The other day I was reading one of MedCity News’ wrap up articles from the JP Morgan Ringling Brothers, Barnum & Bailey Healthcare Circus, which is just folding up tent in San Francisco. Everyone was here: the elephants, the clowns, the whole magilla, as my mom used to say. Also there were lots of great people who I was so happy to see and gorgeous weather and way too many middle-aged white dudes in blue and/or gray suits. Diversity at the JP Morgan conference basically means middle-aged white dudes in brown suits. FYI, for those keeping track, purple ties are in.
Anyway, the reporter in the MedCity News article was enumerating some of the alleged insights she heard at the conference and among them was this one meant specifically for digital health companies:
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“In the early stages, revenue is a trap.”
The person who said this, an entrepreneur running a digital health company, added that, “digital health startups can do themselves a disservice if they become consumed with how to generate revenue. Their focus should be on how to attract users and produce data that shows their technology not only works, but is more effective than what’s available. Once they do that, it should be much easier to focus on revenue.”
The words made me shudder, as they are basically a fancy echo of the famous Field of Dreams strategy; in other words, “If you build it, they will come.”
Now it’s true that in the Field of Dreams movie, the protagonists built the ball field and, against all odds, the ball players and spectators did, in fact, come. But it turns out that was a fictional story and the movie business itself has a very clear business model: charge each person a fee to see the movie and an even bigger fee to buy popcorn and fire-hydrant-sized Diet Cokes. Had the producers of Field of Dreams said, “Hey, I know! Let’s make this movie at great expense and then try to get as many people to come as we can to see it for free and figure out later how to make money off of it,” they would be broke. And job-free.
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It is true that the consumer Internet has somehow managed to avoid business models, in some cases, and still create significant market “value” as defined by high valuations that defy traditional metrics and even gravity. But here’s the difference between the consumer Internet and healthcare, digital or not: you don’t have to deliver life-savings services that cost a lot of money on FaceBook or SnapChat. Nope, you don’t have to deliver anything at all as people generate and share their own content and stare at advertising and somewhat pissed off birds and the like.
But in healthcare, let me tell you, you have to deliver actual stuff. And that stuff costs money and thus you need money to provide it. Prescription drugs, physician visits, inoculations, imaging scans, knee replacements, heart valves, diagnostic tests…the list goes on and on. And I cannot imagine a world where any of those things should be provided on a “let’s give them away to lots of people for free and figure out the business model later” basis. Can you imagine someone building a new hospital and saying, “hey, let’s just let everyone come here and get all the stuff they want for free; we’ll get tons of customers that way! And then we can figure out how to charge for it later. In fact, we can make it up in volume!” Yeah, me neither.
So why should this be a legitimate business strategy in digital health? Just because it is digital, doesn’t mean it should be judged by consumer Internet rules. In fact, the digital health phenomenon is loaded with apps and so-called healthcare products and services trying to justify that they are, in fact, legitimately clinically-valid and thus worthy of insurance reimbursement (aka, healthcare). If that’s the case, how can one think that the one-way flow of cash (out of the company) is a reasonable long-term way to run a business?
People tend to value what they pay for, particularly when it is related to a product or service that gives them something important. People tend not to value things they don’t pay for, with a few rare exceptions (oxygen, sunny days, cute puppies). However, make those free things scarce and you bet the wallets would come out if people thought they could be purchased.
But more relevant is this: if you build a business and can’t figure out pretty early on what value you are providing and how it should and will be paid for, you are on the path to almost-certain ruin. Yes, I’m sure some of my readers are now violently shaking their heads and will notify me of the the example that disproves the rule, but for every one of those I can point to dozens of companies that burned through tens of millions of dollars of investment capital while they didn’t mind the revenue store. And then they were broke. And the people that worked there were job-free.
And, oh by the way, if you want a serious lesson in the importance of revenue and profitability, meander into the many public company presentations at the JP Morgan Healthcare Conference where the CEOs and CFOs are NOT telling audience members that revenue is a nice-to-have and they will get to it when they have time. These guys are pretty much expected to multi-task on the product development and product revenue front, as should all great business leaders.
Companies that want to be taken seriously by investors and partners need to understand their market well enough to devise a legitimate way of extracting cash from customers early in the game. Revenue is the only TRUE proof of concept. Having broad market appeal is critical; having a product that has proven efficacy is essential. But if no one wants to pay for the product despite your having those things, you have built it and they don’t come. Just saying.
And for your viewing pleasure, the original, “People will come” speech from Field of Dreams:
