How did we survive for so long before web applications like Gmail, Facebook, YouTube, and SalesForce.com? These web 2.0 applications have dramatically changed the way we live and work.
These web 2.0 companies are also dramatically changing the way startups are managed and products are developed. Eric Ries coined the term Lean Startup, to describe a new way of thinking about startup companies, their markets and their products. These Lean Startup concepts can be applied to medical device companies too. Let’s start with one of the most critical concepts: Product/Market Fit.
Medical device companies often preach the virtue of being market-driven (where the newly-identified market-need drives the technical solution), versus technology-driven (start with a new technology from the lab, and then look for an application). In the Lean Startup, it just doesn’t matter. Marc Andreessen, co-founder of Netscape, said it best:
The only thing that matters is getting to product/market fit.
Product/market fit means being in a good market with a product that can satisfy that market.
In the Lean Startup, what matters is getting to product/market fit. It doesn’t matter whether the technology or market-need came first, as long as you get there. Today’s post is about defining the term “product/market fit” for medical devices. A subsequent post will cover “how you get there.”
First, let’s define a “good market.” For a medical device startup, here’s my rule of thumb: The addressable market should be large enough so that a reasonable market share would move the revenue line of a potential acquirer. In practice, since the most common acquirers are large medical device companies (e.g. Medtronic or Johnson & Johnson), the addressable market should typically be $1B or greater. The larger the market opportunity, the more value that can be created by a new product.
Startups with a platform technology (capable of solving several unmet medical needs) need to define at least one application with a “good market.” While the platform technology may be common across several products, each application will require its own clinical, regulatory, reimbursement and marketing efforts. So it becomes too expensive, from an ROI viewpoint, to chase multiple small markets as a growth strategy. Platform startups need a killer app.
Second, what do we mean by a “product?” With a web 2.0 startup, the product is the current version of the website (or a simulated site when the company is just beginning). For a medical device startup, the first “product” should be a sales brochure (or website) for an achievable, profitable product. The brochure describes the specific benefits and costs that the product provides to the four-part medical device customer. Benefits must be specific, such as “patients recover 50% faster”, “enables the same outcome with just one incision”, “eliminates 80% of tattoos in 3 to 4 30-minute treatments”, or “the procedure can be performed (and be adequately reimbursed for) in an office instead of the outpatient suite.” Costs must be specific too. If it will take the physician an hour to perform a new procedure, say so. If the device adds direct hospital spending to an existing Medicare DRG, say so. A product concept drawing is really helpful, as is a diagram that shows the product in use (example here). The product must also be achievable by the company, meaning that there is a good rationale for believing that the product can be successfully developed. It does no good to describe a product that is beyond technical or clinical feasibility. Finally, the product must include a selling price that provides adequate profitability for the company. If it’s not going to be adequately profitable, just don’t do it.
I’ve seen many startup product ideas that are poorly defined. Here are a few suggestions. One, avoid the vague benefit. Describing your product as “an improved diabetes monitor” is not specific enough. Is it less painful? Does it require less finger sticks? Is it cheaper? Two, it’s rarely necessary to describe the technology. It doesn’t matter what material you use in your new biodegradeable stent. It only matters that your product reduces the incidence of late-stent thrombosis or that your patient can stop plavix earlier. Three, don’t forget to address the four-part medical device customer. Explain the specific benefits (and costs) for the patient, physician, provider and payor.
Third, let’s define “fit.” Fit occurs when enough of your customers agree to pay your price to use your product for your addressable market. In the Lean Startup, fit must be measured. Unsurprisingly, there’s a great web 2.0 application to measure product/market fit for web 2.0 products – survey.io. Check it out. Medical device companies need to measure fit essentially the same way. You need to get out and sell “the product” to some early adopters. (If you can’t sell to them, you won’t sell to anyone.) As you close (or don’t close) hypothetical sales, you’ll be collecting the data you need. Web 2.0 thought leader Sean Ellis states that “achieving product/market fit requires at least 40% of users saying they would be ‘very disappointed’ without your product.” For medical device companies, it’s a little more complicated. Not only do you need at least 40% of the users to state that they will definitely adopt your device when it is available, you want them to state that they will use it on at least 75% of the addressable patient market. In other words, if you assumed that your addressable market included all patients with congestive heart failure (CHF), but your physician customers stated that the product was only useful in the subset of patients in NYHA Class IV, you’ve got a problem. Further, the lean medical device startup must confirm that the provider (e.g hospital, surgery center) will purchase the device, and that the payor will pay. If your physician customer says “If I could, I would use your device in every laparoscopic surgery, but the hospital will never buy it,” you’d better find out why. Given the tremendous pressure on healthcare costs, hospitals balk at buying anything new. Don’t assume that if physicians want the product, that hospitals will buy it for them.
Value creation really begins when a lean medical device startup achieves product/market fit. Product/market fit must be measured. We can learn a lot from web 2.0 Lean Startups about the process of getting to product/market fit. I’ll discuss that process, as it applies to medical device companies, in an upcoming post.
- There Are Two Venture Capital Industries (avc.com)
- Two Venture Capital Industries – But One Lean Start-Up (bostonvcblog.typepad.com)
- The Pmarca Guide to Startups, part 4: The only thing that matters (web.archive.org)