“How can you tell if an orthopedic startup will be successful?”
People ask me this question because I am a recruiter who works for orthopedic startups. A reasonable question, but not easy to answer because every startup is different.
However, some startups are set up for success. I believe that you can largely predict the future success of an orthopedic startup by evaluating these five areas.
1. Executive Team
Can the management team survive major obstacles and continue to move forward?
All startups hit big walls. Typical challenges are: missed the market need, ran out of cash, pricing/cost issues, product issues, ill-conceived business models, products mis-timed, pivot went bad, failure to pivot, faulty business assumptions, poor execution during commercialization, or simply got outcompeted. Startups need strong leaders (not managers) to get past these huge challenges. Leaders will prevail largely because they bring on people who will kill for them to get past these hurdles. Smart leaders give the employees equity (stock options) and ultimately build a team of evangelists, not employees. VCs admit that they “bet” on the management team first. You should too.
2. Defendable Position
Does the startup have a market position that will be defendable for 10 years?
Whatever a startup’s secret sauce is, it must have longevity. The secret sauce can vary – a defendable technology, or a big regulatory barrier, or speed (they can just outrun the competition with innovation speed). Many startups have great ideas but quickly get outrun by a copying competitor. Is the startup’s unique market position sustainable or will it flame out?
3. Fuel Tank
Does the startup have a financing runway for at least 3 years?
A funding runway of fewer than 3 years is not enough to make strategic longterm plans, investments, sign contracts, etc. If a startup is continually “kicking the can down the road”, it will not be able to focus on the destination. Is there a “real” plan for three years of committed funding?
4. Regulatory Simplicity
Does the startup focus on class II products?
I believe that the class II pathway is the best way to success. When you read the list of acquisitions in orthopedics, you will see the majority of acquired startups focus on class II products.
There is nothing inherently wrong with the other pathways – class III, class II with clinicals, PMA/IDE, DeNovo, HDE pathways – but these pathways chew up precious time and capital. These complex pathways can paralyze a startup. And, most investors do not have the stamina for a $100M spend over 8-10 years. The more money invested, the more difficult the exit. The more time for an exit event, the greater the chance of the business climate changing or the FDA requirements changing.
Are all of the stakeholders’ goals in alignment? the board, investors, management, and employees?
All stakeholders MUST have the same ultimate goal in mind. The single goal could be – an early exit, or reaching profitability by a certain date, or staying in the red to accelerate the sales trajectory at any cost, etc. I have seen many promising startups that do everything right only to succumb to internal goal conflicts that bring the company down.
For best alignment, all stakeholders should have the same type of equity. Alignment can be compromised if some board members have preferred terms. Only when all of the startup’s stakeholders have the same type of ownership, is everyone automatically motivated to achieve the same result – the maximization of the value of those shares.
Nobody wants to work in a startup that is not going to be successful.