Should You Jump Into a Startup? Ten Questions to Answer Before You Do
Are you itching to join a startup? Before you do, ask yourself these ten questions to give yourself a greater probability of success - personally and professionally. In this episode Pat Kothe explains what a startup is, the risks that need to be mitigated along the way to becoming a company, and ten questions every aspiring entrepreneur needs to answer for themselves before jumping into a startup.
Mastering Medical Device:
Episode Transcript
This transcript was generated using an automated transcription service and is minimally edited. Please forgive the mistakes contained within it.
Patrick Kothe 00:31
Welcome. Do you remember the first time you heard about an entrepreneur who started a medical device company, and then sold it and made millions of dollars? Boy, that that was somebody that you really wanted to emulate, I'd like to be that person, be my own boss, make millions of dollars and provide a great new medical technology. Well, startups are a little bit different than that not everyone is successful. Not everyone makes millions of dollars. And the risks associated with a startup are pretty significant. So in today's episode, what I wanted to do was to expose you to a little bit more about what a startup actually is, what the risks are. And then if you are thinking about making a jump into a startup, what questions do you need to ask? First, let's define what a startup is. Because there's a lot of different ideas on what a startup is. Some people believe that a startup is a young company founded to develop a unique product or service and bring it to the market and make it irresistible and irreplaceable. for customers. One of the most popular definitions is from Eric Reis, the creator of the Lean Startup methodology, and he defines it as a startup as a human institution designed to create a new product or service under conditions of extreme uncertainty. A third definition, and one that I really like, is from Steve Blank, and Steve is the author of the startup owners manual. And Steve defines it as a startup is a temporary organization designed to look for a business model that is repeatable and scalable. While a company is a permanent organization designed to execute a business model that is repeatable and scalable. So again, the startup is searching for that business model. And the company already knows what that is. And they're executing on that. And I think it's a really interesting definition, especially within the medical device field, because at what point does that threshold become crossed. As medical device professionals, we generally no product development, we know how to manage projects, we know how to take products through the regulatory cycle, we know how to utilize our quality systems to assure that we've got good quality product coming out at the tail end of a development project. And we know how to get clinical studies done to be able to prove that a device is safe and effective. What we often don't think about is we don't think about that last portion of what Steve Blank talked about. And that's business model. Look for a business model that's repeatable and scalable, we can have the best product. But if we don't have a business model that supports the use of that product within a particular marketplace, we don't have a business or we don't have a product that is sustainable within a company. So those are the some of the things that I think we really need to understand when we're talking about startup companies is do we not only have product, but do we have a business model that's repeatable and scalable. So the next couple of minutes, I want to talk about the risks associated with a startup company and the risks associated with developing a product for a particular marketplace. Because it's really helps to understand from an investor standpoint, and from a development of a company standpoint, where we need to have focus on mitigating risks. And then as you as a person who may be joining company, Where exactly are you within that, that risk mitigation process as you are finding your way to that repeatable and scalable business model? So really, you know, how long does How long is a company a startup? Well, it really depends on what type of product you have. In general, people say, well, it's, you know, three to five years, you're a startup and then you crossover. But if you have a long development cycle and long clinical cycle and long reimbursement cycle, it really depends on how fast you can get through those things. Your startup may be seven, eight years in the medical device space. Whereas if you're if you've got a software product or something in a non regulated market, that startup phase could be much quicker, much quicker than that. So we're a little bit unique in the medical device space. But when someone says, Hey, I'm going to join a startup, well, you need to understand exactly where you are within that startup phase to say, I might truly in a startup, or am I in a developing Stage Company. So let's talk a little bit about the risks that need to be mitigated during the startup phase. So when you have a company, and you are, you've got an idea for a company, there's a lot of risks that need to be mitigated prior to you getting in crossing that threshold from a startup into a company, there is design risk, you've got an idea for a product, you've gone Done, done all of your, your customer discovery, and now you've, you've decided what the product needs to look like, well, there is a lot of risk associated with Can I design a product? Can I make it meet all of the expectations of the marketplace, as well as the expectations of being able to manufacture it being able to do it for the price that I need to get it into the marketplace? So there's design risk, can it actually be designed? Then there's the clinical risk? Does it work? And so and that will be defined by your clinical trials? and defining out your what your endpoints are for safety? And for efficacy, then you've got the regulatory risk? Well, what is the regulatory pathway? And can I get it through the different bodies in order to launch that product into the marketplace? So there is regulatory risk that needs to