Is This Startup Ready For Investment?

Posted on February 25, 2014 by steve blank

Since 2005 startup accelerators have provided cohorts of startups with mentoring, pitch practice and product focus. However, accelerator Demo Days are a combination of graduation ceremony and pitch contest, with the uncomfortable feel of a swimsuit competition. Other than “I’ll know it when I see it”, there’s no formal way for an investor attending Demo Day to assess project maturity or quantify risks. Other than measuring engineering progress, there’s no standard language to communicate progress.

Corporations running internal incubators face many of the same selection issues as startup investors, plus they must grapple with the issues of integrating new ideas into existing P&L-driven functions or business units.

What’s been missing for everyone is:

  • a common language for investors to communicate objectives to startups
  • a language corporate innovation groups can use to communicate to business units and finance
  • data that investors, accelerators and incubators can use to inform selection

While it doesn’t eliminate great investor judgment, pattern recognition skills and mentoring, we’ve developed an Investment Readiness Level tool that fills in these missing pieces.

—-

Investment Readiness Level (IRL) for Corporations and Investors
The startups in our Lean LaunchPad classes and the NSF I-Corps incubator use LaunchPad Central to collect a continuous stream of data across all the teams. Over 10 weeks each team gets out of the building talking to 100 customers to test their hypotheses across all 9 boxes in the business model canvas.

We track each team’s progress as they test their business model hypotheses. We collect the complete narrative of what they discovered talking to customers as well as aggregate interviews, hypotheses to test, invalidated hypotheses and mentor and instructor engagements. This data gives innovation managers and investors a feel for the evidence and trajectory of the cohort as a whole and a top-level view of each teams progress. The software rolls all the data into an Investment Readiness Level score.

(Take a quick read of the post on the Investment Readiness Level – it’s short. Or watch the video here.)

The Power of the Investment Readiness Level: Different Metrics for Different Industry Segments
Recently we ran a Lean LaunchPad for Life Sciences class with 26 teams of clinicians and researchers at UCSF.  The teams developed businesses in 4 different areas– therapeutics, diagnostics, medical devices and digital health.  To understand the power of this tool, look at how the VC overseeing each market segment modified the Investment Readiness Level so that it reflected metrics relevant to their particular industry.

Medical Devices
Allan May of Life Science Angels modified the standard Investment Readiness Level to include metrics that were specific for medical device startups. These included; identification of a compelling clinical need, large enough market, intellectual property, regulatory issues, and reimbursement, and whether there was a plausible exit.

In the pictures below, note that all the thermometers are visual proxies for the more detailed evaluation criteria that lie behind them.

Device IRL

Investment Readiness Level for Medical Devices

You can watch the entire presentation here

Therapeutics
Karl Handelsman of CMEA Capital modified the standard Investment Readiness Level (IRL) for teams developing therapeutics to include identifying clinical problems, and agreeing on a timeline to pre-clinical and clinical data, cost and value of data points, what quality data to deliver to a company, and building a Key Opinion Leader (KOL) network. The heart of the therapeutics IRL also required “Proof of relevance” – was there a path to revenues fully articulated, an operational plan defined. Finally, did the team understand the key therapeutic liabilities, have data proving on-target activity and evidence of a therapeutic effect.

Therapeutics IRL

You can see the entire presentation here

Digital Health
For teams developing Digital Health solutions, Abhas Gupta of MDV noted that the Investment Readiness Level was closest to the standard web/mobile/cloud model with the addition of reimbursement and technical validation.

Digital Health

Diagnostics
Todd Morrill wanted teams developing Diagnostics to have a reimbursement strategy fully documented, the necessary IP in place, regulation and technical validation (clinical trial) regime understood and described and the cost structure and financing needs well documented.

Diagnostics IRL

You can see the entire presentation here

For their final presentations, each team explained how they tested and validated their business model (value proposition, customer segment, channel, customer relationships, revenue, costs, activities, resources and partners.) But they also scored themselves using the Investment Readiness Level criteria for their  market. After the teams reported the results of their self-evaluation, the  VC’s then told them how they actually scored.  We were fascinated to see that the team scores and the VC scores were almost the same.

Lessons Learned

  • The Investment Readiness Level provides a “how are we doing” set of metrics
  • It also creates a common language and metrics that investors, corporate innovation groups and entrepreneurs can share
  • It’s flexible enough to be modified for industry-specific business models
  • It’s part of a much larger suite of tools for those who manage corporate innovation, accelerators and incubators

Listen to the blog post here [audio http://traffic.libsyn.com/albedrio/steveblank_hplewis_140225_FULL.mp3]

Download the podcast here

Filed under: Corporate/Gov't Innovation, Investment Readiness Level, Lean LaunchPad, Life Sciences (NIH), NIH (National Institutes of Health), Teaching | 9 Comments »

Lessons Learned in Diagnostics

Posted on January 2, 2014 by steve blank

This post is part of our series on the National Science Foundation I-Corps Lean LaunchPad class in Life Science and Health Care at UCSF. Doctors, researchers and Principal Investigators in this class got out of the lab and hospital talked to 2,355 customers, tested 947 hypotheses and invalidated 423 of them. The class had 1,145 engagements with instructors and mentors. (We kept track of all this data by instrumenting the teams with LaunchPad Central software.)

