Startup CEOs overvalue themselves, undervalue their companies, and are rarely ready when disaster happens.
Understanding those three insights – and what to do with them – will get an entrepreneur far in the new world of healthcare, according to a quartet of experts who range from attorneys to startup founders themselves. It was one of the big takeaways among all the health startup discussions that flowed through MedCity CONVERGE last week. A standing-room only session of entrepreneurs from all sectors were eager for horror stories – and how to avoid them.
Do any bits of advice ring true?
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Don’t horde equity. It’s the common eye-off-the-ball mistake, said Fahd Riaz, a partner at DLA Piper. Healthcare is increasingly about speed-to-market – even in the life sciences sectors – and entrepreneurs hesitate when an investment offer comes to them and asks for more equity than they had hoped.
Riaz counseled: Ask yourself, what is the real goal? In other words, it’s almost always smarter to give more equity for capital that will lead to faster success.
Your company always has value. While startup CEOs will balk at giving up equity, many companies are too quick to offer their services for almost nothing in a pilot project – particularly on the digital health side, said Dr. Jean-Luc Neptune, executive director at Blueprint Health. Companies forget that, even though they are young and unknown, their potential partners want to connect with them because there’s a real problem to be solved.
In the end, companies should negotiate hard and shoot for one of the following kinds of deals:
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- A pilot project in which the company is compensated for its services and a chance to land the partner as a customer
- A pilot where, if not payment or long-term customer opportunities aren’t available, the company can use the pilot program in marketing materials with other companies
- If marketing or cash aren’t available, make sure your company is extracting the best experience possible.
But there is fourth option, Neptune said: Walk away. Pilot projects cost time, which could be better spent with a customer more willing to provide a startup what it needs the most.
Things may go bad. So have it written down. Here’s the problem: no matter how well you’ve negotiated a partnership – and no matter how well-intentioned they begin – larger companies can always take advantage of smaller ones, said serial entrepreneur Rudy Mazzochi and Lee Drucker, a co-founder of Lake Whillans litigation finance.
Mazzochi, who has founded more than a dozen life science companies, is in the midst of a lawsuit over his current medical device firm Alenza. It sued former partners Alcon and parent company Novartis for theft of trade secrets after they backed out of a deal.
These disputes are more likely to happen in today’s healthcare environment, Mazzochi said. The pressure for big companies to build a strong product pipeline is stronger than it’s ever been, he said. However, their risk-tolerance remains low – despite the fact these business have inched further into early-stage innovation.
Some companies will try to take promising intellectual property by force, banking on the inability of smaller businesses to fight back, Mazzochi warned.
Mazzochi feels good about his current dispute for a few reasons: good legal documentation entering the deal, financial backing through litigation finance that supports the lawsuit, and in-writing correspondence.
“Do everything by e-mail,” Mazzochi said. “Trust no one.”
