite common in startups and the venture capital community. Therefore, we should constantly question our working assumptions and adjust them as needed. The ability to identify incorrect assumptions can greatly benefit entrepreneurs, encouraging them to learn from mistakes and move forward.

Compiled by Chen Xin
Editor: Mo Renying