Mira Medicine is one of the 26 teams in the class. The team members are:
  • Pierre-Antoine Gourraud – PhD, MPH UCSF neuroscientist and c0-leader of the MS BioScreen project
  • Jason Crane – PhD UCSF Manager Scientific Software Development
  • Raphaelle Loren – Managing Director – Health Practice at the Innovation Management Institute

Todd Morrill was the diagnostics cohort instructor. Matt Cooper CEO of Carmenta BioSciences was the Mira Medicine team mentor.

Multiple Sclerosis – MS
Multiple Sclerosis – MS – is an immune system disease that attacks the myelin, the fatty sheath that surrounds and protects nerve fibers of the central nervous system (brain, spinal cord, and optic nerve). T-cells, (a type of white blood cell in the immune system,) become sensitized to myelin and cross the blood-brain barrier into the central nervous system (CNS). Once in the CNS, these T-cells injure myelin, and secrete chemicals that damage nerve fibers (axons) and recruit more damaging immune cells to the site of inflammation. multiple sclerosis and therapeutic targets

There are currently ten FDA approved MS medications for use in relapsing forms of MS. None of these drugs is a cure, and no drug is approved to treat the type of MS that shows steady progression at onset. MS disease management decisions are complex and requires a patients neurologist to figure out what drugs to use.

Mira Medicine and Multiple Sclerosis
The team came to class with the thought of commercializing the UCSF Multiple Sclerosis BioScreen Project a Precision Medicine application that integrates a patients medical records with the latest population-based data from hundreds of other Multiple Sclerosis patients, (including their 3D MRI scans,) and using predictive algorithms makes it possible to chart a unique course of treatment for each patient. (Mira Medicine team member Pierre-Antoine Gourraud was the project co-leader.) MS BioScreen

Mira wanted to commercialize the UCSF Multiple Sclerosis Bioscreen project and to add additional neurological diseases which require multiple types of data  (including biomarkers, clinical, and imaging). They wanted to help medical centers and large providers assess disease progression to guide therapeutic decision-making.  Over the course of the class Mira Medicine team spoke to over 80 customers, partners and payers.

Here’s their 2 minute video summary

If you can’t see the video above, click here.

Then reality hit. First, the team found that their Multiple Sclerosis Bioscreen application (which they used as their MVP) was just a “nice-to-have”, not a “must-have”. In fact, the “must have features” were their future predictive algorithms. Next, they found that if their tool can enable a diagnosis, (even without claiming it could) then it was likely that the FDA would require a  510(k) medical device clearance. Then they found to get reimbursed they need a CPT code (and they had to decide whether to code stack – using multiple codes for “one” diagnosis, and thereby getting multiple reimbursements for one test. (The rules have changed so that code stacking is hard or impossible), Or get a new CPT code, or use miscellaneous code.) To get a new CPT and a 510(k) they would have to perform a some sort of clinical study. At a minimum a 1-year prospective study (a study to see if the neurologists using the application had patients with a better outcome then those who didn’t have access to the app). Getting approval to use an existing (aka old) CPT code means showing equivalence to an existing dx process or test, and the requirements are code-specific. Finally, to get access to data sources of other MS patients they would need to have HIPPA Business Associate Agreement.

Watch their Lessons Learned video below and find out how they pivoted and what happened.

If you can’t see the video above click here

Look at their Lesson Learned slides below If you can’t see the presentation above, click here

Lessons Learned

  • Researchers and PI’s come in believing “My science/project/data are so good that people will immediately see the value and be willing to pay for it.  It will “sell itself”.
  • A business is much more than just good science: it is about customers seeing value and being willing to pay and proper validation and reimbursement coding and…
  • A successful business is the sum (and integration!) of all the parts of the business model canvas.
    • It includes reimbursement, regulation, IP, validation, channel access, etc.

Listen to the blog post here [audio http://traffic.libsyn.com/albedrio/steveblank_hplewis_140102_FULL.mp3]

Download the podcast here

Filed under: Customer Development, Lean LaunchPad, Life Sciences (NIH), NIH (National Institutes of Health), Teaching | 1 Comment »

Lessons Learned in Therapeutics

Posted on December 26, 2013 by steve blank

This post is part of our series on the National Science Foundation I-Corps Lean LaunchPad class in Life Science and Health Care at UCSF. Doctors, researchers and Principal Investigators in this class got out of the lab and hospital talked to 2,355 customers, tested 947 hypotheses and invalidated 423 of them. The class had 1,145 engagements with instructors and mentors. (We kept track of all this data by instrumenting the teams with LaunchPad Central software.)

