Advice for med tech entrepreneurs: Identify your customer and consider stakeholders' incentives carefully

The med tech ecosystem is diverse and teeming with myriad stakeholders, to the point that identifying the customer of a company or device can be challenging.

"He or she who's the user or implementer, versus he or she who's the decider, vs. the person who may actually write the check may be three different people," said Rana Gupta, former CEO of HistoRx, a cancer diagnostic company that was sold to Novartis ($NVS) in 2012, during an online talk sponsored by the U.S. National Institutes of Health.

Although plenty of entrepreneurs wish to improve the lives of patients, in the device world, they are rarely the customer. Successfully creating a new company in med tech means identifying the customer and then finding a way to meet that group's needs, Gupta said.

The trick is to consider various stakeholders' practical incentives in a granular manner. "Clinicians, like everybody, have to feed their families," Gupta said. He gave an example from his experience with HistoRx, saying that it took him years to figure out how to appeal to pathologists, who turned out to be the company's customers, as they grapple with the rise of centralized diagnostic laboratories and technologies that can automate disease identification.

"We thought that the oncologist wanted a quantified, standardized, better IHC (immunohistochemistry) test. Well, that proves not to be the case. What we found was that the pathologist needed something to save them from the fact that these molecule tests were coming out and going off to centralized laboratories. They wanted the test to come back to their laboratories to go back to a previous business model where they could charge and make money. Our platform allowed that. It allowed tests that were being farmed out to come back to the pathologist," he said.

Indeed, carefully analyzing the role of the various players in the med tech ecosystem can lead to interesting conclusions. As more physicians shift from working in private practices to working in large hospitals, they lose some of their business and decision-making powers, Gupta said. Instead, check-writing hospital administrators are becoming increasingly important.

And their advent is impacting the medical device industry in very tangible ways. It's driving consolidation in the orthopedics industry, such as Zimmer's ($ZMH) impending purchase of Biomet for $13 billion, as healthcare providers purchase implants based not on individual physician preference, but with cost considerations in mind. That means more units of fewer models are bought to achieve savings from bulk purchases, necessitating a reduction in the number of suppliers.

Venture capitalists are another prominent player in the ecosystem. Speakers at industry conferences like to sound the alarm and say the market for med tech financing is drying up, in part due to tougher reimbursement from public and private payers. Empirical sources like the MoneyTree Report paint a more mixed picture. With $2.7 billion raised, 2014 was the strongest year since 2011, although, as should be expected, funding has fallen (by roughly 50%) since the pre-financial crisis year of 2007.

Gupta urged startups to seek vendor customer financing as well, saying equity investors and VCs mainly seek to increase asset values and not necessarily to bring new medical technology to market.

"The notion of getting money from Party A and selling it to Party B is what hinders creativity, and it hinders a market-based approach to entrepreneurial finance," he said. "Starting with equity investors may not be the best, whereas your customers and vendors almost by definition have the same objective as you, which is to get this into the marketplace, because your customers need it and your vendors are going to make money from your selling it."

Overall, the entrepreneur, who's now a lecturer at Boston University, demonstrated the importance of thinking about companies' interactions with the entire med tech ecosystem, and analyzing every stakeholder carefully and granularly to respond to their unique needs and challenges.

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