Creation of a Start-Up: The Idea and the Evaluation of the Opportunity

Every entrepreneurial initiative begins with an idea. But is it a good idea? Before acting on an idea, entrepreneurs should thoroughly evaluate the opportunity.

Differentiate Opportunity From Idea

From the beginning, entrepreneurs must understand (1) the dimensions of the opportunity and whether this opportunity is attractive; (2) the return on investment in both time and money, and the magnitude of the effort necessary develop this opportunity; (3) initial strategic considerations and a course of action that maximizes the way to success; and (4) whether the idea responds to a real need or simply represents “a solution in search of a problem.”

Dimensions of the Opportunity

An opportunity has several critical dimensions, including:

The size of the market. The size of the market is a critical dimension because it has a direct implication for the potential sales of the project and, therefore, its financial return. Be aware that at times, large markets can attract large and powerful companies and competitors; therefore, the small niche markets can be interesting to entrepreneurs in the first years.

The window of opportunity. Opportunities exist for only a limited amount of time. They are somewhat like fruit in the store: Unless you act quickly, they will disappear. New technology, changes in administrative regulations, and changes in the consumers’ preferences or in the market demand all can create opportunities, but these opportunities do not remain open for a long time. A new trend opens the window of opportunity for the entrepreneur who recognizes the possibilities.

The speed of growth. Entrepreneurial initiatives usually flourish in environments where there has been rapid growth, and these environments exist in sectors with a strong scientific and technological component. The health sector is a good example.

Return on Investment

An opportunity should offer the expectation of adequate return on investment to justify the risk that entrepreneurs assume. When we say “adequate” or “sufficient” we are talking in relative terms that depend on:

• The capital invested.

• The time dedicated to the initiative.

• The assumed risks in the process.

• The alternative uses for the external capital that will have been invested into the project.

All opportunities that demand significant capital require a long time to mature and entail great risks; consequently they are not sensible unless the opportunity is extraordinary and the return appealing. A good example is biotech start-ups. They are very capital intensive, usually require a very long time to market (at least 10 years), and assume great risk because it is possible, given the circumstances, that the drug might never reach the market. Nevertheless, there might be interesting opportunities with a healthy return on investment.

The adequate investment return also depends on “opportunity cost,” which is the time, effort, and money dedicated to a start-up initiative that could have been dedicated somewhere else. Opportunity cost varies according to the entrepreneur and his or her knowledge, the timing, and the circumstances. An initiative can be attractive, viable, and visionary for one person and absurd for another who has, for example, a more attractive alternative.

Regardless, the opportunities should offer an adequate investment return through rapid and maintained growth, meaning that once a product or service is sold, the client or user remains “locked into” the product. A recurring exchange is preferable to a one-time sale. High economic scale potential alone can generate more and more cash flow over time in order to finance and sustain growth.

Strategic Course of Action

In the face of an unknown future, the entrepreneur cannot remain locked into an initiative that has only one path to success. Successful opportunities in a dynamic environment such as healthcare allow frequent necessary corrections along the way. The worst opportunities are the ones that limit future options and offer no opportunities to change paths. It is important to try to pursue ideas that are flexible.

Success will create all types of pressures and entrepreneurs can be assured that unexpected problems will appear. There are two types of obstacles: (1) external, such as the reaction of competitors, and (2) internal, such as losing an important partner for the project. It is essential to identify and overcome obstacles from the beginning.

Solution to a Problem or in Search of One

The products and innovative ideas that succeed usually have a “true value.” They offer a solution to a problem and answer a real need. This is perhaps the most important point to take into account in generating new ideas. Before discussing with entrepreneurs the strengths and weaknesses of their ideas, I always ask this question: Which problem are we trying to solve? Interesting products and services that do not respond to a need are solutions in search of a problem to solve. These ideas usually do not go very far because without a real problem, there are neither clients nor demand.

Often, entrepreneurs do not adequately understand how their products are going to satisfy the needs of their users and underestimate the time and cost necessary to make consumers aware of those products. When creating new ideas, it is important to consider these questions in order to generate an adequate demand in the health sector.

Develop A Business Model

Once the opportunity is identified, the strategy that will help move it forward is the business model. The business model guides the entrepreneur to maximize the opportunity, to take advantage of strengths and minimize weaknesses.

