Creation of a Start-Up: The Idea and the Evaluation of the Opportunity

By Luis Pareras, MD, MBA
November 11, 2020

Is it an opportunity or only a good idea?

First Phase: How to differentiate an opportunity from a good idea?

Every entrepreneurial initiative begins with an idea. We want to understand:

 

  • The dimensions of the opportunity and to arrive at a conclusion about whether this opportunity is attractive or not.
  • The return of our investment, both in time and in money, and the magnitude of the effort that we will have to realize in order to develop this opportunity.
  • Initial strategic considerations; a course of action that maximizes the way to success and that allows us to work around the obstacles and the risks that surround any new initiative.


If the idea responds to a real need or if it only represents a solution “in search of a problem.”

Dimensions of the Opportunity

We will explore the difference between an idea and an opportunity. While we are developing entrepreneurial language knowledge, we will be able to understand better some of the dimensions of what was described on previous pages. It is important now to emphasize that an opportunity has many critical dimensions:

  • Its size. The size of the market is a critical dimension because it has a direct implication for the potential sales of our project and, therefore, its financial return. But be careful. We should clarify something about this comment. At times very large markets can attract large and powerful companies and competitors. Therefore, at times the small niche markets can be very interesting to the entrepreneur in the first years.
  • The window of opportunity. We should emphasize that opportunities exist during a limited period of time. They are in some way like fruit in the store. If we do not act, they will disappear. Technology changes, new administrative regulations, changes in the consumers’ preferences or in the market demand, and so on, all can create opportunities. But these opportunities do not remain open for a long time. When detecting a trend before its time, the entrepreneur opens a window of opportunity to improve the possibilities.
  • The speed of growth. Entrepreneurial initiatives usually flourish in environments where there has been rapid growth. And these environments exist in sectors with a strong scientific and technological component. The health sector is a good example.


Investment Return

An opportunity should offer some adequate investment return expectations, which justify the risk that entrepreneurs assume. When we say “adequate” or “sufficient” we are talking in relative terms that depend on:

  • The capital we might have invested.
  • The time that we might dedicate to the initiative.
  • The assumed risks in the process.
  • The alternatives (the opportunity cost) that we have for the external capital that is invested into our project.


All opportunities that demand an important quantity of capital, require a very long period of time to mature, and face great risks, normally make little sense, unless the opportunity is extraordinary and the return very appealing. A good example is biotech start-ups. They are very capital intensive, usually require a very long time to market (at least 10 years), and assume great risk because, it is possible given the circumstances that the drug actually might never reach the market. But, nevertheless, there might be very interesting opportunities with a very healthy return on investment.

The “adequate” investment return depends also on our alternatives and on a concept we call the “opportunity cost.” All the time, effort, and money we dedicate to a start-up initiative can likely be employed in a different initiative. This is known as “opportunity cost” and of course, it varies much according to the individual and his or her knowledge, the timing, and the circumstances. An initiative can be attractive, viable, and visionary for one person, and it can be absurd for another that has, for example, a more attractive alternative.

In whichever case, the opportunities should have the following financial characteristics in order to offer an adequate investment return and to be considered appealing:

  • Rapid and maintained growth, meaning that once we have sold a product, the client or user remains “locked in” to our product, and our relationship turns into a recurring relationship instead of being a onetime sale.
  • High economic scale potential, often being able to generate more and more cash flow by itself as time goes by, in order to finance
    and sustain growth.


Can We Open New Roads? Are There Obstacles?

Good opportunities usually “like” having options. Given that the future is obviously unknown, it is critical that the entrepreneur does not remain locked into an initiative that has only one way to success, that it only can become successful in one way. Good opportunities allow frequent corrections along the way that are always necessary in a dynamic environment such as healthcare. Things never turn out the exact way one has planned them. The worst opportunities are therefore, the ones that limit future options and offer us no opportunities to change paths. It is important to try to pursue ideas that are flexible.

On the other hand, obstacles in the road should be identified as soon as possible. For one thing, an entrepreneur can be absolutely sure that unexpected problems will appear. Our success will create all types of pressures, including the appearance of other competitors that will imitate us and products that will become substitutes of our products in the changing technology landscape. It is therefore, essential to identify and fight against our weaknesses from the very beginning.