We are redefining how translational medicine is practiced.

Traditional view of translational medicineWe’ve learned that translational medicine is not just about the science.

More on this in future blog posts.

Lean view of translational medicine

Vitruvian Therapeutics is one of the 26 teams in the class. The team members are:
  • Dr. Hobart Harris  Chief of  General Surgery, Vice-Chair of the Department of Surgery, and a Professor of Surgery at  UCSF.
  • Dr. David Young,  Professor of Plastic Surgery at UCSF. His area of expertise includes wound healing, microsurgery, and reconstruction after burns and trauma. 
  • Cindy Chang is a Enzymologist investigating novel enzymes involved in biofuel and chemical synthesis in microbes at LS9

Karl Handelsman was the therapeutics cohort instructor. Julie Cherrington CEO of Pathway Therapeutics was the team mentor.

Vitruvian Therapeutics is trying to solve the Incisional hernia problem. An incisional hernia happens in open abdominal surgery when the area of the wound doesnt heal properly and bulges outward. This requires a second operation to fix the hernia.Ventral Herniaincisional hernia

Hobart Harris’s insight was what was needed wasn’t one more new surgical technique or device to repair the hernias, but something to prevent the hernia from occurring in the first place. Vitruvian Therapeutics first product, MyoSeal, does just that. It promotes wound repair via biocompatible microparticles plus a fibrin tissue sealant. So far in 300 rats it’s been shown to prevent incisional hernias through enhanced wound healing.

Here’s their 2 minute video summary

If you can’t see the video above, click here.

Two weeks into the class and interviews with 14 of their potential customers (surgeons) reality intruded on their vision of how the world should work. We happened to catch that moment in class in this 90 second clip.

Watch  and find out how talking to just the first 14 customers in the Lean LaunchPad class saved Hobart Harris and the Vitruvian Therapeutics team years.

If you can’t see the clip above click here.

The Vitruvian Therapeutics Lessons Learned Presentation is a real-eyeopener. Given that this product could solve the incisional hernia problem, Hobart and his team naturally assumed that insurance companies would embrace this and their fellow surgeons viewed the problem as they did and would leap at using the product. Boy were they in for a surprise. After talking to 74 surgeons, insurance companies and partners appeared that no one – insurance companies or surgeons – owned the problem. Listen to their conclusions 8-weeks after the first video.

Watch the video and find out how they pivoted and what happened.

Don’t miss Karl Handelsman comments on their Investment Readiness Level at the end. Vitruvian is a good example of a great early stage therapeutics idea with animal data missing and many key components of the business model still needed to verify.

If you can’t see the video above click here

Look at their Lesson Learned slides below

If you can’t see the presentation above, click here

Market Type
During the class the Vitruvian Therapeutics class struggled with the classic question of visionaries: are we creating a New Market (one which doesn’t exist and has no customers)? In Vitruvian’s case preventive measures to stop incisional hernias before they happen.  Or should we position our product as one that’s Resegmenting an Existing Market? i.e. reducing leakage rates.  Or is there a way to get proof that the vision of the New Market is the correct path.

When Hobart Harris of Viturvian asked, “… what if you’re a visionary, and no one but you sees the right solution to a problem” we had a great in-class dialog. Karl Handelsman‘s comments at 3:15 and 4:16 and Allan May at 4:35 were incredibly valuable. See the video below for the dialog.

If you can’t see the video above, click here

Further Reading

Lessons Learned

  • Principal Investigators, scientists and engineers can’t figure out commercialization sitting in their labs
  • You can’t outsource commercialization to a proxy (consultants, market researchers, etc.)
  • Experiential Learning is integral to commercialization
  • You may be the smartest person in your lab, but your are not smarter than the collective intelligence of your potential customers, partners, payers and regulators

Listen to the blog post here [audio http://traffic.libsyn.com/albedrio/steveblank_hplewis_131226_FULL.mp3]

Download the podcast here

Filed under: Customer Development, Lean LaunchPad, Life Sciences (NIH), NIH (National Institutes of Health), Teaching | 1 Comment »

Lessons Learned in Medical Devices

Posted on December 20, 2013 by steve blank

This post is part of our series on the National Science Foundation I-Corps Lean LaunchPad class in Life Science and Health Care at UCSF. Doctors, researchers and Principal Investigators in this class got out of the lab and hospital talked to 2,355 customers, tested 947 hypotheses and invalidated 423 of them.  The class had 1,145 engagements with instructors and mentors. (We kept track of all this data by instrumenting the teams with LaunchPad Central software.)

We are redefining how translational medicine is practiced. It’s Lean, it’s fast, it works and it’s unlike anything else ever done.

—–

Sometimes teams win when they fail.

