Evaluating Product-Market Fit in Healthcare

Introduction

When evaluating early-stage companies, investors often focus on the problem being solved and the founding team.

However, not all problems are equal, and each requires a distinct approach to achieving product-market fit.

We’ve found that Sequoia's framework for understanding product-market fit archetypes is invaluable for us as investors to direct our diligence.

So how do we apply this framework in a healthcare-specific lens, and what are some clinical and non-clinical healthcare innovation examples and insights to better evaluate companies for investment?

Hair On Fire Problem: Tackling Known Problem / Known Outcome with Differentiated Solutions

"Hair on Fire" problems are urgent issues that require quick and effective solutions. These problems are characterized by an immediate need for action and resolution, fitting within the existing clinical guidelines or best practices.

Clinical example: Telemedicine

Telemedicine delivers well-established clinical pathways efficiently and remotely for many specialties. Its adoption soared during COVID-19 when in-person services were restricted. Interestingly, as restrictions eased, the reliance on telehealth decreased, highlighting its role as a solution for urgent access issues rather than a permanent replacement for in-person care.

Non-Clinical Example: AI powered RCM

Reimbursement remains contentious between payors and providers. Payors profit by collecting premiums and limiting payouts, while providers aim to offer services cost-effectively. For providers, any roadblocks, like prior authorizations and administrative processes, can disrupt this flow. AI and large language models (LLMs) offer solutions by automating clerical tasks, improving efficiency. Startups such as AKASA and Adonis are emerging to streamline reimbursement and reduce administrative burdens.

What should I look for when investing in these types of solution?

Successful solutions solve hair on fire problems because they deliver a known (and often desired) outcome to a known problem in a different way or more efficient manner.

Perhaps more importantly, healthcare solution needs to be easy to integrate into existing workflow and implement by healthcare stakeholders, and provide quick ROI (ideally < 12 months) for typical healthcare customers to justify the investment.

An addition thing to note is that hair on fire problems can be heavily influenced by “what’s hot” and a sudden market need that isn’t sustained over the long run, as highlighted by telemedicine’s swift decline.

Hard Facts: Changing Behavior and Reframing the Problem to your Advantage

"Hard Fact" problems in healthcare often arise from previous best practices and guidelines that were effective in their time but show limitations when widely adopted in diverse settings. While these practices are still adequate for many, gaps and inefficiencies become apparent over time, and call for new practices to be established to improve the standard of care.

Particularly for healthcare, success in addressing "Hard Fact" problems often comes from external forces, such as policy changes or shifts in public opinion. Companies that effectively leverage these changes or influence sentiment can gain a competitive edge.

Clinical example: Intuitive Surgical and Robotic Surgery

Intuitive Surgical has been a major success in robotic surgeries by initially focusing on the rise of minimally invasive surgeries compared to traditional open procedures. In addition to the technical innovation in laparoscopic surgery, they influenced industry practice by building a community of early surgeon adopters to train new users and provide valuable feedback, which helped refine and popularize their robotic surgery systems.

Non-clinical example: Epic and EHR dominance

Epic has achieved market dominance by capitalizing on policy changes, notably the Health Information Technology for Economic and Clinical Health (HITECH) Act, which encouraged the adoption of digital health records. This legislation provided incentives for healthcare providers to switch to electronic systems, which Epic used to its advantage.

What should I look for when investing in these types of solution?

Many startups mistake technical innovation as the key to answering “Hard Facts” problems, leading to the classic phrase “if you’re a hammer, everything looks like a nail”.

In fact, being able to effectively change behavior may be more important, as Intuitive Surgical demonstrated through their successful go to market initiatives.

Reframing how a problem is viewed can be similarly effective, Epic has a bad reputation among healthcare workers for its clunkiness, but has found tremendous success by providing a reliable, complete solution that large healthcare systems can rely on. Instead of focusing on innovative products, Epic ensured top decision makers can rest easy knowing Epic delivers a comprehensive solution that checks all the boxes. To borrow an old phrase, “Nobody ever got fired for buying Epic”.

Future Ideas: Dream Big

"Future Ideas" are not always linked to a specific problem like "Hard Fact" or "Hair on Fire" issues. Instead, they redefine their categories, creating entirely new markets and possibilities. These concepts challenge the status quo and can even give rise to new "Hard Truths" and "Hair on Fire" problems that need solving. Success with "Future Ideas" requires visionary thinking, pioneering efforts, and the ability to navigate regulatory and cultural shifts, turning these groundbreaking ideas into transformative realities within the healthcare industry.

Clinical example: Longetivity

What would you do if you could live an extra 20 years?

Longevity studies focus on understanding the genetic, molecular, and environmental factors that influence aging and developing interventions to delay or reverse age-related decline. Research areas include caloric restriction, senolytics (drugs that clear aging cells), and gene therapies targeting aging pathways. While a tantalizing proposition, significantly longer lifespan for the broader population would bring new questions to consider:

• Is “living longer” considered a medical treatment and should be regulated?

• Assuming the treatment is safe, should this be made available to anyone willing to use it Or only those with the means to afford such “treatment” and longer lifespan?

• How would our social structure further change with fewer and fewer young people to support the old that are living longer and longer?

Non-clinical example: AI Doctors

What if instead of fleshy human physicians who get tired and aren’t always available, we had AI physicians who would be at your every beck and call for any disccusion about physical and mental ailments, and even keeping an eye on your health for any anomalies.

Assuming AI medical workers possessed superior clinical diagnostic capabilities compared to human, a whole host of new problems, solutions, and opportunities would emerge:

• How would the healthcare workforce change when a large portion of the non-physical work can be automated away?

• How would our healthcare infrastructure (hospitals, clinics, etc) change in response to always available AI doctors?

• How would the economic infrastructure of healthcare change? Would health insurance (whether it be Medicare, employer, or commercial insurance) change still look the same? Would PBMs still need to exist?

What should I look for when investing in these types of solution?

Building a company in this category requires a visionary leader through the long journey of development; it also takes investors who share in that vision to nuture the company as it evolves. For investors, look for companies on missions that share your values and founders who can clearly explain their idea maze.

Conclusion

Product Market Fit is a journey and comes in all shapes and form. While these archetypes may be an oversimplification, they provide a convenient way to guide investors in their diligence of different startups companies. By focusing on the unique characteristics and success factors of each category, investors can make informed decisions and invest in the companies that best align with their strategies and values.

Thanks for reading our views on Product Market Fit! Please subscribe to our newsletter if you haven’t, and stay tuned to our newsletter for more insights into healthcare innovation and early stage investing!

Don’t invest alone; bring a friend! Share our newsletter, and stay tuned to our newsletter for more insights into healthcare innovation.

If you already know how to evaluate Product Market Fit, join us at The Healthcare Syndicate as we back compassionate founders 10Xing the standard of healthcare!