How (Not) to Fail as an Entrepreneur (or R&D Engineer, Buyer, Product Manager...)

Dear Reader: While this article focuses upon avoiding the common pitfalls of the start-up entrepreneurial company, there are lessons here that anyone working in any company can benefit from, since at the end of the day we are really all entrepreneurs, and work in an increasingly competitive world. When we think like entrepreneurs and take ownership of our own success, and work to build innovative value at whatever type of company we are at, everyone benefits. -TK

Typically, any successful venture follows a path that in hindsight seemed the only reasonable path to success. This path, however, was likely not known when the journey started. The journey forward was similar to driving down a foggy winding road, at night, with only dim headlights. There were any number of ways to go off the road, and only one way that eventually led to the destination. 

A common aphorism states that walking is falling forward and catching yourself before you fall. There is a well-known maxim known as the Anna Karenina Principle which states that there are many ways to fail, few to succeed, and if you eliminate the greatest risks for failure, hopefully, the principles for success remain. [1]

“Happy families are all alike; every unhappy family is unhappy in its own way.”–Leo Tolstoy, Anna Karenina

During World War II, the British examined battle-damaged bombers that managed to return from raids. They would note where the bullet holes and flak damage were, and then look for ways to armor the sections of the plane without bullet holes. The theory was that if the plane returned with a hole, it was assumed that damage was survivable. If it got a hole elsewhere, that is what brought down the planes that did not return. This was a clever way to discover and reduce the risks of failing to return from a mission.

This restates the principle mentioned at the beginning, that there are many ways to fail, and few to succeed. The goal is to be in the “happy family” of successful entrepreneurs.

Some of the principles of success are few and deceptively simple: purpose, focus, persistence, planning and a bit of providence. Myers and Hurley state, “The three pillars of bioentrepreneurship are scientific and managerial talent, technology and money.” Others have stated this as the various Ps of entrepreneurship: passion, persuasiveness, persistence, priorities, and “pain threshold.” In this essay are some of the “broad ways” that can lead to entrepreneurial failure. The idea is to identify these potential problems and address them before you sink years of your life into the venture, and a bunch of money into patents and product development.

What follows is a list of things that I have personally seen lead to entrepreneurial failure in the medical device space. It is hardly exhaustive; however, these are distressingly common.


[1] Mentioned, for example, in Jared Diamond’s book, Guns, Germs and Steel.


The Technology-driven Product

In medical devices, one of the most tempting traps is the technology-driven product. This is a device that does not address a clear clinical need or address a clear market, but has really cool technology. This is the proverbial solution in search of a problem, or the “science project.” These can be the result of grant-based academic research, or the discovery of a company founder. Here the discoverer falls in love with the technology, and all time, money and effort are directed to its perfection. It is believed that the usefulness of the technology will somehow magically become self-evident, and that the world will stand in awe of the brilliance of this discovery and beat a path to the door of the company, seeking this better mousetrap, with dollars in hand. (This is the “If you build it, they will come” approach.) Or that by having a better mousetrap, hoping the world will beat a path to your door. “Hope” is a prayer, not a plan. There is nothing wrong with hope and prayer, if they are combined with planning, preparation and crisp execution.

Sometimes the world does beat a path to your door (if you are lucky). More often, it is possible to spot the pioneer by the number of arrows in his back.

Symphonix Devices (SMPX) was a Silicon Valley medical device startup founded in 1994 to perfect a high-fidelity implantable hearing aid. Virtually all of the funding went to R&D. Between VCs (including some top-tier firms) and the public market, SMPX raised over $350 million, and never produced a marketable product. The technology and intellectual property was eventually sold in 2003 for $2.5 million. This illustrates the hazard of the technology-driven product.

Pure research projects are perfectly fine if you are doing university or corporate research, and don’t need to immediately build a company that will return a profit. These can even be great licensing deals. If you are taking in investment money that is expected to generate a return based on revenues, these “science projects” are very seductive. However, they are best avoided until a clear, compelling and marketable need for the technology is identified, with a clear execution path.