Knox Medical Devices was building a Spacer which contained a remote monitoring device to allow for intervention for children with Asthma . (A Spacer is a tube between a container of Asthma medicine (in an inhaler) and a patient’s mouth.The tube turns the Asthma medicine into an aerosol.)Asthma

Knox’s spacer had sensors for basic spirometry measurements (the amount of air and how fast it’s inhaled and exhaled) to see how well the lung is working. It also had a Nitrous Oxide sensor to provide data on whether the lungs airways are inflamed, an inhaler attachment and a GPS tracking device.

Knox SpacerThe Spacer hardware was paired with data analysis software for tracking multiple facets of asthma patients.

The Knox team members are:

Allan May founder of Life Science Angels was the Medical Device cohort instructor. Alex DiNello CEO at Relievant Medsystems was their mentor.

The Knox team was a great mix of hands-on device engineers and business development. They used agile engineering perfectly to continually test variants of their Minimum Viable Product (MVP’s) in front of customers often and early to get immediate feedback.

Knox was relentless about understanding whether their device was a business or whether it was technology in search of a market. In 10 weeks they had face-to-face meetings with 117 customers, tested 33 hypotheses, invalidated 19 of them and 53 instructor and mentor interactions.

Here’s Knox Medical’s 2 minute video summary

If you can’t see the video above, click here

Knox was a great example of having a technology in search of a customer. The initial hypothesis of who would pay for the device – parents of children with asthma – was wrong and resulted in Knox’s first pivot in week 4. By week 6 they had discovered that; 1) Peak Flow Meters are not as heavily prescribed as they thought, 2) Insurance company reimbursement is necessary for anything upwards of $15, 3) Nitrous Oxide testing isn’t currently used to measure asthma conditions.

After the pivot they the found that the most likely users of their device would be low income Asthma patients who are treated at Asthma clinics funded by federal, state or county dollars. These clinics reduce hospitalization but Insurers weren’t paying to cover clinic costs nor would they cover the use of the Knox device. The irony was that those who most needed the Knox device were those who could least afford it and wouldn’t be able get it.

Watch their Lesson Learned presentation below. Listen to the comments from Allan May the Device instructor at the end.

If you can’t see the video above, click here

In the end Knox, like a lot of startups in Life Science and Health Care, discovered that they had a multi-sided market.  They realized late in the class the patients (and their families) were not their payers – their payers were the insurance companies (and the patients were the users.)  If they didn’t have a compelling value proposition for the insurers (cost savings, increased revenue, etc.) it didn’t matter how great the technology was or how much the patients would benefit.

The Knox Medical Device presentation slides are below. Don’t miss the evolution of their business model canvas in the appendix. It’s a film strip of the entrepreneurial process in action.

If you can’t see the slides above, click here

Knox is a great example of how the Lean LaunchPad allows teams to continually test hypotheses and fail fast and inexpensively. They learned a ton. And saved millions.

Lessons Learned

  • In medical devices, understanding reimbursement, regulation and IP is critical
  • Sometimes teams win when they fail
Download the podcast here

Filed under: Customer Development, Lean LaunchPad, Life Sciences (NIH), NIH (National Institutes of Health), Teaching | 1 Comment »

Lessons Learned in Digital Health

Posted on December 19, 2013 by steve blank

This post is part of our series on the National Science Foundation I-Corps Lean LaunchPad class in Life Science and Health Care at UCSF.

Our Lean LaunchPad for Life Science class talked to 2,355 customers, tested 947 hypotheses and invalidated 423 of them.  They had 1,145 engagements with instructors and mentors. (We kept track of all this data by instrumenting the teams with LaunchPad Central software.)

This post is one of a series of the “Lessons Learned” presentations and videos from our class.

Sometimes a startup results from a technical innovation. Or from a change in regulation, declining costs, changes in consumers needs or an insight about customer needs. Resultcare, one of the 26 teams in the class started when a resident in clinical medicine at UCSF watched her mother die of breast cancer and her husband get critically injured.

The team members are:

  • Dr. Mima Geere  Clinical Medicine at UCSF.
  • Dr. Arman Jahangiri HHMI medical fellow at UCSF, Department of Neurological Surgery
  • Dr. Brandi Castro in Neuroscience at UCSF
  • Mitchell Geere product design
  • Kristen Bova MBA, MHS
  • Nima Anari PhD in Data Science

Abhas Gupta was the Digital Health cohort instructor. Richard Caro was their mentor.

ResultCare is a mobile app that helps physicians take the guesswork out of medicine. It enables physicians to practice precision medicine while reducing costs.precision medicine

Here’s Resultcare’s 2 minute video summary

If you can’t see the video above, click here.

Watch their Lesson Learned presentation below. The first few minutes of the talk is quite personal and describes the experiences that motivated Dr. Geere to address this problem.

If you can’t see the video above, click here

The Resultcare presentation slides are below.

