Why Healthcare Startups Fail
“You got to know when to hold’em, know when to fold’em. Know when to walk away and know when to run.”
Most startups fail. It's the nature of entrepreneurship, and the healthcare industry is no exception. While egregious failures— like Done, uBiome, and of course Theranos— get outsized media attention… Very few failures in our space are actually rooted in fraud or intentional deception.
The difficulty of building in healthcare, combined with bad timing and bad luck, can lead to solutions that simply don't succeed, even when it comes from the best of intentions.
Startups are built upon dozens, if not hundreds, of assumptions about how the future will unfold. Founders assume a product will work as envisioned, that acquiring customers will be economically feasible, that somebody will pay for the product or service, that competitors will respond in a certain way, that the regulatory environment will remain favorable, that investors will fund them, and the list goes on and on. When a startup fails, it’s generally because one of the core assumptions did not pan out.
In my experience, I've seen several common reasons why these assumptions prove to be incorrect, leading to the failure of the startup. These include:
The payor problem
The adoption hurdle
The regulatory minefield
The healthcare mafia
The burn rate burnout
Let’s dive in.
First and foremost: the payor problem
Time and time again, I see startups with great products struggle to secure sustainable revenue simply because the patient is the user but not the customer. And payors (e.g. insurance companies, employers, or the government) often have different, competing priorities. Even if a product is clinically valuable, even if patients love the product, if payors don't see a clear value proposition or return on investment within their necessary time horizon, they simply won’t cover it. Take for example Pear Therapeutics, which struggled to convince payors to reimburse for its digital therapeutics, despite strong clinical evidence (Founder Corey McCann shared this in a LinkedIn post).
I see payor problems stemming from four systemic factors that make innovation more difficult in healthcare, including:
The free rider problem: When multiple parties benefit from an innovation, but no one wants to be the first to foot the bill.
Switchover disruptions: The temporary drop in productivity and potential chaos that occurs when adopting a new technology.
The time-horizon problem: The disconnect between who pays for a solution and who benefits from it, especially when people stay on health plans for just a few years.
The patchwork payer problem: The difficulty of coordinating and aligning incentives for population-wide initiatives when there are numerous fragmented payers.
The adoption hurdle
Usually, a startup’s biggest threat isn't a direct competitor, or even the incumbents. It's the inertia of 'how things have always been done'. Change can be scary, especially when it feels like a threat to our livelihoods. Employees are usually inclined to favor the familiar, and new technologies or processes can be perceived as a disruption to their flow— or worse, their replacement.
Image via California Nurses Association
Many founders assume their product will convince stakeholders to change their current workflow. In reality, healthcare professionals and patients are often hesitant to adopt new solutions, particularly if they disrupt established processes or require behavior change. Startups that fail to anticipate and address these barriers to adoption often struggle to gain traction, even if their product is technically awesome.
I always think about the tale of when the first ATM appeared in London in the 60s. Apparently, fearing the "robot cashiers" would cost them their jobs, some bank tellers decided to fight back. They snuck out and covered the ATMs in honey, hoping to gum up the machines and save their jobs.
The honey-covered ATMs highlight a theme that’s not unique to healthcare— the human resistance to change. That is the biggest competitor.
In most of healthcare, there’s a resistance to change at every level. The medical field operates under the principle of "First, do no harm." Providers have a duty to protect patients, which naturally breeds a culture of caution when it comes to adopting unproven solutions. This culture means it takes a while to gain widespread trust and acceptance. This safeguards patients but can create a high bar for entry that slows the pace of change.
New solutions don’t just need to be better than the alternatives; they must be so compelling that it convinces providers, administrators, and patients to ditch their familiar routines. This is where innovators must get creative not only in solving the problem but also in change management and behavior design.
The regulatory minefield
It is no secret that the healthcare industry is heavily regulated, with a combination of federal and state laws governing everything from data privacy to employment laws to medical device approvals. Startups that fail to anticipate and navigate these regulatory hurdles can find themselves facing significant delays and costs, or even being shut down entirely.