There are two types of weaknesses:

• External: for example, the reaction of our competitors.

• Internal: for example, losing a very important partner for the project.


And finally, Is Our Idea the Solution to a Problem or Is It a Solution in Search of a Problem

This is perhaps the most important point that one has to take into account in generating new ideas. The products and innovative ideas that succeed usually offer a solution to a problem. They usually give answers to a real need. To support something of true “value,” something that satisfies some real need in our environment is extremely important. When I listen to a new idea, before coming in and discussing with the entrepreneur its strong and weak points, I always ask this question: Which problem we are trying to solve? Many entrepreneurs that consult me design interesting products and services that do not respond to a need. They are therefore solutions—that is, very elegant and innovative—in search of a problem to solve. These ideas usually do not go very far, because without a real problem there will not be clients nor sufficient demand.

Often, entrepreneurs do not adequately understand how their products are going to satisfy the needs of their users and underestimate the time and cost necessary in order to make buyers aware of those products. When creating new ideas, it is important to understand well these questions in order to generate an adequate demand in the health sector.

Second Phase: How can I structure the opportunity in order to be a better one?

DEVELOPMENT OF THE BUSINESS MODEL
Once the opportunity is identified, we should think about a strategy that will help us move this opportunity forward, that is, our business model. The business model is the mechanism behind our start-up that will generate revenues and benefits. Will we sell our product at a higher price? Or will we give it away for free in order to have many users and to get the revenues from maintenance fees? Or perhaps sell additional services attached to that product? How will we differentiate ourselves from competitors? What is our competitive advantage? This business model has to allow us to optimize this opportunity to the maximum, to take advantage of our strengths and to minimize our weaknesses, and has much to do with the definition of our strategy.

For example, suppose that our start-up tries to distribute a medical device that we want doctors to use in hospitals. The question that we should ask ourselves is how do we define how our business model: How will we contact the hospitals to distribute this product? Through whom? Is it good that this product can be found in other ways, not only in hospitals? Will we get revenues from the sale of the product or from a consumable used with the product? Will we cover our costs in a situation of contracted demand? Will we extend its consumption throughout the United States, all the world, or to only one city as a test? Will we make these products ourselves or subcontract their production to a third party according to our needs? What is our competitive advantage? How will we differentiate ourselves from our competition?

These are examples of complex questions we will need to face at some point. For all of them, I will try to offer a strategic framework of analysis later on.

We can begin to be aware of the following five questions:

1. Can we create barriers of entry?

Elevated barriers of entry play to our advantage in new healthcare initiatives, making it difficult for a competitor to imitate our project. One has to take into account that every good initiative attracts imitators. Often, the first competitors enter the market with a strategy of “copying and pasting.” It is important to know ahead of time all of the competitive threats and to think from the onset in terms of what measures we need to protect us from them. The protection of intellectual property for example, is quite usual and necessary in our field.

2. Who will be the clients of our product and service?

Are they accessible and open to change? Another question that I usually ask entrepreneurs is can they give me the names of possible clients. If they cannot identify who they clients will be, they are still not ready to begin the process. Identifying future clients is not enough, however; they should be open as well to change to our product. Normally, the success of any start-up initiative depends on getting the client to let go of a previous way of doing something and adopting our proposal. Consequently, it is essential that the change offers a clear benefit.

3. Will we and our providers understand each other?

In this initial phase we should begin to decide if we are going to produce the product or service ourselves, or if we are going to hand it over to a third party. In the early stages of a start-up, it is very common not to invest in equipment or in our own manufacturing of the products. But all of these decisions have a strong impact on the company, because what on one hand saves us money, on the other hand makes us more dependent on our providers who could use their position to take advantage of us.

4. Will we and our future clients understand each other?

In considering the value chain in the health sector, we will understand better who could be our clients, who might be our allies, and who might be our enemies. When the consumers are citizens, patients, and individuals, they usually don’t have great buying power and are not able to influence our decisions. However, when the consumers are big institutions such as hospitals or the administration, one has to take into account that the consumer will have great influence and therefore, will be able to highly influence our actions.

