Many people have great ideas for medical devices that they are sure will revolutionize the surgical suite, and some start a company to develop a product and bring it to market. However, the unfortunate reality is that 9 out of 10 of these startups fail. What are the things that separate successful ventures from those that don’t make it? Here are four key elements of a sound business plan for a successful medical device startup.
First, make sure your potential customers agree with your assessment of the concept. Lots of ideas look great on paper, but in practice do little to improve patient outcomes, save the providers money, or make the doctor’s job easier. In fact, one of the worst mistakes entrepreneurs make is creating a device that forces clinicians to radically change their technique; even if it does improve their results. Surgeons, in particular, are creatures of habit who have spent years perfecting their procedural methods, and they resist starting over without seeing substantial benefit.
Second, don’t forget the economics. You may be going after a large market with a product that doctors love, but can you present a compelling argument to the economic customer. As we all know, more and more medical care is being driven by economics, and while doctors and hospitals are focused on improving medical care for patients, without a clear cost benefit, even the best new products will have a difficult time getting an evaluation. Understanding the cost drivers of the market you’re going after, and having a good cost/benefit analysis to demonstrate potential cost savings will go a long way to gaining acceptance. For example, let’s imagine you have a product that will reduce OR time for a particular surgical procedure. Given current average OR costs, you think you’re saving the hospital hundreds of dollars, but the reality can be very different. Unless the time saving allows the hospital to do more procedures per day in that OR, the cost saving is not real because staffing and room costs don’t go away and are not being offset by more billable work.
Third, make sure that you can make a profit! Once you have analyzed the market and understand the cost/benefit metrics for the customer, you will have some idea of the price you can charge for your product. That’s good, but is your manufacturing cost such that you can make a profit selling it? For most companies, the gross profit (sales – cost of goods sold) needs to be 50-70% of sales in order to make a profit after deducting sales and marketing expenses, salaries, R&D, taxes, and other costs. You don’t need to be making money at launch, but a cost of goods analysis at various levels of sales volume will allow you to create a financial model that demonstrates long term profitability critical to raising investment money.
Fourth, evaluate the competitive landscape. Are you going up against large, well-entrenched competitors who have a head start of years with essentially similar products? If so, you may be facing an uphill climb given the purchasing contracts and other incentives have to work with them. Also, understand the strength of the intellectual property portfolio for your idea. Can you get a patent, will you have the right to practice it, and how difficult will it be for others to work around it. Improvements on existing products can be patentable, but sometimes can’t be marketed because they are covered by existing IP. For example, you have a great idea for a new scalpel with a sharper blade that is unique and patentable, but if someone already has a broad patent for a generic surgical cutting instrument, you may not be able to legally market your product.
Lastly, don’t be afraid to challenge the big guys if you have something truly novel, and game changing. After all, they represent the best opportunity to ultimately monetize your business. Large companies are increasingly willing to pay for a proven technology, rather than invest in long term, high risk internal development projects.