If you can’t see the presentation above, click here

Listen to the blog post here [audio http://traffic.libsyn.com/albedrio/steveblank_clearshore_131219.mp3]

Download the podcast here

Filed under: Customer Development, Lean LaunchPad, Life Sciences (NIH), NIH (National Institutes of Health), Technology | Leave a comment »

We’ve seen the Future of Translational Medicine and it’s Disruptive

Posted on December 17, 2013 by steve blank

A team of 110 researchers and clinicians, in therapeutics, diagnostics, devices and digital health in 25 teams at UCSF, has just shown us the future of translational medicine.  It’s Lean, it’s fast, it works and it’s unlike anything else ever done.

It’s going to get research from the lab to the bedside cheaper and faster.

Welcome to the Lean LaunchPad for Life Sciences and Healthcare (part of the National Science Foundation I-Corps).

This post is part of our series on the Lean Startup in Life Science and Health Care.

——–

Our class talked to 2,355 customers, tested 947 hypotheses and invalidated 423 of them.  They had 1,145 engagements with instructors and mentors. (We kept track of all this data by instrumenting the teams with LaunchPad Central software.)

In a packed auditorium in Genentech Hall at UCSF, the teams summarized what they learned after 10 weeks of getting out of the building. This was our version of Demo Day – we call it “Lessons Learned” Day. Each team make two presentations:

  • 2 minutes YouTube Video: General story of what they learned from the class
  • 8 minute Lessons Learned Presentation: Very specific story about what they learned in 10 weeks about their business model

In the next few posts I’m going to share a few of the final “Lessons Learned” presentations and videos and then summarize lessons learned from the teaching team.

Magnamosis
Magnamosis is a medical device company that has a new way to create a magnetic compression anastomosis (a surgical connection between two tubular structures like the bowel) with improved outcomes.

anastomosis

Team Members were: Michael Harrison (the father of fetal surgery), Michael Danty, Dillon Kwiat, Elisabeth Leeflang, Matt Clark.  Jay Watkins was the team mentor. Allan May and George Taylor were the medical device cohort instructors.

Their initial idea was that making an anastomosis that’s better, faster and cheaper will have surgeons fighting to the death to get a hold of their device.  magnamosisThey quickly found out that wasn’t the case.  Leak rates turned out to a bigger issue with surgeons and a much larger market.

Here’s their 2 minute video summary

If you can’t see the video above, click here.

Watch their Lessons Learned video below and see how a team of doctors learned about product/market fit, channels and pricing.

If you can’t see the video above, click here

Their slide deck is below. Don’t miss the evolution of their business model in the Appendix.

If you can’t see the presentation above, click here

The best summary of why Scientists, Engineers and Principal Investigators need to get out of the building was summarized by Dr. Harrison below. After working on his product for a decade listen to how 10 weeks of the Lean LaunchPad class radically changed his value proposition and business model.

If you can’t see the video above, click here.

For further reading:

Listen to the blog post here [audio http://traffic.libsyn.com/albedrio/steveblank_clearshore_131217.mp3]

Download the podcast here

Filed under: Customer Development, Lean LaunchPad, Life Sciences (NIH), NIH (National Institutes of Health), Teaching | 1 Comment »

How Do You Want to Spend Your Next 4 Years of Your Life?

Posted on December 9, 2013 by steve blank

As our Lean LaunchPad for Life Sciences class winds down, a good number of the 26 teams are trying to figure out whether they should go forward to turn their class project into a business.

Given that we’ve been emphasizing Evidence-based entrepreneurship and the Investment Readiness Level, I guess I shouldn’t have been surprised when someone asked, “After we figure all this data out, should we pursue our idea based on the numbers?”

Ouch.

I pointed out that the “data” you gather in 10 weeks (talking to 100+ customers, partners, payers, etc.,) are not the first thing you should look at. There are three more important things you should worry about.

(see 0:30 in the video below)

turning point

——–

1. Do you want to spend the next 3 or 4 years of your life doing this?

(See 1:03 in the video below)

Now that you’ve gotten to know your potential channel and customers, regardless of how much money you’re going to make, will you enjoy working with these customers for the next 3 or 4 years?

One of the largest mistakes in my career was getting this wrong. I used to be in startups where I was dealing with engineers designing our microprocessors or selling supercomputers to research scientists solving really interesting technical problems. But in my next to last company, I got into the video game business.

My customers were 14-year old boys. (see 1:30 in the video)  I hated them. It was a lifelong lesson that taught me to never start a business where you hate your customers. It never goes well. You don’t want to talk to them. You don’t want to do Customer Development with them. You just want them to go away.  And in my case they did – they didn’t buy anything.

So you and your team need to feel comfortable being in this business with these customers.

2. Is this a scalable business?  And if not, are you Ok with something small?

(See 2:03 in the video below)

Is it a lifestyle business while you’re keeping your other job?  Is it a small business that hits $4 million in revenue in four years and $8 million in ten years?  Or is it something that can grow to a size that will result in an acquisition or some liquidity event?

You need to decide what your personal goal is and how it matches what you think this business can grow into.  And you and your cofounders need to have that discussion to make sure that all the co-founders’ interests are aligned – before you make any decision to start the company.  If one of you are happy making $500K/year and the other has visions of selling the company to Roche for a billion dollars, you have very different goals. Without clear alignment, one or both of you will be really unhappy later when you try to make decisions.

