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

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.