be overcome as well. Then the other big one here is reimbursement what is the reimbursement situation with your particular product? How long is it going to take to get reimbursement? And how much am I going to get reimbursed for this product? Because reimbursement will control how rapidly or if your product is even going to get adopted? So there's big risk in in in the reimbursement side? Then you've got intellectual property risk? Can you have protection for that product? And what type of protection? Are there other patents out there that you would need to be aware of? And if you do patent your product? Or protected with trade secrets? How protectable Is it for the for the long term? Then you've got manufacturing risk, you know, how is your product could be manufacturer, is that easy to manufacture? Or is it hard to manufacture? What's the cost implications of the manufacturing processes that need to be put in place for your for your product? Then there's another big one resources, you know, what resource risks do you have? Are you able to draw the people in to execute on a plan? That's probably the biggest one of all is, is do you have the talent to pull this off? And then on the resource side is money, how much money are you going to need? And are you able to access that money and keep that money flowing in order to execute on your plan, and that's a big one, there's early dollars that are needed, typically coming in from friends and family. And then there's either angels that are coming in, or VCs that are coming in, and you have to be able to have that money, continue to flow in order to maintain the traction that you're you've established and product development, and also, to maintain your team to be able to execute on your plan. And then once you execute on all of these aforementioned things, well, then you're going to bring it out to the marketplace. So what is the business model to be able to execute your product and being able to offer, you may have a really great device. But the pricing maybe off the reimbursement may be off, you may have thought that your product is good is geared towards physicians, and a physician preference item. But you may have contracts that get in the way you may have gatekeepers, they're going to keep you out of the out of the marketplace, your product may have seemed like it was going to be geared towards one type of customer and when you actually get through your clinical trials, it's actually geared towards a another type of customer which which may create a different business model. So that is the market risk and the business model risk, who you're actually going to be selling it to who the who the participants are in that purchase decision, and how they affect how you're going to ultimately sell your product and be successful with your product. So these are all risks throughout this startup. phase that you really need need to be be aware of. Because if you are going to make the jump into a startup, you need to understand where you are with each of these phases to be able to make a good informed decision. The reason why I wanted to start off with a definition of a startup, and then the risks associated with a startup is I think it's really important to understand exactly where you are today. So if you're working in a large company, this may be news to you, if you're working in a startup or a small company, it may or may not be news to you. But I wanted to start us off all on the same same foot. So when you think about where you are, as a company, if you are, prior to having everything nailed down in terms of repeatable and scalable business model, you're still in the startup phase, if you're a small company, and you already know and have a scalable model while you're in a small company. And if you're in a large company, and large multinational company, well, you're in a large multinational company. And a lot of these things may be things that need to be mitigated on an individual product, but not you as a company. We've looked at the startup from a company and opportunity perspective. But now let's transition over to an individual's perspective, and what questions you need to ask of the company that you're going to be joining, or of yourself more importantly, when you're presented with a startup opportunity? So here's 10, things that I think that you really need to understand and answer before you make that jump. Probably the most important to number one is, why am I doing this? Why am I considering jumping into a startup? What is my motivation for doing it? Very often, what I see is people are running away from something not running towards something. So I don't like what's going on in my current company. I don't like the situation that I've got. So I'm going to look for refuge somewhere else. And if that's the motivation, that's wrong, that's bad, you have to understand that I am running towards something that is a great opportunity, versus I'm running away from something. And that's something that you're going to have to be honest with yourself about, what is the real motivation for me doing this? And then the second thing is, am I prepared to do this? Have I prepared myself to do this? And we're not only talking about the skills that you're bringing in to this opportunity, but overall, within your life? Are you prepared to do this? Because startups are a different breed? There are a number of financial questions that you need to ask yourself. And what I mean by that is, are you in position financially, to go into an uncertain situation? So how much cash reserves do you have? Have you talked about this? And has your spouse or partner committed that they want to do this as well? Extremely important consideration? How long are you prepared to go without income? Depending on where you are with that startup, if you're in a very early napkin stage, and don't have any funding? Well, you may be going out without income for a while. Or if you run out of money, you may be going without income for a while. How important are our benefits to you? probably not going to have that 401k anymore? What about medical insurance? Can your spouse pick that up? Do you have to go to outside and buy it yourself? benefits are very, very light and startups