3. If I Didn’t Make Any Money After 4 Years, Did I Still Have A Great Time?

(See 4:36 in the video below)

If your company fails, would you still say you had one hell of a ride? Founders don’t do startups because they’re searching for a huge financial windfall. They do it because it’s the greatest invention they can imagine. Most of the time you will fail. So if you’re not going to have a great time with your team and learn and build something you are truly excited about – don’t do it.

If you can’t see the video above, click here

Lessons Learned

  • Do you want to spend the next 3 or 4 years of your life doing this business?
  • Is this a scalable business?  And if not, are you Ok with something small?
  • If you didn’t make any money after 4 years, did you have a great time?

Listen to the podcast here [audio http://traffic.libsyn.com/albedrio/steveblank_clearshore_131209.mp3]

Download the podcast here

Filed under: Family/Career/Culture, Lean LaunchPad, Life Sciences (NIH) | 5 Comments »

When Customers Make You Smarter

Posted on December 2, 2013 by steve blank

We talk a lot about Customer Development, but there’s nothing like seeing it in action to understand its power. Here’s what happened when an extraordinary Digital Health team gained several critical insights about their business model. The first was reducing what they thought was a five-sided market to a simpler two-sided one.

But the big payoff came when their discussions with medical device customers revealed an entirely new way to think about pricing —potentially tripling their revenue.

——

We’re into week 9 of teaching a Lean LaunchPad class for Life Sciences and Health Care (therapeutics, diagnostics, devices and digital health) at UCSF teaching with a team of veteran venture capitalists. The class has talked to ~2,200 customers to date. (Our final – not to be missed – Lessons Learned presentations are coming up December 10th.)

Among the 28 startups in the Digital Health cohort is Tidepool. They began the class believing they were selling an open data and software platform for people with Type 1 Diabetes into a multi-sided market comprised of patients, providers, device makers, app builders and researchers.

tidepool website

The Tidepool team members are:

  • Aaron Neinstein MD  Assistant Professor of Clinical Medicine, Endocrinology and Assistant Director of Informatics at UCSF. He’s an expert in the intersection between technological innovations and system improvement in healthcare. His goal is to make health information easier to access and understand.
  • Howard Look, CEO of Tidepool, was VP of Software and User Experience at TiVo. He was also VP of Software at Pixar, developing Pixar’s film-making system, and at Amazon where he ran a cloud services project. At Linden Lab, delivered the open-sourced Second Life Viewer 2.0 project. His teenage daughter has Type 1 diabetes.
  • Brandon Arbiter was a VP at FreshDirect where he built the company’s data management and analytics practices. He was diagnosed at age 27 with Type 1 Diabetes. He developed a new generation diabetes app, “nutshell,” that gives patients the information they need to make the right decisions about their dosing strategies.
  • Kent Quirk was director of engineering at Playdom and director of engineering at Linden Labs.

A Five-sided Market
In Week 1 the Tidepool team diagramed its customer segment relationships like this:

Tidepool ecosystem

Using the business model canvas they started with their value proposition hypotheses, articulating the products and services they offered for each of the five customer segments. Then they summarized what they thought would be the gain creators and pain relievers for each of these segments.

Tide pool value prop week 1

Next, they then did the same for the Customer Segment portion of the canvas. They listed the Customer Jobs to be done and the Pains and Gains they believed their Value Proposition would solve for each of their five customer segments.

Tide pool cust week 1

It’s Much Simpler
Having a multisided market with five segments is a pretty complicated business model. In some industries such as medical devices its just a fact of life. But after talking to dozens of customers by week 3, Tidepool discovered that in fact they had a much simpler business model – it was a two-sided market.

tidepool simplification

They discovered that the only thing that mattered in the first year or two of their business was building the patient-device maker relationship. Everything else was secondary. This dramatically simplified their value proposition and customer segment canvas.

So they came up with a New Week 3 Value Proposition Canvas:

Tide pool value prop week 3

And that simplified their New Week 3 Customer Segment Canvas

Tide pool cust week 3

Cost-based Pricing versus Value-based Pricing
While simplifying their customer segments was a pretty big payoff for 3 weeks into the class, the best was yet to come.

As part of the revenue streams portion of the business model canvas, each team has to diagram the payment flows.

Tide pool market pricing

The Tidepool team originally believed they were going charge their device partners “market prices” for access to their platform. They estimated their Average Revenue per User (ARPU) would be about $36 per year.

Tide pool market pricing ARPU

But by week 6 they had spoken to over 70 patients and device makers. And what they found raised their average revenue per user from $36 to $90.

