The up/downside of startups

I have a certain affinity for medical technology startups. They represent the leading edge of thinking in the industry, ignoring the status quo or just pulling the rug out from under it with new applications, new technologies and new thinking. Startups in medical technology are therefore are a window on the future of the market.

Keeping track of these startups, and having started and labored at several, I recognize the duality of their existence.  For every opportunity that comes with being a startup there seems to be an equal (greater?) and opposite challenge to seizing that opportunity. For being able to move swiftly with its ideas, the startup is forced to wait for slow-footed bureaucracies (FDA, reimbursement, distributors and other partners) as it tries to bring its products to the marketplace. The small company, simply by virtue of being small, has little wherewithal to set terms of any kind with those it deals with, and instead must often rely on the terms dictated to it by vendors and clients alike, which increases the cost of doing business through restricted cash flow, increased administrative effort and other burdens.

Startups and small companies can often get stuck in that notorious catch 22 — they need money to create the kind of successes that can often only be achieved once they have secured funding. Only the most ingenious and diligent are able to last longer than what can be supported with 3F funding (i.e., family, friends and fools).

The double-edge swords of startups:

Lack of infrastructure / lack of bureaucracy. Perhaps the single biggest advantage of the small company is its ability to turn on a dime because it does not have layers of decision-making and paperwork in managing its business. A colleague recently related the culture at a very large IT company in which each internal meeting with a particularly finicky executive was accompanied by a "pre-" meeting to prep for it and a "post-" meeting to decipher the exec’s rants and debrief the meeting’s participants. That’s 1-2 hours of lost time.

Clean slate / unproven ideas. The ability to disregard preconceived notions and create "disruptive" technologies is like a vital organ for startups. Their technologies need to be seen as setting new standards, as uniquely capturing patient caseload whose demands have previously been unsatisfied in whole or part. Yet the unproven idea will never ultimately sell until it carries with it high credibility or at least convincing proof-of-concept.

Ivory tower and too many cooks in the kitchen. The startup relies upon the cohesiveness of its ideas, the singularity of its decision-making and its ability to avoid conflicting mandates or conflicting stakeholders. It isn’t constantly hounded by Wall Street’s short term demands for ROI, P/E and other pesky acronyms. The startups can also suffer with ivory-tower syndrome limiting consideration of relevant alternative view points. Many a strong-willed visionary leader, for wont of second opinion, has led his or her company into Chapter 11.

Marching to the beat of a different drummer. Startups are veritable breeding grounds for executives, engineers, scientists and others who refuse to heed the drills and policies of corporate culture. Of course, this is a prerequisite for a company seeking to commercialize a disruptive technology, because corporate culture doesn’t often foster thinking outside the box (said box, labels and packing tape being manufactured on site). Also, of course, the successful technology — and all the staff and management who help bring it to market — has to play by the regulatory, reimbursement, accounting and myriad other market rules that will never be disrupted. Not all who march to the different drummer will ultimately learn to march in step with the market.

Put another way, it would be nice to think that for every disadvantage of being a startup there is a converse advantage, but that would be fantasy (and were that the case, there would be far more startups in business). There is little if any plus side to being short of funds, struggling to get attention, or having to accept whatever terms are given. While the large company (I’ve dealt with a few $5 billion plus in size) can easily elect to defer business until it meets their sometimes irrationally one-sided terms, the small company with shallow pockets and growth-oriented costs has to often take the terms that are thrust upon it, or else.

Day in and day out, at countless bootstrap-financed, growth-squeezed startups and early stage companies, there are many, many low profile battles being fought — on regulatory, cash flow, reimbursement, staffing, public relations and other battlegrounds — the outcomes of which determine which medical ideas become real and which become footnotes in rejection letters, declined reimbursement and other adverse decisions.

Given the potential windfall of startups — live-saving medical technologies, new jobs, tax revenue, etc., etc. — is it not then imperative to create a little affirmative action for them? While we are not typically advocates of regulation, particularly since regulation can go awry, the interests of a free-market economy can be well served by mechanisms like tax credits and accounting rules, to name a couple, that will free up entrepreneurship and grease the wheels of young industry.

 

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