Josh Makower, M.D. has made a science of identifying clinical needs, and is the co-chair of the Stanford Biodesign program and Venture Partner at New Enterprise Associates. He suffered from chronic sinusitis. At a doctor’s appointment, he noticed in an MRI image that the convolutions in the sinuses resembled coronary arteries. He began to speculate whether sinus blockages could be gently squeezed open with balloons like blood vessels instead of having the blockages being resected with rongeurs. The result of this was applying well-know balloon angioplasty techniques and technology in a new indication, ENT. This focus on clinical need rather than technology has made Acclarent, the company Josh founded with John Chang to manufacture these sinus-clearing balloons. This major medical device success story was acquired by Johnson and Johnson for $785 million.

Market Too Small

One basic blunder is attempting to address a market that is too small. Since it often takes as much time and effort to address a large market as a small one, think big and go for the biggest market you can. An entrepreneurial start-up is likely to consume five to eight years of your life, if not more. Make sure you get into a project with a market size and payoff that are worth it. Small markets can still be a viable enterprise if you have enough niche products to add up to a decent market, and iterate and commercialize quickly and inexpensively. Typically, a product must have a price tag of over $300 to get an independent medical device sales rep to focus on it, and to get the interest of a corporate acquirer.

Arthrex is an example of a very successful company with many products that sell for under $100. Arthrex has a catalog of literally thousands of these products, close relationships with surgeons in the specialty, and an exceptional sales force, tightly focused on the orthopaedic sports medicine segment.  The company booked about $800 million in sales in 2010. You can make a business with smaller products; however, this is the kind of effort and marketing execution it takes.

There is nothing wrong with making a meal out of a bucket of chicken wings vs. one steak. Just don’t try to make a meal out of one chicken wing. It is tempting to go after a small market, as it seems there would be less competition and fewer barriers to entry, but if you do not scale up after getting your handhold, you may wind up with a business that is too small to generate revenues to pay its own way, and will be too small to be of interest to a potential investor or acquirer. Typically, venture capital investors will not fund a company in a market less than $1 billion in size. Angel investors will usually not fund an opportunity under $250 million.  There has to be enough of a market to scale the opportunity into a real business.


“I just need a small piece of a big market”

This is a tempting fallacy, oft repeated, but unlikely to succeed. Hospitals are reducing their number of suppliers. They are trying to keep market bit players like you out. Some hospital chains have explicitly put out the “unwelcome mat” for sales reps with new products trying to gain a foothold in their systems. You have to have enough critical mass, a compelling enough product, or a distribution partner to get in. This is unlikely to happen when all you want to be is just a “small piece of a big market.” Big companies can afford to have small products, because they already have the marketing channel. If you were a potential investor, and this assertion were made in the presentation, you might want to be just a bit skeptical.

Phantom Markets

It is possible to do “top down” estimates, twiddle with spreadsheets and clearly identify markets that don’t really exist. Back-check your numbers. Make sure that your assumptions of capturing a percentage of a statistically available market don’t include selling your product to more doctors than actually exist in that specialty. Get current data on the market that you plan to enter. Run your numbers top-down (percentage of a market segment, or overall number of procedures) and also bottom-up (how many cases per week a typical surgeon is likely to do where your product will be used, and how many of these procedures you are likely to capture), and see if they agree. Invest in some current market research. Make sure out of your total available market (TAM) is also a plausible total accessible market. Know specifically how you are going to get your product into the hands of these customers, who is going to get them there, how they will be adopted, and how you plan to make these products stick. Know going in what type of a sales force will be needed to accomplish this and how much it will cost to develop this marketing channel. Talk to sales reps who are actually selling your type of product. Have someone on your team with the sector experience. Know what a “sales funnel”[2] is, and have one in place. At some point you will be selling real products to real customers, not to statistical abstractions.

