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Investors are making tough demands on entrepreneurs

By Mike Moran, Project Editor

SAN JOSE, Calif. -- When it comes to investing in telemedicine technology and services, venture capitalists typically won't give the time of day to anything intended for a market of less than $500 million.

The reason is simple: It costs the same amount of money to develop a product for a small market as it does a large market, but large markets offer more profit potential.

"You want something to pay off big," said Barbara Lubash, managing director of the investment firm Versant Ventures.

In fact, when it comes to health IT, she said, her firm turns down "nine of 10 – and maybe more" of all requests for funding, and that's because most are intended for a niche audience that health plans won't reimburse.

Lubash and Jack Young, senior investment manager for Qualcomm Ventures, took part in the Monday Industry Executive Panel "Financing Telemedicine," which was moderated by Molly Coye, MD, chief innovation officer for the UCLA Health System Institute for Innovation in Health. The session's goal: To explain what the investment community looks for when sizing up potential opportunities in telemedicine.

In addition to market size, that includes "something that solves a top 1, 2 or 3 problem for decision makers," Lubash said. "It has to be compelling."

For example, with the rise of accountable care organizations, reducing readmissions is a big issue for hospitals.

"In the past, it was more about getting revenue," Lubash said. "Now the top problem is not getting heads in the bed, but controlling the underlying costs."

Also, investors like to work with entrepreneurs that have a track record of success.

"If you can find a person who investors are already crazy about, do it," she said. "If you can't, it's better to come alone than with a runner-up."

When seeking investment dollars, healthcare entrepreneurs should be able to explain how their product or service will benefit payers, patients, doctors and device makers. How will it reduce costs (payers), improve care (doctors), create conveniences (patients) or drive revenue (device makers)?

"It's easy to say, 'I've got this great thing,' but have they thought about how it will satisfy these four constituencies?" he said.

If the product or service is intended for a consumer audience, it should be easy to use, and, if possible, allow for passive adoption. That's because people are more likely to use a product if it doesn't require them to change behavior or learn something new, Young said.

When it comes to mHealth, convincing an investor to provide funding can be a difficult task, Lubash said.

"In general, they tend to be (products) with narrow applications and short lifecycles," she said. "It's not a sustainable model."

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