I interviewed with Danek back in 1990 when there were only a handfull of employees. To be honest, it scared me. A “risky” sounding startup in the “risky” new spine area. I was naive.
We all sat back and watched Danek dominate world spine after a series of great moves – a merger with Sofamor, an investment in the INFUSE molecule, an IPO and acquisition by Medtronic. Danek stands today as one of the greatest startups in the history of orthopedics. Danek made many careers and created many millionaires.
It was clear that I had missed the boat. After I gained more experience and learned about startups, I wanted to find another Danek. Then, I found one. I found the perfect startup in Ellipse Technologies. I got there as fast as I could, sold everything and moved to California.
Today, working as a recruiter for small orthopedic companies, people ask me, “How can I tell if a startup will be successful ?” A reasonable question, but not easy to answer. So let me try to answer. Here is my opinion on what to look for in an startup before you join as an either an employee, a supplier or consultant. There is no guarantee that any startup will be successful, but many are set up to win. Ask these 5 questions.
1. Management Team – Can the management team weather major issues and survive?
This question should really be question one two and three. All startups hit big walls. Startups need leaders not managers/bosses. Startup challenges may include: missed the market need, ran out of cash, got outcompeted, pricing/cost issues, product issues, ill-conceived business models, products mis-timed, pivot gone bad, failure to pivot, faulty business assumptions, poor execution during commercialization, etc. Leaders will prevail as they bring on people who will kill for them to get past these hurdles. Smart leaders give the employees equity (stock options) and they build a team of evangelists, not employees.
VCs say that they “bet” on the management team first. You should too. Did you know Danek nearly went bust twice? Once a fire burned down the factory and once a massive class action lawsuit erupted after an pedicle screw exposé on 20/20. The early leaders, Ronnie Pickard and others, prevailed.
2. Defendable Market Position –Does the startup have a market position that will be defensible in 10 years?
A startup’s secret sauce must have some longevity. The secret sauce can be a many things – a defendable technology, or a big regulatory barrier, or maybe they can just outrun the competition with innovation speed. Many startups flame out as the competition catches them or copies them. And there is no happy exit, because no acquirer is interested in a temporary market advantage.
3. Funding plan – Does the startup have a realistic financing runway for at least 3 years?
A funding runway of less 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”, they will not be able to focus on their destination.
4. Regulatory path – Does the startup focus on class II products?
The class II pathway is the best way to success. There is nothing inherently wrong with a class III, or class II with clinicals, or DeNovo or an HDE pathways, but these pathways chew up precious time and capital. These more complex pathways can paralyze a startup. Most investors do not have the funding stamina for a $100M spend over 8-10 years. The more money in, the more difficult the exit. The more time, the greater chance of the business climate changing or the FDA requirements changing.
5. Alignment – Are the shareholders goals in alignment – the Board, investors, management, and employees?
This can be a hard one to figure out initially. All shareholders MUST have the same ultimate goal in mind. The alignment goal could be many things – early sale, or reaching profitability by a certain date, or staying in the red to accelerate the sales trajectory at any cost, or IPO, etc. Often promising startups that do everything right will have internal goal conflicts that will bring the company down.