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January 26, 2015 Startup CEOs and Investors 3 Comments

Finding Those First Few Paying Clients
By Speculating Scribbler

Having been an investor in and advisor to a number of various stage healthcare startups, I have observed a common constraint that applies to nearly every startup before they enjoy early success: finding those first few paying clients. They might have created the best product in the world, a revolutionary way of doing things better or faster, or a way to fill a void that has never been filled. They might have a brilliant team of tomorrow’s Mark Zuckerbergs and Steve Jobs. Without some early clients taking a chance, however, the potential could sadly go untapped.

Startups can have some inherent advantages over the big guys. They are nimble, and if they have the right team, can adapt and adjust their product faster than a large company. They generally have no sacred cow product lines, so the “Innovator’s Dilemma” that can curse large companies that protect cash cow product lines often doesn’t apply to them.

Still, it can take a leap of faith for a hospital, health system, or physician group to engage a startup. Even as an enthusiast of startups, there are some that I would do business with in a heartbeat if I were a hospital, yet others that I would never take a chance on. The old adage that, “You don’t get fired for buying IBM” applies in healthcare, too, even today in the age of the cloud computing and mobile everything.

For those who want to give that smaller, hungry company a chance at earning your business or who need to prove to your bosses or board that you’ve done your diligence before suggesting engaging a startup, here are a few key questions to ask to cover your bases and get comfortable with the startup.

 

What Will This Contract Do To Your Business?

You don’t need to know how profitable they will be or what kind of revenue increase your order would do for them. It is fair, though, to understand what sequence of events scaling up to serve you might trigger. Maybe they will need to change their server structure. Maybe they will need to set up the support department they have never needed before. Perhaps they will need to double their development staff with to-be-determined resources.

Whatever the case, the key is to have the open discussion and get comfortable with their plans. A thoughtful company has thought a lot about how they would scale to accommodate your business. At a minimum, they should have growth plans and timelines that are clear and that you can get comfortable with. The red flag is if they either don’t have a plan or give you the impression they aren’t rigorous enough about the scaling question.

 

Am I A Sustainable Client?

You might be tempted to get an insanely good deal from the startup founder who is hungry for your business. Given the lean nature of most small companies, there should in fact be a very good value proposition for you.

Don’t overdo it, though. The best long-term answer is for you to get a deal you can feel good about and for the startup to have enough revenue flowing in to continue to improve their product and an incentive to spend the time needed to serve you with topnotch attention. Startups often forge new ground in a space that does not yet have tried-and-true pricing mechanisms, but be sure that your business deal gives the company the cash flow it needs to do a great job for you.

 

Are You All Doing This Full Time?

This is one of the questions I ask as an investor and that I would ask it as a potential customer as well. If you are entrusting a startup to fill a key need that you have, you should expect that the people you are talking to are “all in.” It might be a relatively small team, but it is important they are fully committed to their business.

I have observed startups run by people who are moonlighting or trying to get the company going on evenings and weekends. I admire bootstrapping and the founders just might be brilliant and could be the next big thing. If I were a hospital system or physician group, though, I would insist that I only contract with someone who is fully committed to their business. It is a lot easier to walk away from a venture and your contract if you still have a nicely-paid job to go to on Monday morning.

 

How Will Our Organizations Communicate?

Frankly, this kind of expectation-setting question should be done with companies of any size. You probably have experience with big guys who have 40 percent market share dropping the ball on this.

A startup sometimes does not have their customer service or account management infrastructure fully built out, so it is a good question to explore. You just want to be sure you have a clear path for communications to and from the company, whether that be escalating an issue or having regular status updates. A red flag is if the CEO dismissively says “Oh, just call me on my mobile if you need anything.” While it might be flattering to have the founder on your speed dial, it is a sign that they have not thought about how to scale up for multiple customers like you.

 

How Are You Protecting My Data?

I would never suggest that just by virtue of being a startup, a small company is not as good as protecting data. In fact, some of the startup firms I have worked with are doing things with data protection that could set a standard for the rest of the industry. But in the spirit of being able to tell your leadership and board that you responsibly vetted the startup, explore the topic. A well-run startup will welcome the question because it gives them a chance to show that they are a step ahead of their competitors.

 

Conclusion

All of your go-to large vendors were startups one day. I see first hand many startups filling niches that have gone ignored too long. You might find that engaging the right startups could be the start of a great, long-term partnership for your organization. Just ask the right questions first. The mediocre startups will demonstrate that they aren’t ready for your business, but the good ones will show you that they can do things for you that nobody else can.

The author is a healthcare angel investor, board member, and mentor to numerous startups.

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Currently there are "3 comments" on this Article:

  1. I have a very different view and perspective. As one who has done several bootstrap start ups in health care software what I learned (and have seen repeatedly) is the first few sales are the ‘easy’ ones. The second half dozen are really far more difficult and here’s why. If you have a good concept and have a good industry network finding the first three or four beta sites is easy because these people know you, have interacted with you in various ways, and may even have a bias towards your new technology. Also the founder is very heavily involved in the sale process and can quickly answer any product /use related question.

    The second batch of contracts is where real marketing/sales come into play, and very few new entrepreneurs are prepared for this. The first batch being ‘easy’ (relatively speaking) serve to mislead the founder into thinking ‘our product/service can sell itself’. Hey, see everybody loves it, just look at the startup accounts we already have!

    So why bother with spending money on marketing and high level sales folks. We’ll just hire a good demo person or two, and once the prospects see the demo…the deal will be done!

    About nine months and hundreds of thousands of dollars latter the inquisition starts…

  2. I agree with the piece, in that the focus should be on building a long-term relationship rather than getting a sweetheart deal from a startup. If all they are doing are sweetheart deals, then they won’t be around long enough to do any good for you or them.

  3. Frank Poggio’s right, a vendor with ten sales is not proof of market success, and certainly not a vendor with a few pilot customers with sweetheart deals. I spent over a decade at a start-up which did make it and we looked at lots of companies for acquisition. Our CEO, for whom this was his third successful company, always said the first ten sales are easy, it’s getting from ten to forty that is the sign of a successful company.

    If you’re starting a SaaS business selling to hospitals/health systems, assume it will take 3-4 years to get to break-even with cash flow. Lots of business plans have a faster path to positive cash flow, but it almost never goes that fast.







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