For example, suppose our start-up distributes a medical device that we want doctors to use in hospitals. Will we make these products ourselves or subcontract their production to a third party according to our needs? What is our competitive advantage? How will we differentiate ourselves from our competition? How will we contact the hospitals to distribute this product? Through whom? Is it good that this product can be found in other venues, not just in hospitals? Will we get revenues from the sale of the product or from a consumable associated with the product? Will we cover our costs in a situation of contracted demand? Will we extend its consumption throughout the United States? Around the world? Or to only one city as a test?

These are examples of complex questions that must be answered at some point. Initially, the most important questions include the following:

1. Can we create barriers of entry?

Every good initiative attracts imitators. Elevated barriers of entry make it difficult for a competitor to imitate a product. Often, the first competitors enter the market with a strategy of “copying and pasting.” It is important to know ahead of time all of the competitive threats and to think from the onset in terms of what protective measures are necessary. The protection of intellectual property, for example, is usual and necessary in our field.

2. Who are our clients?

I often ask entrepreneurs whether they can give me the names of possible clients. If they cannot identify who their clients will be, they are not ready to begin the process. Identifying future clients is not enough, however; it’s important to know if they are accessible and open to change. The success of any start-up initiative typically depends on getting the client to let go of a previous way of doing something. Consequently, it is essential that the change offers a clear benefit.

3. Will we and our providers understand each other?

In this initial phase, it’s important to determine who is providing the products or services — you or a third party. In the early stages of a start-up, it is common to not invest in equipment or in product manufacturing. But these decisions have a strong impact on the company because what on one hand saves money, on the other hand creates dependence on providers who could use their position to take advantage of you.

4. Will we and our future clients understand each other?

When the potential clients are citizens, patients, and individuals, they usually don’t have great buying power and are not able to influence your decisions. However, when the consumers are big institutions such as hospitals, it’s important to realize that they will have great influence and therefore will be able to influence your actions.

5. Can regulation of the health sector play to our favor?

The healthcare field is strongly regulated, which presents an important barrier of entry. It is necessary to know from the very beginning the possible regulatory requirements in the administration regarding market approval, methods and procedures, clinical trials, insurance, and so on. Frequently, entrepreneurs have not reflected on how they are going to comply with these requirements, or even if these requirements can offer interesting competitive advantages to their business model.

Evaluate the Resources Needed

Entrepreneurs have the idea and the knowledge to carry it out to practice. The investor has a good part of the resources. Rarely does an entrepreneur as an individual control all of the resources, capacity, and relationships needed to pursue an opportunity in the long run.

Entrepreneurs must learn to evaluate and understand what is needed in relation to the resources, relationships, and abilities, and above all, which of these are and are not under their control. The majority of start-ups fail at the outset because there is a big gap between the resources the entrepreneurs have at their disposal and the resources they actually need. What resources do you have? What resources do you need? How can you get them?

1. Resources you already have. The creation of a real and lasting value depends on the ability of the entrepreneur to contribute something new. The less entrepreneurs contribute, the more fragile and vulnerable the start-up will be; the more they contribute, the more interesting the project will be.

Each entrepreneur contributes distinct essential elements for the development of the idea. These resources can be in the form of knowledge, relationships, leadership capability of other necessary professionals, and so on. When you know your capacity and resources, you know how to surround yourself with a team that complements your current capacity, adding to what you do not have.

2. Resources you need. Normally, the resources needed for any entrepreneurial initiative include knowledge of the following:

• Finance

• Marketing and sales

• Technology

• Production

• Human resources

• Management

Therefore, it is crucial to develop the ability to attract complementary people who contribute distinct profiles in necessary areas. I believe what distinguishes good entrepreneurs is their ability to lead “virtual” teams, even outside the project — people who will accept coming on board at the precise moment the necessary capital is available to go forward with the project. These entrepreneurs inspire and attract a team around their idea. They also are capable of finding ingenious ways to use the resources they need.

The deep and wide knowledge that the healthcare professional can provide is immediately useful to entice third parties and to obtain resources. Personal experience improves our credibility and enhances the possibilities for success.

3. Internal resources versus external resources. What resources will you need from the beginning and which can you subcontract to a third party? In all entrepreneurial initiatives, a series of recourses considered essential require continued coordination that cannot be externalized. Other resources can be subcontracted outside of the start-up, saving some of the costs and eliminating fixed costs.

