Innovation in healthcare is at an inflection point. With the rise and adoption of digital health, novel patient engagement models, new medicines, AI-driven solutions across the value chain; patients, healthcare practitioners and all industry stakeholders alike are embracing this transformative new normal. Unprecedented capital investment is fueling a growing ecosystem of healthcare startups globally trying to bring these innovations to market. For startups, partnering with established corporations can be a growth booster, assisting with accessing client channels at scale and navigating the complex regulatory landscape. On the other side, large corporations differentiate their portfolio securing access into transformative innovations going to market – it is the perfect match for success for both parties. However, the critical part is finding the right partner among the thousands of promising healthcare startups and hundreds of corporate innovation centers.
Last year, 2021, was a record period of capital deployment in healthcare startups: over $100 billion was invested globally– an increase of 21% year-over-year according to CB Insights, with $39.6 billion of that on digital health alone. While 2022 capital deployment and deal trends have been adjusted, the healthcare innovation market continues to grow strong.
Healthcare and life sciences corporations deploy capital and engage systematically with startups through dedicated functions, called corporate innovation hubs or corporate VCs. These hubs also offer the operating structures and experienced mentorship to help entrepreneurs build the next innovative solution to solve the next healthcare challenge. Yes, it’s true that innovation hubs have been around for decades. Yet now is the tipping point in the industry that these functions are coming of age.
As an example, most of life sciences firms – 18 of the top 20 – have established innovation hubs or centers that operate as corporate VCs, incubators, and accelerators. The centers are strategically located around the globe, where innovation is growing rapidly such as in Israel, the U.S., Germany, Singapore and beyond. Innovation hub and startup engagement models can take one of a few flavors with equity investments, commercial partnerships and accelerator programs covering most of the cases. Partnerships are symbiotic. Like the union of marriage they are paramount to a startup’s long-term success, as the established firms contribute funding, sweat equity and sales channels while in return they benefit from access to world-class forward-thinking solutions that solve for patient unmet needs that could transform healthcare.
Finding the appropriate business chemistry
When startups and corporate firms are looking to partner, the closest analogy to use is dating. Upon first meeting, each party is looking to impress the other one by highlighting the best of what they bring on the table, like a first date where enthusiasm is the driving force in securing the second date. Startups typically highlight the uniqueness of their solution and the market potential. Corporate innovation hubs bring their established brand, access to clients, assets, expertise and plenty more. It is a delicate dance of information unravelling, where some is being shared under mutual confidentiality agreements and much is not.
Companies – on both sides of the equation – have admittedly different appetites for risk. For instance, a startup could have a disruptive idea without a clear path to market making it a much riskier partner than one that has a solid business model in place. To manage corporate risk aversion, startups could first secure some market validation and look for corporate partners to scale once they have their first proof-points. This is an effective evidence-based strategy.
As dating continues, there are critical elements in the evaluation process where alignment should be achieved around the innovation factor, the product-market fit, the market potential, the viability of the business model – it becomes the 1+1=3 rule. On the basis that the above are aligned, then comes the business chemistry between the leadership of the two firms. Sometimes that comes first. It is not about pre-existing connections between a startup leadership and a corporation but rather it is about similar styles in growing a business and managing risk. The risks are high, especially for early-stage companies, therefore fostering trust through similar business styles between the two parties becomes a critical factor of safe, trusted collaboration navigating unforeseen challenges together.
Getting the fundamentals right
Speaking the same language is not to be taken for granted. Large corporations have their established semantics around industry vocabulary and startups often use the same value propositions across prospective partners/investors. What an “AI-based digital platform that increases quality of real-world evidence” means to a leading industry player means something different to a top pharma and/or VC investor.
Articulating the value proposition succinctly for a prospective corporate investor/strategic partner is often problematic. Often the value proposition would claim: “This is the only biomarker that measures X endpoint, the first of its kind” or “this AI digital platform is the only that integrates and extracts value from any real-world data, being source agnostic, modality agnostic, device agnostic and user agnostic.” Statements of this nature are – if not dealbreakers – often time wasters for corporate giants. Similar solutions often exist behind the walls of large corporations and the dialogue then becomes troublesome, more focused on the potential overlap, than the complementarity. In successful scenarios, startups CEOs are clear, focused and well prepared. They don’t claim too much, and they also contextualize their company’s solution in the context of the partner’s portfolio and ecosystem of assets.
Startups that accompany their market sizing analysis with a preliminary go-to-market strategy have higher chances of securing the right partner or investor faster. This critical piece is often overlooked or inflated in pitch decks. Large corporations, with tremendous knowledge of the market – will pressure test who the target customer is, how to reach them and will look for a solid sense of business viability. While these plans can be further built out as the partnership develops, there is a need for groundwork before a partnership starts.
Match often not made in heaven
With tens of thousands of promising healthcare startups and a few hundred of corporate innovation hubs, how does one get the right match? It is based on various dynamics. Corporate partners often participate enthusiastically on the cap table of transformative startups, as strategic investors, with the promise to hold their hand in their market entry; in many cases this doesn’t come to fruition and scale up is not achieved. In other cases, promising startups, despite support by large corporations’ access to clients, fail to pick up the pace in client adoption, market conditioning and differentiation from the competition; as a result, they miss the business case. In both cases, the match didn’t quite work.
For entrepreneurs, while there are established routes and processes to raise capital, there are no proven routes to realizing the business case and this continues to be a challenge. Pioneering startups, despite the novelty of their solution are more often hit with several roadblocks: the non-viability of the original business model and the need to pivot; the need to evolve their value proposition to resonate with clients; the risk-aversion of prospective clients adopting a forward thinking untested solution; and even in the cases that the first clients are signed up, repeatability of a client solution and annual recurring revenues (ARR) are easier in theory than practice. Contracting and MSAs with large organizations are thrown in the challenges mix.
For large corporations who have conquered the challenges that startups face, they have knowledge of being the experienced partner in the relationship. They have the capital, the industry knowledge and strategic partnerships that bolster startups through several of their roadblocks. Yet, corporations cannot just enter a partnership without fully evaluating the startup, as nine out of ten may not make it to market. Solid research to understand the unique value of the novel solution, the business plan and capital must be done in detail. The partnership is a marriage where each party must evaluate the other before deciding to spend significant time together over the course of several years.
For those startups who wish to go it alone, they will be at a disadvantage. In fact, very few choose to go this route as partnering with an established firm only speeds the time to market or adoption. Pharma partners bring streamlined processes to the trial phase, especially for startups in the therapeutics space, and assist with the clinical trial process.
Partnering achieves greater success for both parties
Established corporate innovation hubs can offer valuable paths to scaling a startup: introductions to client channels, as well as opportunity to access proprietary technologies, data and business frameworks. When deploying capital, this is often accompanied by offering supporting functions to accelerate the startup’s go-to-market, sales enablement, product and business development.
Startups offer an entrepreneurial fresh perspective, novel solutions, fast pace and disruptive approaches to the market’s unmet needs. They are a source of innovation that large corporations need to stay ahead of the curve. It is a marriage of two different parties coming together, of different size, pace, and culture.
Meeting patient unmet needs and solving for healthcare most complex challenges is now more promising than ever before, especially as larger corporations join forces with startups to bring the next generation of medicines and transformative solutions to market, providing better solutions and outcomes for patients. As in life, the key to success is finding the right partner where each party can grow and benefit from each other, making the sum greater than the individual firms.
Photo: metamorworks, Getty Images