5. Can regulation of the health sector play to our favor?

The healthcare field is strongly regulated. This presents an important barrier of entry. It is necessary to know from the very beginning the possible regulatory requirements in the administration regarding market approval, methods and procedures, clinical trials, insurance, and so on. Frequently, entrepreneurs have not reflected on how they are going to comply with these requirements, or even if these requirements can offer interesting competitive advantages to their business model.

Third Phase: What resources do I need to move my idea forward?

EVALUATING THE RESOURCES WE NEED
The entrepreneur has the idea and the knowledge to carry it out to practice. The investor has a good part of the resources. Rarely does an entrepreneur as an individual control all of the resources, capacity, and relationships needed to pursue an opportunity in the long run. It is important that entrepreneurs learn to evaluate and understand what is needed in relation to the resources, relationships, and abilities, and above all, which of these are and are not under their control. The majority of failures in the creation of new start-ups occur because there is a big gap between the resources that entrepreneurs have at their disposal and the resources they actually need. What resources do we need? How can we get them?

1. The resources that we already have (although we are not aware of them)

The creation of a real and lasting value depends on the ability of contributing something new. The less we contribute as entrepreneurs, the more fragile and vulnerable the startup will be; the more we contribute, the more interesting the project will be. The answer to the question “why me” is fundamental. Each entrepreneur contributes distinct essential elements for the development of the idea. These resources can be in the form of
knowledge, relationships, leadership capability of other necessary professionals, and so on. It makes us know our capacity and resources, in order to know how to surround ourselves with a team that complements our current capacity, adding to what we do not have. It is a matter of being the leader of the initiative, not of doing it all ourselves.

2. Resources that we need in a start-up (what we do not have)

Normally, the complete collection of resources that one needs for any entrepreneurial initiative from the beginning will include many of the following points:


• Financial knowledge
• Marketing and sales knowledge
• Technology knowledge
• Production knowledge
• Management of human and personnel resource knowledge
• Management knowledge


Therefore, it is crucial to develop our ability to attract complementary people that contribute distinct profiles in necessary areas. In my option, what distinguishes good entrepreneurs is their ability to lead “virtual” teams, even outside the project, people that will accept coming on board at the precise moment the necessary capital is available to go forward with the project. These entrepreneurs both inspire and attract a team around
their idea. They are also capable of finding ingenious ways to use, even without possessing, these resources they need.

The deep and wide knowledge that the healthcare professional can provide is immediately very useful to excite third parties and to get resources. The personal experience improves our credibility and enhances the possibilities for success.

3. Internal resources versus external resources

What resources will we need from the first day in the organization and which can we subcontract to a third party? In all entrepreneurial initiatives, there exists a series of recourses considered essential, that require continued coordination, and that cannot be externalized.

Other resources, on the other hand, can be subcontracted outside of the start-up, saving part of the costs and eliminating fixed costs on the project. In either case, I would like to point out that the idea of outsourcing as many resources as we can in order to lower our risk is completely wrong. There is always an optimal equilibrium of internal resources versus external necessary resources for the positive development of a project. It is the task of the entrepreneur to find this point.

Fourth Phase: How can I describe the opportunity to a third party?

WRITING A BUSINESS PLAN
By the time we have reflected about the opportunity and we have done our first estimate of what we need to carry it into practice, then comes the moment of putting all of these reflections into a business plan. The business plan describes the opportunity and how to pursue it. Its purpose is to tell a story, the story of our project. One of the major mistakes that entrepreneurs in the healthcare sector make is thinking that they already have a very clear picture of this story in their mind and therefore do not need to explain the ideas in a document.

I cannot emphasize enough how wrong they are if they think like this. The business plan is a basic tool that entrepreneurs in the healthcare sector need to transform their idea into an opportunity and make it real. It is a document of some 20–40 pages with a very defined structure that includes, among other things, a study of the market, an analysis of the competition and of the risks, a study of the technological development and of the process, a definition of our strategic position, the description of the team executives and the founder who will lead the start-up, an estimate of the financial necessities, and an estimate of our investments, costs, and benefits. A business plan allows us to:

  • Develop an objective and critical vision of the business opportunity.
  • Anticipate the obstacles during the development of the business.
  • Line up and motivate our collaborators.
  • Convince investors.
  • Communicate the business strategy to others.
  • Attract people and resources to the project.