Sector Inexperience

If you are getting into a medical device market with which you are not familiar, find someone with real sector expertise to give you guidance. This person knows the chief competitors, their technologies, the available distribution channels, the sales cycle and the available distribution partners. Do you know if most devices in your market are purchased by hospital buyers under contract? Are devices sold by manufacturer’s representatives or agents who are hired directly, are they stocking distributors, or independent agents carrying other lines? What are the typical commission levels paid to distributors and agents? How long is the sales cycle? Is yours a product that is typically bundled and sold with other products that you don’t offer? If you do not know the answers, learn them before you spend money developing your product, or you could be in for an expensive education.


[2] Information on the “sales funnel” is readily available online. Here is just one tutorial: www.mindtools.com/pages/article/newLDR_94.htm


No Reimbursement

Some medical device products can be sold without reimbursement. These tend to be consumable, and Class I and II exempts. It is possible to make a business in these categories if you understand the economics which tend to be at high volumes and lower margins, or if you can sell into a specific niche in which you can offer exceptional value and have deep expertise. For a therapeutic 510(k) device and especially a premarket approval product at higher price point, reimbursement is critical. A premium-priced therapeutic device without reimbursement is unlikely to sell, with the possible exception of patient-pay aesthetic procedures. It is an unfortunate fact that “What people want, they pay for, and what they need, they expect others to pay for.” Study the reimbursement landscape and discern what a reimbursement path will require before you sink a lot of money into product development.

Regulatory Purgatory

Some devices are relatively easy to get approval and clearance for. Others are not. The newer the technology or more expansive the therapeutic claims, the more difficult and expensive getting FDA approval will be. Clinical trials to prove therapeutic claims can run into tens of millions of dollars. Know what you are getting yourself into before you start.

Patent Mine Fields

Now that you have found a large, attractive market, and have an idea for a technology, there is one more important thing to find out: did someone beat you to it, and did he patent his technology? The lay person who knows about patents and invention typically does not know what a patent really is. It is not the right for you to make the invention. It is the right to keep others from making and selling what is claimed in the patent, but not necessarily the right for you to practice the invention yourself. Others may hold blocking patents that prevent you from making your invention. Knowing if you have “freedom to operate” before you start is a prerequisite to obtaining funding from a knowledgeable or credible investor. This is especially important in crowded therapeutic fields. Also, be sure that you have enough in the war chest to see a patent all the way through from filing in your home country to Patent Cooperation Treaty through “National Stage.”

Raising Too Little Money

One of my favorite quotes is from David Lloyd George the British Prime Minister during World War I.

“Don’t be afraid to take a big step when one is indicated. You can’t cross a chasm in two small jumps.” —D.L. George

Some things just cost as much money as they do, and all of the bootstrapping in the world is not going to close the gap. A variation on this is the “man-year myth” that states: One woman can have a baby in nine months. You can’t get nine women to have a baby in one month. Some things just take as long as they take, and the timeline can only be compressed so far. Tom Fogarty likens this to being a “percolator” rather than an “incubator.” The idea of an incubator is that a predictable result happens in a predictable time from known inputs. Innovation rarely happens this way.


Raising Too Much Money

It is rarely possible in medtech to raise too much money. (You can, however, sell too much of your company and cede too much control.) However, having too much money (or the illusion of too much money) allows you to do the wrong things too easily, for too long. Jim Collins describes this in his book, Good to Great. Whether you have a lot or a little, there is never enough to waste. When dealing with capital, spend money only when it will make more money or achieve a meaningful milestone, or don’t spend it. I’ll share an anecdote to illustrate this principle. Dane Miller, CEO of Biomet in the early years of the company, was asked by his employees to pave the gravel parking lot at their headquarters in Warsaw, Indiana. After bids were obtained for the job, Dane held a meeting. He agreed with the employees that a paved parking lot would be nice to have. However, the same amount of money could also buy a piece of production machinery that Biomet needed. To employees, he said, “We can take this money, buy asphalt, and pour it on the ground, or buy a new machine to produce more product that makes all of us money.” Needless to say, the new machine was purchased and eventually the lot was paved with the business profits.