When talking to device makers they learned how the device makers get, keep and grow their customers.  And they discovered that:

  • device makers were spending $500-$800 in Customer Acquisition Cost (CAC) to acquire a customer
  • device makers own customers would stay their customers for 10 years (i.e. the Customer Life Time (CLT))
  • and the Life Time Value (LTV) of one customer over those 10 years to a device maker is $10,000

Tide pool market pricing device cac

These customer conversations led the Tidepool team to further refine their understanding of the device makers’ economics.  They found out that the device makers sales and marketing teams were both spending money to acquire customers.  ($500 per sales rep per device + $800 marketing discounts offered to competitors’ customers.)

Tide pool device economics

Once they understood their device customers’ economics, they realized they could help these device companies reduce their marketing spend by moving some of those dollars to Tidepool. And they realized that the use of the Tidepool software could reduce the device companies’ customer churn rate by at least 1%.

This meant that Tidepool could price their product based on the $1,800 they were going to save their medical device customers.  Read the previous sentence again. This is a really big idea.

Tide pool value pricing big idea

The Tidepool team went from cost-based pricing to value-based pricing. Raising their average revenue per user from $36 to $90.

Tide pool value pricing $90 ARPU

There is no possible way that any team, regardless of how smart they are could figure this out from inside their building.

If you want to understand how Customer Discovery works and what it can do in the hands of a smart team, watch the video below. The team ruthlessly dissects their learning and builds value-pricing from what they learned.

This short video is a classic in Customer Discovery.

If you can’t see the video click here.

Lessons Learned

  • Most startups begin by pricing their product based on cost or competition
  • Smart startups price their product based on value to the customer
  • You can’t guess how your product is valued by customers
  • Customer Development allows you to discover the economics needed for value pricing your product

Listen to the podcast here [audio http://traffic.libsyn.com/albedrio/steveblank_clearshore_131202.mp3]

Download the podcast here

Filed under: Customer Development, Customer Development Manifesto, Lean LaunchPad, Life Sciences (NIH), NIH (National Institutes of Health) | 8 Comments »

Lean LaunchPad for Life Sciences – Revenue Streams

Posted on November 18, 2013 by steve blank

We’re teaching a Lean LaunchPad class for Life Sciences and Health Care (therapeutics, diagnostics, devices and digital health) at UCSF with a team of veteran venture capitalists. The class has talked to 2,056 customers to date.

This post is an update of what we learned about life science revenue models.

Life Science/Health Care revenue streams differ by Category
For commercialization, the business model (Customers, Channel, Revenue Model, etc.) for therapeutics, diagnostics, devices, bioinformatics and digital health have very little in common.

This weeks topic was revenue streams – how much cash the company can generate from each customer segment. Revenue streams have two parts: the revenue strategy and the pricing tactics.

Figuring out revenue strategy starts by gaining a deep understanding of the target customer(s). Setting a revenue strategy starts with understanding the basics about the customer segments:

  • who’s the user, the recommender, buyer, and payer
  • How the target customer currently purchases goods and services and how much they currently pay for equivalent products
  • Their willingness to pay for value versus lowest cost?
  • How much budget they have for your type of product?

Revenue strategy asks questions like, “Should we offer cost-based or value-based pricing.  How about demand-based pricing? Freemium? Do we price based on hardware sales or do we offer hardware plus consumables (parts that need to be disposed or replaced regularly)? Do we sell a single software package or a subscription?  These strategy hypotheses are tested against the target customer segment(s).

Once you’ve established a revenue strategy the pricing tactics follow. Pricing is simply “how much can I charge for the product using the selected revenue strategy?”  Pricing may be as simple as setting a dollar value for hardware or software, or as complicated as setting a high price and skimming the market or setting a low price as a loss leader.

You can get a feel for how each of the cohorts address the Revenue Streams by looking at the Revenue lectures below – covering the therapeutics, diagnostics, devices and digital health cohorts.

At the end of the lectures you can see a “compare and contrast” video and a summary of the differences in distribution channels.

Diagnostics

Week 5 Todd Morrill Instructor 

If you can’t see the presentation above click here

Digital Health

Week 5 Abhas Gupta Instructor 

If you can’t see the presentation above click here

Devices

Week 5 Allan May Instructor 

If you can’t see the presentation above click here

Therapeutics

Week 5 Karl Handelsman Instructor 

If you can’t see the presentation above click here

Life Science and Health Care Differences in Revenue Streams
”
This weeks lecture and panel was on Revenue; how much cash the company can generate from each customer segment – and the strategy and tactics to do so. Therapeutics, diagnostics, devices and digital health use different Revenue Strategies and Pricing Tactics, in the video and the summary that follows the instructors compare and contrast how they differ.