When attempting to bring a new start-up to the sector, the initial enthusiasm of the entrepreneur has no limits. The business plan also helps to moderate this enthusiasm, making the healthcare professional analyze the initiative in a more objective and critical manner.

This allows for more clarity and better sense of direction and helps to visualize where we want to go and how we want to get there. The business plan continues being useful even after the writing and implementation, for example, in order to measure and compare our initial expectations with the results we get and in order to help us to reevaluate the opportunity and to launch new lines of business. It is therefore, also a growth tool that allows us to formulate a hypothesis about different scenarios of expansion.

Fifth Phase: How can I keep others from taking advantage of my idea?

PROTECTION OF MY IDEA
Intellectual property represents one of the best fundamentals for our new start-up in the health sector. Patents can be used to prevent competitors from entering our market, and transformed into a source of revenues for our start-up. Patents allow the enjoyment of a product monopoly in a geographic environment and the fostering of technological development by stimulating research and development (R&D) in the hospitals and research institutions.

However, as we will see later, intellectual property is misunderstood or frequently goes over our head and almost never is considered as important as it should be. Many healthcare professionals prefer for example, to publish their ideas in place of (or before) patenting them. This publication invalidates the patent. A patent can be at times an essential asset for the viability of our idea, because it is precisely the only asset that investors can leverage to attract investment in the early phases. The patent is necessary to obtain financing, because in the end, the sale of the patent can bring revenues to the entrepreneur or to the investors if things do not go as planned.

Sixth Phase: What alternatives do I have to move my idea forward?

WHAT FUTURE DO I WANT FOR MY IDEA?
A good opportunity can drive the creation of a new entrepreneurial start-up in the healthcare sector, offering the professional and the team the possibility to profit from their invested effort.

There exists, however, other alternatives to profit from this effort. Not all ideas turn into companies. The term “commercialization strategy” delineates precisely these alternatives that we have to deliver our product, service, or patented technology to the market. In this process, one might be familiar with the “process of technology transfer.” This process sends a concept along from the scientific to the practical, from an idea to its execution.

There are four basic alternatives:

  • Selling the patent, in the case of a product or service that might be able to be patented because its characteristics permit it.
  • Licensing the patent to a third party so that, while belonging to us, it can be promoted by an already existing company in the market. In this way, we can profit from our idea by receiving royalties.
  • Establishing an alliance with some other company in the sector to launch this idea to the market. The objective is to contribute to our idea, while our alliance contributes the necessary resources to carry it out.
  • Launching our project into a start-up, surrounding ourselves with an adequate team, and raising capital to establish a small company that will carry our idea forward toward the future, carrying us with it.


It is important for us to consider these alternatives after and not before writing our business plan. Why? In order to adequately choose which is the alternative of the future, we should understand very well what the possibilities are for our idea. By writing the business plan, we will understand much better the work that we have before us and this will help us to decide which alternative is most interesting to pursue.

Seventh Phase: How do I organize a team to push forward my idea?

DEFINITION OF TEAM
Starting a business is a team effort. Logically, health professionals, as the driving force of the project, should learn to lead the team, but should also be conscious of their limitations. Healthcare professionals have not received specific training in the world of business and, therefore, lack much necessary knowledge to make the idea successful. This does not mean that healthcare professionals cannot carry forward their projects.

Basically, as we will see, it means that they should be capable of surrounding themselves with people that can compensate for their lack of knowledge and to help them carry out their vision. Some characteristics of the best teams are:

  • The presence of a clear leader, normally the health professional, with responsibility to decide the function of the rest of the members of the team and to identify priorities when the company is created.
  • The fact that different professionals that join our team know well their own strengths and weaknesses, so that all complement each other in an effective manner.
  • A special emphasis on continuing improvement of the relations and of the efficiency of working together.
  • An open structure that should allow the team to change and be flexible during the first months as the company takes off, a period of time where there is a great chance that the unexpected will happen and circumstances will dictate those changes.


Eighth Phase: Who can bring capital for my idea and in what form?

