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Should Digital Health Startups Prioritize Eyeballs or Revenue?

Jan 17 2014, 2:11pm CST | by

 
 
 

The good news, I guess, is that the well-worn “eyeballs versus revenue” debate – a dialog that has beset the tech world for years – has at long last reached digital health, suggesting that now there may be enough of each to merit a serious conversation.

In a nutshell, the question is whether startups should focus on building out the user base, or developing a revenue stream.  On the one hand, revenue is obviously what investors ultimately care about, but the issue is whether focusing on revenue prematurely can distract a startup from the important task of reaching a relevant scale.

Google, of course, stands out at the canonical example of the principle of growth before revenue, achieving remarkable scale before they eventually figured out how to monetize the platform effectively.  Twitter is an example as well.

Perhaps not surprisingly, Practice Fusion – a cloud-based EMR company built on this model – includes as a pivotal early investor Founders Fund partner Brian Singerman, a Google alumnus.

The Practice Fusion model is simple: the product is distributed free to physicians, generally in small ambulatory care practices (vs large health centers, which typically run Epic or Cerner).  While initially generating revenue by selling ad space to partners (“traditionally big pharmas,” according to VentureBeat), they’re actively searching for other ways to monetize the collected data (suitably anonymized) by crunching it and hopefully selling it to potentially interested stakeholders (including, disclosure, drug development companies such as mine).

Many digital health startups seek to emulate this example, and focus on platform development first, with the assumption that if it works well, revenue will follow.  A recent Med City News article applauded this approach, observing that “revenue is a trap,” and noting that the CEO of wireless pill company Proteus Digital Health, Andrew Thompson,

“pointed out 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.”

These comments got the goat of Valley VC Lisa Suennen (my Tech Tonics co-author), who wrote “these words made me shudder.”  This “field of dreams” strategy, she continued, may work for consumer internet, but it won’t work for healthcare because “you have to deliver actual stuff.”

Moreover, Suennen cautions, “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” – a destructive path she says she’s witnessed far too often in digital health and healthcare services.

Not so, says Michael Douglass, VP-Platform at Practice Fusion, tweeting “historical focus on early, consistent $$ by HC Cos is primary reason HealthTech is 15 years behind.”

In some sense, this debate is a bit misleading; clearly, success ultimately requires proof that your technology works and proof that you can link this success to revenue.

For instance, if you’re trying to design a therapeutic digital health intervention, or building a platform intended to improve a health-related service (like discharge planning, say), then demonstrating meaningful impact, as Thomson suggests, is critically important, a must-have.  It can also be quite difficult to demonstrate value, a problem traditional medicine struggles with as well.  But as Suennen points out, you’ll ultimately need for someone to buy your product, which means that if you want to raise money from investors, you’ll need to convince them that someone’s likely to pay for your elegant solution.  Showing early evidence of revenue flow can be very persuasive.

If you’re trying to leverage data and analytics, or are counting on network effects, then, yes, acquiring enough users may be necessary for success, but you still need a revenue model – someone has to buy the insights you are selling, or place a high value on accessing the platform you’ve worked so hard build.  A successful IPO — of the sort achieved by Twitter, and envisioned by Practice Fusion — requires confidence that revenue will arrive.

Driving the eyeball versus revenue debate, I suspect, is a larger discussion about the right vision for healthcare innovation, a dialog that at times seems to pit the Pragmatists against the Disruptors.

Pragmatists, often backed by investors with healthcare experience (I’d put Suennen in this category), look for business opportunities within the existing system; they use their experience and expertise to identify a seam, which they then hope to exploit.  In this context, an early view on revenue may make sense, since you typically have a specific pain point in mind, and often have relatively early visibility into whether your solution is likely to work.

Disruptors, meanwhile – often backed by tech investors like Benchmark’s Bill Gurley (as I recently discussed) – envision startups that are profoundly disruptive.“I don’t want to worry about trials and regulation too much,” Gurley noted.  “Not interested in ideas that partner closely with current players.”  This approach might lean towards big, risky bets, ideas that may initially appear foolish or overly ambitious – right up to the point where they gain traction and win big.  At least, that’s the idea – largely unproven and awaiting validation in healthcare.

Hopefully, this debate will be settled by successful exits representing important companies that deliver meaningful products to patients, and not by investor disillusionment with this important but notoriously difficult space.

Source: Forbes

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