as well. So there's a whole bunch of financial considerations. You need to understand how deep you're willing to dig into your savings in order to support this decision to move into the startup world. There's other things that you need to know about yourself, too. Are you a generalist? Or are you really specific in your skills, because in a startup, you're going to be asked to do a lot of different things, not just your own functional area. But you need to understand what other people are doing. And you're going to need to pick up some functions that you're not necessarily trained to do. So how much of a generalist are you? Are you prepared for the pace you may be used to, to going at one pace in your current job, but things change drastically in startups. And sometimes it's it's a very fast pace, and you need to be able to change directions very quickly is that in your personality? Is that something that that you're you're prepared to do? Do you have the energy and passion to sustain it? And how hard Are you willing to work? A lot of people have a called fake passion. And you know, they talk a good game. But when it really comes down to it, are you really prepared to do? What's needed to be done? Do you really have the energy? That's something that you have to look inside yourself? and be honest with yourself and say, am I really prepared to do this? Do I have? Do I have the energy in order order to do it? And then there's a lot of uncertainty in that, within startups and some wild swings, sometimes you're wildly successful and happy. And sometimes you think the world is falling apart? Well, do you know your personality well enough to know that you can level this out? And you're not going to take it out on the people around you? So are you willing and able to deal with the uncertainty and wild wild swings? And also, can you manage yourself? Not only, you know, on the emotional side, but no one's telling you what to do? No one is, is giving you the goals and objectives. It's your it's up to you in order to do those things. It's all up to you in order to make sure that you are doing everything possible to move your startup forward. So can you manage yourself really kind of boils down to Sean Connery when he was Jim Malone in the movie untouchables when he said, What are you prepared to do? And he said that two times within within the movie, what are you prepared to do? And that's really what you have to look, look at when you're evaluating yourself and joining a startup. What are you prepared to do in order to assure success within that company? So now we've kind of looked at ourselves internally. So now let's look at the external. So the next eight things really have to do with the opportunity? So the first thing is your, you're going to be joining a small team? How well do you know that team? That's number three? How well do you know that team? Because one of the key attributes in successful companies is the team. It is one of the most critical, how well does the team get along. And that doesn't mean that everyone is, is getting along? Great all the time, you need to be honest with your communications. And friction is generally a good thing. That's how things things happen. But can you work together as a team to achieve the goal? Do you like the people that you're going to be working with the respect those people because those people are going to be key to your success, and your happiness in a very stressful time? So you really need to understand, are these people that I respect are these people that I can work with, that are going to help and are competent in order to achieve the objective? The fourth thing is, have you done the homework? Have you truly done it? Look at yourself and say, Have I done the homework on the market? on the device on the problem? And I've also looked at startup success rates? It's not 100%, believe me, it is not 100% that all startups are successful. So are you realistic with yourself on the market, the device the opportunity, because a lot of times people hear what they want to hear, and you hear a great idea. But then you are not the skeptic, you have to be the skeptic and look at the market, the device, the success rate, and then say, Okay, I accept the risks associated with each one of these things. I'm knowledgeable about them. And now I accept that risk. The next thing number five, is what stage is the startup in. And we kind of discussed that a little bit about where you are with mitigating a lot of these risks. But that true, you truly need to understand all of these risks in order to say, okay, I've checked that one off, I've checked that one off, I've checked that one off. And I am now in this stage, because you need to understand what the next stages that are coming. Because as you're evaluating the opportunity, you're also going to be evaluating the risks. You need to understand what risks are behind you, and which ones are still in front of you. Because that will affect the probability of success of that organization. So where are you? Have you passed design? Do you know what reimbursement plan is? Have you passed your FDA? Have you gotten through the key key clinical milestones? Each one of those things are important for you to understand. You also need understand what's coming, how soon it's coming? And then what are the milestones that you need to put in place in order to get to the next funding cycle? Number six, what funding exists? What's your cash burn? And how much runway is they're very critical in your decision. So what funding exists means is it not only how much money is in the bank? But where's that funding coming from? It wasn't from angels, was it from friends and family? Because if it was, you're also looking at what's the ease of getting to the next level of funding. If you're funded by a VC and the VCs in your deal, they may say, okay, we want to put X amount of dollars in at this stage, once you pass that milestone, we've got X amount more to fund the next stage. So you've already lined up what your financing is, what a lot of startups end up doing is you end up with angel investment early on, and then you have to switch to a new new pool of investors. Now you're getting into the venture capitalists. And when