RAISING CAPITAL
Creating a new start-up is an activity that requires much capital. Without a doubt, entrepreneurs will need to face the process of asking for funding at some point in their journey. The health professional should not approach the financial sources with the mentality that “all types of financial sources are worth getting money from.” The best way is to assume that at different moments within the cycle of the creation of our new company, we will need to use different types of financing. For this reason, the entrepreneur
should ask the following questions:

  • What types of financial sources exist for each stage of development?
  • In what time frame can I use these different ways of financing if I want to carry out my idea successfully?
  • How can I coordinate all those financial sources so that the final result is optimal?


Ninth Phase: How do I use the invested capital in the most effective manner?

ACQUISITION OF NECESSARY RESOURCES
Before raising capital and buying the resources we need, it is essential to structure some type of legal vehicle to create the company. When we have determined the resources that are necessary to carry out our initiative
(not only which but also at what time), we should acquire them. It must be noted here that acquiring does not mean “owning.” In general, to own a resource in a direct way and having absolute administrative control over it is a very costly form of embarking on a project and it should only be used for those resources that truly are critical and central for our idea. As we have seen, the entrepreneur should be creative. Renting or taking a loan with and the intelligent use of external subcontracting from some area of the company are habitual practices. These options minimize the substantial manner of resource needs and, therefore, the fixed costs of the project. This, of course, helps to minimize risk and to augment the potential for financial return.

Tenth Phase: How can I lead my project?

LAUNCHING THE NEW START-UP
We are ready. It is the time for us to set out to work and launch our initiative. The first days will be very chaotic given that the entrepreneur and the direct team will learn about the business at the same time that they are moving it forward. All that occurs will be happening for the first time and someone will have to make decisions. Yet we will have little economic resources and furthermore, there will be a very natural uncertainty among all the members of the team about whether or not the project is going to succeed. Some health professionals, busy in their new role as leaders of a start-up initiative, try to attract young, energetic, capable people, often with MBAs, with the desire to work. It will be important also to talk about the role of the entrepreneur at that time, to be conscious of his or her changing role as the size of the project grows. As the activity of the new company grows, the entrepreneur will likely have to delegate some of the responsibilities to the team and this will create a new role for the entrepreneur as manager of human resources, demanding the development of new personnel capabilities.

Final Phase: How can I harvest?

REAPING THE REWARDS OF THE EFFORT

If the initiative is successful, we will want to harvest the fruits of our effort at some point. The problem will be then how to pick up, distribute, and divide this value. Of course, those purely financial investors that have invested in our project will want to reap the rewards of their investment and convert their initial investment again to capital. There exist therefore, two questions that are important to define:

  • Is there some consensual mechanism from the beginning to reap the rewards of the effort and the invested money? Not all initiatives have the same alternatives to benefit from their efforts. Some may not be able to be sold and simply they should be operated to get more benefits. It is in this distribution of these benefits then where one can be rewarded for the realized effort.
  • Is it possible to plan the sale of our company to a bigger company in the sector? These options include also, in general, the options to harvest are:

 

  • Benefits from the operation of the company.
  • Sale of the company to a third party.
  • Sale of the company to the team (management buyout).
  • Initial public offering (IPO) (selling the company to the public)
  • Acquisition by a bigger company.


Furthermore, it is useful to be able to realize when the right moment comes to enjoy the fruits of our labor. On occasions, the healthcare entrepreneur decides to sell the project in some of the following circumstances:

  • When the company needs a larger quantity of money to make it to the next phase of growth.
  • Important changes in the regulation or in the circumstances of the company.
  • The slowdown of benefit potential that we might have in the future (when we perceive that we have arrived at the peak of possible benefits).
  • Changes in the economic cycle.


It is important to highlight that it is in our best interest to correspond with all the investors, groups, and employees to allow them to harvest also from the generated value. If in the future we want to launch some other project, we should be assured that they have left the current project happy and satisfied. Although the moment of harvesting what we have sown is at times a bitter experience for many entrepreneurs that consider their project their child, we should remain conscious that it represents a long drawn out effort that lifts our company and creates value. It is, without a doubt, the end of a very satisfying experience.

 

innovation-and-entrepreneurship-in-the-healthcare-sector-from-idea-to-funding-to-launch_grande
Excerpted from: Innovation and Entrepreneurship in the Healthcare Sector: From Idea to Funding to Launch by Luis G. Pareras, MD.

 

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