If you can’t see the video above click here

Therapeutics (Starting at 0:30)

  • Therapeutics revenue is from drug companies not end users
  • 18 months to first revenue from a deal
  • Predicated on delivering quality data to a company
  • Deal can be front-end or back-end loaded
  • Quality of the data has to be extremely high for a deal

Diagnostics (Starting at 4:10)

  • Diagnostic revenue is from end users: a hospital or clinical lab
  • You need to figure out value of your product but…
  • Pricing is capped by your reimbursement (CPT) code limits
  • Reimbursement strategy is paramount, design to good codes avoid bad ones
  • Find a reimbursement code consultant
  • Don’t do cost-based pricing… go for value-based pricing

Medical Devices (Starting at 8:23)

  • There really is no such thing as a perfect First Generation Medical Device
    • So Medical Device companies often start with a Volkswagen product and then build to the Ferrari product
  • Revenue models are typically direct product sales
  • Don’t do cost-based pricing… go for value-based pricing, especially where your device lowers the treatment costs of the patient
  • In most cases, pricing is capped by your reimbursement (CPT) code limits
    • Or pricing can be capped by what competitors offer, unless you can demonstrate superior cost savings
    • In a new market there is no reimbursement code but if you show high cost-savings you can get a high reimbursement rate
  • A risk in device hardware is getting trapped in low-volume manufacturing with low margins and run out of cash

Digital Health (Starting at 10:35)

  • Digital Health revenue models are often subscription models to a company per month across a large number of users
    • Intermediation fees – where you broker a transaction – are another source of revenue (i.e. HealthTap)
    • Advertising is another digital health revenue model, but requires at least 10 million users to have a meaningful model, but can be lower if you have higher value uses like specialist physicians because  you can charge dollars not cents
  • Don’t do cost-based pricing… go for value-based pricing
    • Value-based pricing is based on the needs you’ve learned from the customer segment and the strength of your product/market fit
      • the sum of customer needs + product/market fit = the pricing you can achieve

Lessons Learned

  • Each of these Life Science domains has a unique revenue strategy and pricing tactic
  • In therapeutics revenue comes in lump milestone payments from drug companies based on quality data
  • Diagnostics revenue comes value pricing to hospital or clinical lab
    • capped by reimbursement (CPT) code limits
  • Device pricing starts by offering an initial value-priced base product and then following up with a fully featured product
    • capped by reimbursement (CPT) code limits
  • Digital health products use subscription value pricing. Alternatively may use advertising revenue model

Listen to the podcast here [audio http://traffic.libsyn.com/albedrio/steveblank_clearshore_131118.mp3]

Download the podcast here

Filed under: Customer Development, Life Sciences (NIH), NIH (National Institutes of Health), Teaching | Leave a comment »

Well They “Should” be Our Customers

Posted on November 13, 2013 by steve blank

When scientists and engineers who’ve been working in the lab for years try to commercialize their technology they often get trapped by their own beliefs  – including who the customers are, what features are important, pricing etc.

 

——–

One the key tenets of the Lean LaunchPad class is that every week each team gets out of the building and talks to 10+ customers/partners to validate a new part of their business model.  Back in class they present their findings to their peers and teaching team in a 10 minute Lessons Learned presentation. One of the benefits of the class is that the teams get immediate unvarnished feedback on their strategy.

For researchers and clinicians who’ve been working on a project in the lab for years, getting out of the building and talking to customers at times creates cognitive dissonance.  While they’ve been in the lab they had a target customer in mind. However when they leave the building and start talking to these  supposed customers there’s almost always a surprise when the customer is not interested in the product.

Often when they consistently hear that their expected customers aren’t interested the first reaction is “the customers just don’t get it yet.”  Rather than testing a new customer segment they keep on calling on the same group – somehow thinking that “we just need to explain it better.”

Some times it takes a nudge from the teaching team to suggest that perhaps looking at another customer segment might be in order.

They Should be Our Customers
The Mira Medicine Team is trying to accelerate the path to the right treatment for each patient in complex Central Nervous System diseases. They spent years building their first tool MS Bioscreen, which was developed for the physicians at the UCSF Dept of Neurology. So they naturally believed that their first customers would be neurologists.

This was a very smart team who ran into the same problem almost every smart researcher attempting to commercialize science faces.  Here’s what happened.

If you can’t see the video click here.

Listen for:

0:35 “Our primary customer we built this app for was neurologists…

1:00 “(but neurologists have told us) your prototype is interesting… and probably some features are nice to haves…

2:26 “What’s special about neurology?  Doesn’t cardiology and oncology have problems like this?

3:00 “Is neurology a key component of what you’re trying to do?

3:15 “I’ve worked on this for two years…”

3:24 “You’ve already done too much prototyping work. You’re hung up on the prototype.”

3:29 “You have a square peg you’er trying to jam in a round hole…”

3:43 “Don’t be afraid to think laterally”

Postscript: 70 customers later they no longer talking to neurologists.

Lessons Learned

  • Don’t get trapped by your own beliefs
  • When reality outside the building doesn’t match your hypotheses – test alternate hypotheses
  • Most of the time your vision is just a hallucination

Listen to the podcast here [audio http://traffic.libsyn.com/albedrio/steveblank_clearshore_131113.mp3]

Download the podcast here

Filed under: Lean LaunchPad, Life Sciences (NIH), NIH (National Institutes of Health), Teaching | 8 Comments »

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