The “multiple principle” works in reverse, as well as forward. This principle states that an investment dollar spent to build value today will yield a multiple in a successful exit. However, a dollar wasted today destroys a multiple of its value in future returns. This destroyed value manifests itself in down rounds, reverse stock splits or the outright failure of the business.

Don’t do a job inside that can be done cheaper and possibly better outside, even if you have the money. Don’t buy a piece of equipment that does not pay its own way, after you have factored in the cost ownership and the cost of an employee to run it. Don’t spend money on non value-add things like new furniture or class A office space when it’s not needed. The great enemy in the long run are fixed expenses. Given enough time, these can sink even a well-funded start-up.

Beware small expenses. A small leak will sink a great ship.” –Benjamin Franklin

Insufficient Margins

Small volumes require high margins. Low margins require high volumes. No margins or no volume equal no viable business. If you have a product that you expect to be acquired by another company, you will need to be making at least 70 percent gross margin.

For a medical device, you need to be operating in the 60 to 80 percent gross margin range to have a viable business. Without these margins, the cost of selling (20 to 45 percent commissions and discounts, promotion) while still covering your own overhead becomes prohibitive. If you have a product with a small price tag, make sure there is enough volume to support a business. Or, if there is a smaller number of potential customers, make sure the product has a high enough price tag to support a business. If you are contemplating going into a business or are being presented an opportunity, this is a quick way to screen what you should and should not be considering. Remember, in the long run, technology is a means to an end. The goal is to build a sustainable business.


Lack of Urgency

When running a venture-funded start-up, time is literally money. Think about a start-up with a $200,000 per month burn rate. Divide this into 5.5 working days per week. That is $50,000 per calendar week, and $9,090 per working day. A company like this must have people who know how to get things done. Note the old saying: “Lose an hour, lose a day; lose a day, lose a week…” and so on. You burn up money 24 hours a day, seven days a week by just standing around thinking about it. Venture money is the most expensive money you will ever have, and the surest way to burn through it is with needless delay and sloppy execution. The penalties for this are down rounds, layoffs, downsizings, reverse-splits or no follow-on funding rounds—and the end of the entrepreneurial road. Take action, and make sure everyone in your organization has a bias toward action.

Wrong People Involved

There are a number of wrong people you can have involved in a company. One is an

incumbent or someone who has just “always been there.” They may be members of the founding team. Sometimes these incumbents give off the message that they will make getting rid of them more painful than keeping them. Don’t put up with people who threaten tantrums. Ask yourself, if this person was not here, would you bring them in now? If not, then you might think twice about keeping them. Another wrong person is an investor, especially as a board member, without sector experience or with unrealistic expectations. Educate him on realistic expectations, and help him get up to speed on the business. However, if you can’t get alignment of interests and expectations, you may be headed for trouble. In a corporation, the CEO—even if he is the founder of the company—is hired by the board, and can be fired by the board. Choose your boss carefully.

Every person in a startup is critically important. As Jim Collins writes, you have to “get the right people on the bus and the wrong people off the bus.” You are not doing a favor to an employee who cannot advance with the company by keeping them in place. Help her find a situation where she can succeed, and be sure you have the right people for the work the company needs to get done.

Team First, Technology Second

A good team can navigate its way around a technology roadblock. The wrong team can take the best technology and blow an opportunity with bad execution. Better to have both a compelling technology and a sharp team. Make sure you have A players in key roles. Two B players don’t add up to one A player. Be mindful of this, because the technology and clinical indication you start with may not be the one you wind up being successful with down the road.


Not Shooting the Engineer Soon Enough

Entrepreneurs are often great starters, but not always good at finishing what they start. They like to do new things and live in the fun “fuzzy front end” of innovation. Engineers and designers love to tinker and iterate. However, at some point you have to take what you have to market, and if it is successful, start scaling it up and squeezing out the costs. This is the part that entrepreneurs, engineers and designers often don’t like. They want to keep on iterating forever! But, if you let this happen, the product design will never get frozen and the company will never have a stable product that earns any money. At some point you have to “shoot the engineer,” stop iterating and run with what you have (provided the product is safe and effective). It takes exceptionally good judgment to know then to do this, when the product is “good enough,” and when to stop adding features that don’t add additional incremental value.