you switch to that new pool, you no longer have the same funding sources. Now you have to you have to develop new funding sources, which takes time. So where those funding sources are, who those funding sources are, is an important question. So what funding exists, what's the cash burn, you know, how much is being is being spent every month Where's is being spent? Is is being spent on clinical trials at this point? Is it people personnel? How is it being spent? And then how much runway do you have? How many months? Do you have have cash in the bank before you need to bring in more funding? The seventh point is, is there a go no go endpoint? And when would it occur? So for example, if you are running a clinical trial, and at the end of that clinical trial, you're going to know whether you've got efficacy of your device, well, that's a really strong endpoint, because you may be shutting the company down at that point. Or you may be going into redesign at that point. And then knowing that you're going to have to go and repeat everything that you've done, and then you're going to need new funding in order to do that. Well, those are some really important questions that you need to understand. What is the next go no go point? And how many of those go No, go? points do you have? Because it may be reimbursement. If you don't have reimbursement for your product, you probably don't have a market for it. So how do you get to that next go? No, go point and identify what it is. and identify the probability of success of that go no go point. Then number eight, what happens if it all falls apart? We know that not every startup is successful, assuming that it's not successful, where are you in your career? what it what would your next step be? Is it to go back to a big company? Is it now go to another smaller company? Is it in a startup? What is your next step? When you accept a position, you should be looking two positions down? It's not the position that you're going for? It's the one after that. So as you're looking at this opportunity, also understand what happens if this doesn't work? What is my next step after that? Because it may not work, and you need to be prepared for it to On the flip side, number nine, what does winning look like? Can you articulate what a success means to you personally? Yes, success to the company. But what is success to you personally mean? Is it a financial windfall? Is it positioning your career in a different way? Is it getting set up to take your own startup out? What does success look like to you? What does winning look like to you? And then finally, number 10? Do you truly know the upside of the opportunity? If you don't know the true upside, you can't evaluate whether it's a good opportunity or not. So if you're saying it needs to be a million dollar payoff, or it needs to be a $5 million payoff, or it needs to be a $500,000 payoff, or it needs to take my career in a different direction. That is the upside that you need to define for yourself. What is it? And it's really important that you understand this, because in many instances, people don't understand what the economics are. Have someone joining a startup. For example, if you look at a CEO of a startup, and you go through the different funding phases of the startup, that CEO may own 70% of the company at the outset. And then you go through all of the funding cycles associated with that. And when it all boils down to it, that CEOs ownership position of the company is under 5%. And that's a CEO. So if the company has achieved a milestone sins is sold for $400 million. Okay, great. That's fantastic. But on the other side, if you're a sales rep, and you're joining a startup, and there's already 25 $30 million into the company, and you get your 10,000 shares of stock, well, the upside of the head is not going to be very big. So you need to understand not only how many shares you're going to get, but you also need to understand the ownership percentage, and the amount of investment that's going to be needed in order to bring that product to the marketplace, and to continue to sell that product in the marketplace. Because each new dollar that comes into that company, each new dollar investment that comes into that company is diluting your shares, and diluting the percentage of ownership that you've got in that company. Now, if all things go well, and the company continues to grow, and valuation continues to grow, hey, that's a fantastic thing. But if it doesn't grow as fast as you want, there are many, many examples of people that are put years into a startup company and when all boils down to it, their shares are not valuable to them. So they've, they've provided a lot of value to the investors, but they may not have provided the amount of value to themselves that they thought of at the beginning. So understanding the valuation game, understanding the startup game, understanding the percentage of ownership, and what winning really means to you, and what the true upside is not the imagined or hope for opportunity is an upside is. If you truly understand those things and are realistic, you can make a more informed decision in whether you should join this startup or not. So these are 10 questions, I believe, you need to ask yourself before you jump into a startup, it really boils down to better understanding yourself, your motivations, your capabilities, your pocketbook, and then really analyzing the startup market, and a particular opportunity, and where that where that opportunity is in its lifecycle, and what the risks are, and what the payoff is. If you can understand these things, then you can make an informed decision. Whether it's best for you to jump into the into this startup or not. Our careers are something to be managed, and the only way to manage is to understand. Thank you for listening. Make sure you get episodes downloaded to your device automatically by liking or subscribing to the mastering medical device, podcast and Apple podcasts, Spotify, or wherever you get your podcasts. Also, please spread the word and tell a friend or two to listen to the mastering medical device podcast. As interviews like today's can help you become a more effective medical device leader. Work hard. Be kind
