Seems like asking investors, “What do you look for when investing in startups?” is the go-to panel topic at every health tech conference.
The problem is most founders have heard the same answers so many times that they would rather stick sharp needles in their eyes than sit through another panel on the topic.
Rarely discussed are the all-too-common pitch mistakes that quickly land companies in the “No” bucket before the pitch is even finished. These are self-inflicted wounds. If you make these mistakes, your platform and market opportunity do not matter. Maybe it is unfair, but a team that makes these five mistakes will likely not get funded.
Why so impulsive? Investors turn down 95 percent of the deals they look at. As a result, they have learned to instinctively triage deal flow. While the VC’s office seems friendly, with a polite staff offering you coffee and water, you are entering hostile territory chock full of people looking for reasons to pass on your deal. The burden is on you, the entrepreneur, to quickly establish that you deserve to be in the 5 percent .
So let’s unload the five chambers of the revolver pointed at your foot one by one.
Weak Problem Statement
A Deep-dive Into Specialty Pharma
A specialty drug is a class of prescription medications used to treat complex, chronic or rare medical conditions. Although this classification was originally intended to define the treatment of rare, also termed “orphan” diseases, affecting fewer than 200,000 people in the US, more recently, specialty drugs have emerged as the cornerstone of treatment for chronic and complex diseases such as cancer, autoimmune conditions, diabetes, hepatitis C, and HIV/AIDS.
I can’t overstate how many companies do not have a clear and compelling problem statement. If we don’t believe you are solving a big and urgent problem that affects a large market, nothing else in your deck matters. Our admittedly non-scientific analysis suggests at least 50 percent of companies fail because they don’t make it onto the short list of compelling problems that high-level decision makers are demanding to be solved. Healthcare stakeholders are allergic to change. To survive the enterprise sales cycle, you need strong champions who will rally around the problem you are targeting.
Start with a crisply articulated problem statement that defines the scope of the problem, its consequences in terms of cost or outcomes, and why current solutions are not effective. Test it on people who know nothing about your business and iterate based on feedback. Here’s an example of a clear problem statement from one health IT company:
“Doctors are spending too much time manually reviewing the EHR trying to find critical data in order to make accurate diagnoses and better clinical decisions. This yields over $80 billion in excess labor costs, missed diagnoses and underbilling, and is a leading cause of physician burnout. Our platform automates this process, reducing the physicians’ time in the EHR by 75 percent.”
Unclear solution statement
From a recent digital health pitch from a startup with a similar platform to the company referenced above:
“We reduce labor costs and improve outcomes by analyzing EHR data through AI and ML via our proprietary algorithms, which in turn yield decision support, efficient data review, and better outcomes in a way that has never been done before.”
Come again? At my firm, we call these “Motherhood and apple pie” solutions. Everyone (well, almost everyone) loves motherhood and apple pie. We just don’t know how to monetize it. The statement provides no useful information.
Rather than a high-level abstract description, take the investor through a specific customer or patient journey in a way that makes your solution and value proposition obvious.
These often begin with:
Meet Mr. Smith [Patient], who suffers from congestive heart failure and high blood pressure [disease states] and lives alone at home [care setting]. His care coordinator, Mary [Customer/user] has no reliable method of communicating with him or knowing when he is heading for a critical event [Problem]. As a result, he has been readmitted to the hospital three times in the last eight weeks which cost over $60,000 [Consequence and cost]. Now, with our solution, Mr. Smith is connected to our device which collects and communicates the following data to his care coordinator in the following manner [workflow]…our study data demonstrate a 50 percent reduction in readmissions. This results in 5x ROI for the payer [Outcomes and ROI supported by data].
A strong use case demonstrates how your solution improves specific outcomes, drives efficiencies, cuts costs, and how this translates into a meaningful ROI. Importantly, highlight how your solution fits into or simplifies existing workflows.
For examples of startups that state their problem and market opportunity statements well in their pitch decks, check out Moz’s and Dwolla’s early decks.
Buzzword Bingo
Peppering your pitch with buzzwords like “disrupt,” “revolutionize,” “disintermediate,” “next generation,” “game changer,” and “blockchain” will have investors reaching for their smartphones faster than you can say “Series A.”
Somewhat related, most professional investors are not impressed with the number of pitch competitions you have won. Sadly, these have become ubiquitous and do not always to correlate with long-term success.
Unsupported Assumptions
Too many startup pitches incorporate unsupported assumptions often related to customer demand and market size. To paraphrase, these sound something like:
- “The market is huge. Every doctor will want one.” Often this is delivered with body language that screams, “If you can’t see how huge this opportunity is, you are an idiot.” All assumptions, especially those regarding customer demand, need to be supported by actual data. No points for gut feel. Extra points for providing references to data sources in your deck.
- “We spoke with 10 enterprise healthcare systems and they all want to buy our platform.” Really? Are you approved in their budget? In contracting? With all of them? Oh, you actually had a few great meetings which you project will become sales? Are you aware the enterprise sales cycle is 12-24 months? Exaggerate your sales pipeline, instantly lose credibility, and join the 95 percent club.
- “The size of the diabetes market is $100 billion. If we get just 1 percent market share, we’ll be a billion-dollar company.” We call this the China market share plan. If we get just 1 percent of the China market…you get the idea. First, the platform probably serves only a segment of the diabetes market, so the market size is wrong at best, or ridiculous at worst. Second, most investors have no interest in funding a company that’s plan is to capture a de minimis share of an enormous market. We want to invest in companies that will become market leaders.
Death by PowerPoint
Investors sit through hundreds every year. Most are painfully boring. Make your pitch interesting, even entertaining, and you will keep the investors engaged.
Open with an interesting or provocative statement or question that highlights the problem. These sometimes start with “Did you know…” or “Imagine if…” Here’s another example from a care coordination business:
“Imagine if two jumbo jets fell out of the sky every day? No one would fly. Yet each year the same number of hospital deaths are attributable to preventable medical errors.”
Keep to the prescribed time limit. No doubt it is challenging to tell your story in just a few minutes. As Mark Twain once said, “If I had more time, I would have written a shorter letter.” A rule of thumb is that your pitch should take no longer than one-third of your allotted time. So if the fund has given you a 30-minute slot, you pitch should be no longer than 10 minutes.
Final thoughts
Raising capital is hard work. This is a shots-on-goal game. Expect to kiss a lot of frogs. For one of my startups, I pitched to 162 funds to find two that eventually invested.
Some investors will be caustic and abrasive. Always be polite, professional, and never burn bridges. Success is the best revenge.
Photo: Getty Images