Innovation as a Panacea

Everyone loves innovation. Innovation is great, the lifeblood of business growth. However, innovation is not a substitute for a properly-run business. It takes both innovation and a well-run business to have a sustainable advantage. Papering over sloppy practices with “innovation” is just another way of saying you are trying to out-earn stupidity.

A variation on this is the “panacea” technology that is good for everything. Pick one thing the technology does exceptionally well, that meets an important need, that is within your capability to execute and focus relentlessly on doing that. Think of a start-up as hunting geese with a double-barrel shotgun. You cannot afford to “wing” the goose and have it fly away, leaving you to starve. Pick the biggest goose in the flock that is within range, and shoot it twice.

A classic example of this is ArthroCare as the subject of a Harvard Business School case study.[3] Hira Thapliyal and Phil Eggers discovered a unique bipolar radiofrequency modality that generated a cutting and coagulating plasma in saline (Coblation®). At first this was applied to removing arterial plaque, where it was found to be unsuitable.[4] Many other uses were envisioned; however, the investors informed the founders that while these many indications were interesting, there was only enough capital to execute on one. When it was found that Coblation was especially effective in arthroscopic bursectomies, Arthrocare was formed to pursue this specific orthopaedic opportunity, and continues to do so successfully.

Ethical Shortcuts

Skimp on the granola bars in the breakroom. Drive a class B rental. Skimp on hotels. Fly coach, but make sure you are always flying first-class when it comes to ethics. This is especially important when it comes to relationships with your surgeon advisors. In the old days, some companies would sign up an influential key opinion leader advisor (KOL) expecting that advisor to steer in business in exchange for a lucrative contract and little real work.[5] Those days are long gone. Giving an advisor a sinecure in exchange for their influence will get you in trouble, either in the short run, or in the long run when you are acquired and compliance issues surface during due diligence. Bring in KOLs as advisors, but make sure they are doing real work for fair compensation, free of conflict of interest.

Remember that electronic data once on the internet never dies, and there is no presumption of privacy. Just ask Tiger Woods or Anthony Weiner. Think twice about committing intemperate comments to email or social media like Twitter, Facebook, LinkedIn and the like. Assume that whatever you write or post can appear on the front page of a newspaper or surface at a deposition.

These are just a few ways to fail as an entrepreneur. There are others, some of which likely came to mind as you read this. Fortunately, there are many places to go for good advice. Connect with the angel investor groups in your area. Attend industry conferences, watch and observe investment pitches at meetings and learn all you can. Since the business and legal environments are always changing, the entrepreneur needs to be always learning.


[3] Harvard Business Review. ArthroCare by Michael J. Roberts. Dec 01, 1997. http://hbr.org/product/arthrocare/an/898056-PDF-ENG

[4] To hear Mr. Thapliyal tell this story, listen to his Stanford Innovator’s Workbench interview with David Cassack at http://biodesign.stanford.edu/bdn/networking/pastinnovators.jsp#season9 “2008-09 Season 7”

[5] www.mddionline.com/article/orthopedics-firms-under-new-scrutiny-justice-department


Here are some resources available for the medical device entrepreneur.

ORTHOWORLD Inc.

www.orthoworld.com

Founded in 1992, ORTHOWORLD is the only producer of strategic intelligence in the world solely focused on the global orthopaedic market. Its singular mission is helping orthopaedic companies and individuals improve their performance. Highly specialized product offerings such as ORTHOFLASH®, ORTHOWORLD Membership, ORTHOPRENEUR®, BONEZONE® and OMTEC® empower industry participants to respond to challenges, maximize opportunities and more aggressively expand their orthopaedic businesses.

Wilson Sonsini, WSGR Medical Device Conference

www.wsgr.com/news/medicaldevice/

This conference focuses upon the impact of the changing economic climate to the early-stage and emerging growth medical device industry, as well as the venture capital funds that sustain it. In a series of topical panels presented over the course of one day, you will hear from industry CEOs, venture capitalists, industry strategists, investment bankers and market analysts.