In some cases, the necessary regulatory pathway or classification for a new product may not yet exist, requiring startups to work with regulators to create a new framework, a process that can take years and significant resources.
In other cases, it comes down to changes in the law. For example, Home Hero shut down after The Department of Labor upheld a federal ruling stating that home care workers would qualify for the Fair Labor Standards Act, meaning they would have to switch from the 1099 independent contractor model to W-2 employees entitled to overtime pay and other benefits.
As the company's founder, Kyle Hill, wrote in a post-mortem, "We underestimated the timing, effects and intensity of state and federal regulatory changes in home care. The only thing worse than losing a fight is being told you can't even compete anymore." The shift to a W-2 model eroded Home Hero's competitive advantages and made it difficult for the company to differentiate itself from traditional home care agencies.
The healthcare mafia
The healthcare industry is dominated by a powerful group of entrenched players, who have built profitable businesses within the current system and are often completely uninterested in changing, even if change could lead to better outcomes for patients or lower costs for the healthcare system as a whole.
Startups often assume that if they can demonstrate a better way of doing things, they will succeed despite the power of the incumbents. But the reality is that these incumbents have a vested interest in maintaining their power and profitability. They may view innovative startups as a threat to their business models or revenue streams and use their considerable influence to block or slow down change.
In some cases, their market power and inefficiences can create opportunities for startups to disrupt the market. Take for example, Mark Cuban's Cost Plus Drugs which recognized that the opaque pricing and complex supply chain in prescription drugs were driving up costs for consumers. By building a transparent virtual pharmacy that offers generic drugs at cost plus a fixed 15% margin, Cost Plus Drugs has quickly become a favorite for patients looking for significant savings on their medications.
However, in other cases, startups may underestimate the power and influence of the healthcare mafia to block or slow down change. Haven, the high-profile joint venture formed by Amazon, Berkshire Hathaway, and JPMorgan Chase to bring down healthcare costs shut down just three years after its founding. Despite the influence and backing of three major institutions, Haven ultimately failed to achieve its ambitious goals. Ultimately, they couldn’t overcome the perverse incentives of the U.S. healthcare system.
The burn rate burnout
Most of the time, startups simply run out of money. They fail to raise (enough) funding, or they burn through their cash too quickly in an industry where results take time. Less than half of tech companies that raise funding ever raise a second round, meaning their first round of financing— usually led by angel investors— is all the money they ever get to build their business.
To make things worse, some groups (people of color, women) have historically been left out of traditional funding networks, making it even harder for them to secure the capital they need to fuel their startups. This lack of access to funding can create a vicious cycle, where underrepresented founders struggle to gain traction, which in turn makes it harder for them to attract investors in the future.
While it’s not easy to raise money for a business, sometimes it’s actually easier to do so when it’s just an idea than after the startup has launched. Once a founder has raised some money, if they haven’t accomplished much with that initial investment, then later investors are less interested. While in the beginning it’s about Founder-Market Fit (FMF) and if the team is the right one to lead the business… After that, it shifts to become about Product-Market Fit (PMF) and if the company has proven market demand for their product or service. This leads to a lot of very impressive professionals raising seed rounds, but not being able to raise subsequent rounds.
Even the most promising idea needs a long enough runway to iterate, find product-market fit, and ultimately secure sustainable revenue. And getting that runway from external investors often means navigating a high-pressure game of its own, with risks and potential pitfalls that come with the territory.
Our community should embrace a culture of learning from mistakes
While a failed startup is a disappointing experience for everyone involved, our industry can learn invaluable lessons from these ventures. Truth be told, we don't hear enough from the founders who have shut down their companies. I’d love to see more post-mortems where founders share their lessons, and what they would do differently.
Ultimately, building a successful healthcare startup is a Herculean feat requiring skill, experience, connections, and also some serendipity. For those who are up to the challenge, the rewards could not be higher. Not just in terms of financial success, but in making healthcare massively better for all.
So to the healthcare founders out there, I say this: thank you for trying. Keep learning from your and other’s failures, and don’t forget to celebrate your successes along the way. The road may be long and the odds against you, but the potential impact of your work is too important to ignore.
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