Regardless, the idea of outsourcing as many resources as you can in order to lower your risk is completely wrong. There is always an optimal equilibrium of internal resources versus external necessary resources for the positive development of a project. It is the task of the entrepreneur to find this point.

Write A Business Plan

After you have weighed the opportunity and done your initial estimate of what you need to carry it into practice, it’s time to assemble your findings into a business plan. The business plan describes the opportunity and how to pursue it. Its purpose is to tell a story — the story of your project.

One of the major mistakes that entrepreneurs in the healthcare sector make is thinking that because they already have a clear picture of this story in their mind, they do not need to explain the ideas in a document. I cannot emphasize enough how wrong they are.

The business plan is a basic tool that entrepreneurs in the healthcare sector need to transform their idea into an opportunity and make it real. It is a document of some 20–40 pages with a very defined structure that includes, among other things, a study of the market, an analysis of the competition and of the risks, a study of the technological development and of the process, a definition of the strategic position, the description of the team executives and the founder who will lead the start-up, an estimate of the financial necessities, and an estimate of investments, costs, and benefits.

A business plan allows you to:

• Develop an objective and critical vision of the business opportunity.

• Anticipate the obstacles during the development of the business.

• Line up and motivate your collaborators.

• Convince investors.

• Communicate the business strategy to others.

• Attract people and resources to the project.

When attempting to bring a new start-up to the sector, the initial enthusiasm of the entrepreneur has no limits. The business plan helps to moderate this enthusiasm, causing the entrepreneur to analyze the initiative in a more objective and critical manner. This allows for more clarity and better sense of direction and helps the entrepreneur visualize where they want to go and how they want to get there.

The business plan continues being useful even after its writing and implementation. For example, it is helpful to measure and compare your initial expectations with your results in order to help you reevaluate the opportunity and launch new lines of business. It therefore is also a growth tool that allows you to formulate a hypothesis about various scenarios of expansion.

Protect Your Idea

Intellectual property represents one of the fundamentals for a new start-up in the health sector. Patents can prevent competitors from entering your market and they can be transformed into a source of revenues for your start-up. Patents allow the start-up to enjoy a product monopoly in a geographic environment and foster technological development by stimulating research and development (R&D) in the hospitals and research institutions.

However, the concept of intellectual property often is misunderstood or not understood at all. It is almost never considered as important as it should be. For example, many healthcare professionals prefer to publish their ideas in place of (or before) patenting them. Publication invalidates the patent. A patent can be at times an essential asset for the viability of an idea because it is precisely the only asset that investors can leverage to attract investment in the early phases. The patent is necessary to obtain financing because, in the end, the sale of the patent can bring revenues to the entrepreneur or to the investors if things do not go as planned.

Decide What Future You Want

A good opportunity can drive the creation of a new entrepreneurial start-up in the healthcare sector, offering the professional and the team the opportunity to profit from their invested effort.

However, there are other ways to profit from this effort. Not all ideas turn into companies. The term “commercialization strategy” delineates precisely these alternatives that you have to deliver your product, service, or patented technology to the market. The “process of technology transfer” sends a concept along from the scientific to the practical, from an idea to its execution.

The four basic alternatives are:

1. Selling the patent in the case of a product or service that might qualify to be patented because its characteristics permit it.

2. Licensing the patent to a third party so that, while belonging to you, the product can be promoted by an already existing company in the market. In this way, you can profit from your idea by receiving royalties.

3. Establishing an alliance with another company in the sector to launch the idea to the market. The objective is to contribute to your idea while your alliance contributes the necessary resources to carry it out.

4. Launching your project into a start-up, surrounding yourself with an adequate team, and raising capital to establish a small company that will carry your idea toward the future, and you with it.

It is important for you to consider these alternatives after, and not before, writing your business plan. Why? To choose the alternative for the future, you should understand the possibilities for your idea. By writing the business plan, you will understand much better the work that you have before you, and this will help you decide which alternative is most interesting to pursue.