Medtech Insight

www.medtechinsight.com/conferences.html

IN3 events bring together early/mid/late-stage medtech innovators with leaders in investment, venture capital and business development. IN3 is also a forum for presenting start-up medical device opportunities to prospective investors and corporate partners.

OneMedForum and OneMedPlace

www.onemedplace.com/forum/

OneMedPlace is a gathering of those building fast-growing and emerging healthcare and life science companies in Europe and North America.


Canaccord Genuity Conferences

Canaccord Genuity is the global capital markets division of Canaccord Financial, offering institutional and corporate clients idea-driven investment banking, research, sales and trading services from 16 offices worldwide. The firm offers their Musculoskeletal and Diabetes and Obesity analyst conferences organized by Mr. William Plovanic.

www.canaccordgenuity.com/EN/about/Pages/Events.aspx

National Venture Capital Association

www.nvca.org

The National Venture Capital Association (NVCA), comprising more than 400 member firms, is the premier trade association that represents the U.S. venture capital industry. NVCA's mission is to foster greater understanding of the importance of venture capital to the U.S. economy, and support entrepreneurial activity and innovation.

The NCVA website is an invaluable source of model legal documents including term sheets, stock purchase agreements and many more. These represent the accumulated experience from literally thousands of venture financed deals and can save you substantial amounts of time and money, as well as many other useful links and resources.

VC Taskforce

www.vctaskforce.com

VC Taskforce has built an organization that the venture community can give input and direction to and get immediate results that benefit both investors and their portfolio companies. VC Taskforce sponsors a number of seminars, panels and roundtables for entrepreneurs. Their website features links to numerous resources, VCs and Angel Investment groups.

Keiretsu Forum Entrepreneur Academy

www.keiretsuforum.com

The Keiretsu Forum Entrepreneur Academy was designed by the members of the Keiretsu Forum community to provide course offerings taught by seasoned industry executives in the critical elements of start-up companies’ business plans.


The Kauffman Foundation

www.kauffman.org

www.entrepreneurship.org

The Ewing Marion Kauffman Foundation was established in the mid-1960s by the late entrepreneur and philanthropist Ewing Marion Kauffman. It carries out its mission through four programmatic areas: Entrepreneurship, Advancing Innovation, Education and Research and Policy.

University Bio-entrepreneur Programs

www.palgrave-journals.com/jcb/journal/v14/n1/fig_tab/3050078t1.html

A list of Bioentrepreneurship education programs in the U.S. compiled by Arlen D Meyers and Patrick Hurley [6]

Biodesign Programs

Stanford Biodesign

innovation.stanford.edu/bdn/index.jsp

biodesign.stanford.edu/bdn/india/

biodesign.stanford.edu/bdn/singapore/

Our mission is to train students, fellows and faculty in the Biodesign Process: a systematic approach to needs finding and the invention and implementation of new biomedical technologies.

Arizona State University Biodesign

www.biodesign.asu.edu/about 

The Biodesign Institute at Arizona State University spurs scientific breakthroughs that improve health, protect lives and sustain our planet.

Our research is aimed at focuses upon predicting, preventing and detecting the onset of disease; developing renewable energy and reducing environmental damage and developing innovations that safeguard our nation and the world.

Yale University Biodesign

dailybulletin.yale.edu/article.aspx?id=8164

Ted Kucklick is co-Founder and CEO of Cannuflow Incorporated, San Jose CA, and the author of the best-selling title “The Medical Device R&D Handbook” (2005 CRC Press/Taylor and Francis). Please contact Ted at This email address is being protected from spambots. You need JavaScript enabled to view it..



[6] Bioentrepreneurship education programmes in the United States, Arlen D Meyers and Patrick Hurley Journal of Commercial Biotechnology (2008) 14, 2–12. doi:10.1057/palgrave.jcb.3050078; published online 27 November 2007