Define the Team

Starting a business is a team effort. Logically, health professionals, as the driving force of the project, should learn to lead the team, but they should also be conscious of their limitations. Most healthcare professionals have not received specific training in the world of business and therefore lack much necessary knowledge to make the idea successful. This does not mean that healthcare professionals cannot carry forward their projects, however. They should surround themselves with people who can compensate for their lack of knowledge in certain areas and help them carry out their vision. Some characteristics of the best teams are:

• A clear leader, usually the health professional, with responsibility to decide the function of the rest of the members of the team and to identify priorities when the company is created.

• Professionals who know well their own strengths and weaknesses so that all effectively complement each other.

• A special emphasis on continuing improvement of the relationships and of the efficiency of working together.

• An open structure that allows the team to be flexible during the first months as the company takes off, a time when the unexpected is likely to happen and circumstances will dictate those changes.

Raise Capital

Creating a new start-up requires much capital and without a doubt, entrepreneurs will need to ask for funding at some point in their journey. The health professional should not approach the financial sources with the mentality that “all types of financial sources are worth getting money from.” Instead, assume that at different moments within the cycle of the creation of your new company, you will need to use different types of financing. For this reason, the entrepreneur should ask the following questions:

• What types of financial sources exist for each stage of development?

• In what time frame can I use these different ways of financing if I want to carry out my idea successfully?

• How can I coordinate all those financial sources so that the final result is optimal?

Acquire Necessary Resources

Before raising capital and buying the resources needed, it is essential to structure a legal vehicle to create the company. Under the auspices of the company, then determine and acquire the resources that are necessary to carry out your initiative in a timely manner.

Note that “acquiring” does not mean “owning.” In general, to own a resource and have absolute administrative control over it is a costly way to embark on a project, and the strategy should be used only for those resources that truly are critical and central for your idea.

Renting or taking a loan with, and the intelligent use of, external subcontracting from some area of the company minimizes the needed resources and, therefore, the fixed costs of the project. This helps to minimize risk and to augment the potential for financial return.

Launch the Start-Up

It’s time to launch the initiative. The first days will be very chaotic given that the entrepreneur and the direct team will learn about the business at the same time that they are moving it forward. All that occurs will be happening for the first time, and someone will have to make decisions. Yet you will have few economic resources and there will be a very natural uncertainty among all the members of the team about whether or not the project is going to succeed.

Some entrepreneurs, busy in their new role as leader of a start-up initiative, try to attract young, energetic, capable people, often with MBAs, who have the desire to work. It will be important to talk about the role of the entrepreneur and his or her changing role. As the activity of the new company grows, the entrepreneur will likely have to delegate some of the responsibilities to the team, and this will create a new role for the entrepreneur as manager of human resources, demanding the development of new personnel capabilities.

Reap the Rewards

If the initiative is successful, you will want to harvest the fruits of your efforts. The problem will be then how to obtain, distribute, and divide this value. Of course, those purely financial investors in your project will want to reap the rewards of their investment and convert their initial investment to capital. Therefore, two questions are important to address:

1. Has there been a consensual mechanism from the beginning to reap the rewards of the effort and the invested money? Initiatives don’t always have the same ways to benefit from the efforts. Some benefits were not intended to be sold and should be operated only to get more benefits. It is in the distribution of these benefits that one can be rewarded for the realized effort.

2. Is it possible to sell your company to a larger company in the sector? The options to harvest are:

   • Benefits from the operation of the company.

   • Sale of the company to a third party.

   • Sale of the company to the team (management buyout).

   • Initial public offering (IPO) (selling the company to the public).

   • Acquisition by a bigger company.

Furthermore, it helps to know the right moment to enjoy the fruits of your labor. On occasion, you may decide to sell the project when:

• The company needs a large amount of money to make it to the next phase of growth.

• Important changes have occurred in the regulation or in the circumstances of the company.

• You perceive that you have arrived at the peak of possible benefits.

• The economic cycle has changed.

It is in your best interest to correspond with all the investors, groups, and employees to allow them to reap from the generated value as well. If in the future you want to launch another project, you should be assured that they have left the current project happy and satisfied.

Although the moment of harvesting what they have sown is at times a bitter experience for many entrepreneurs who consider their projects their children, you should remain conscious of the fact that it represents a long drawn out effort that lifts your company and creates value. It is, without a doubt, the end of a satisfying experience.

Excerpted from Innovation and Entrepreneurship in the Healthcare Sector: From Idea to Funding to Launch by Luis G. Pareras, MD, PhD.

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