It always surprises me that the majority of economy and business books explain how to write a business plan without paying attention first to the natural process of analyzing if the idea is an opportunity. This natural process mimics precisely the “construction” of the plan.
The process always begins with an idea. This idea can turn into a product (something “material” that can be sold, for example, a new surgical tool that we have patented) or into a service (some “process” of an intellectual type of intermediation with which we are going to satisfy a need of a third party, for example a home assistance call-center service for elderly). At times the idea emerges from a hobby, or on other occasions from the fact that the entrepreneur has a series of abilities that deserve to be shared. On other occasions, perhaps, it originates through the detection of a need, which is to say, by the frustration of needing something and not being able to find it in the market.
At the time of the idea, one initiates the analysis process, looking at:
Its potential and its viability (evaluation of the opportunity); and
Its implementation and structure (what we are going to do, how we are going to do it, who is going to do it).
In order to come to fruition, an initiative not only should have growth potential, but it also should be viable. Previously, we have seen the idea as an opportunity. Now it is necessary to consider the process for developing this opportunity. This information can be used to prepare the business plan.
Evaluating the Opportunity
Let’s begin, then, to analyze whether the idea is an opportunity. In the first place, we should establish if the initiative has the possibility of making it to the market and becoming a reality. This carries with it the profound analysis of:
The market; and
The competition.
The viability of the project, as much technological as economic, is estimated by evaluating its risks, the costs that we will incur to carry it out, and the likelihood of obtaining returns on our investment with the commercialization of our product or service.
It has to be clear that the objective of this stage is merely a rough analysis. It means that the entrepreneur seeks all the available information, in order to use it as the foundation on which to build the possibilities of his initiative. This information will not be used so much so to make “definitive” decisions about the future of the initiative but, rather, more for the preliminary analysis.
Market Analysis
A healthcare start-up can be successful if there are enough people interested in buying what it hopes to sell. The total market of potential buyers of a product or service can always be delimited by a determined size. Obviously, the magnitude of the opportunity is not the same in a big market as in a small one. Within this market there are still segments, distinct subgroups of potential buyers that we can differentiate by their motivation to buy, their financial capacity, the ease with which we can locate them, and so on.
For example, if our product is a new medical device for ophthalmologists, the total market of possible buyers would be all those ophthalmologists (as individual practitioners) and all those public and private centers where they practice ophthalmology. But in this general market, for example, the ophthalmologists certainly will have different criteria to buy than public centers, and they will form a segment of the market that we will need to deal with in a different manner than the rest. A public primary care center also will be very different from the bigger hospital centers, and from the private centers. Each segment poses a challenge and a systematic difference for selling the product.
A great majority of the entrepreneurial initiatives in the health sector need to concentrate their efforts on sales, choosing a specific sector as a client. So it is fundamental that the entrepreneur analyzes carefully what market will be more profitable, and focuses efforts on targeting this market. Usually the market analysis contemplates:
Who are the potential buyers of the product or service?
Can this market grow in an important way?
Where can this market expand? Geographically? In new segments? With different products?
What potential segments interest us today? Where are these potential buyers? How many are there? Taking into account the price that we could put on our product, what is the approximate volume of sales (sales volume = price × the number of buyers)?
What is the value chain of this market? Who manufactures this product? Who distributes it? Who can sell it?
Can some regulatory change or new law affect our initiative?
What is our break-even point? A break-even point tries to define how many units we should sell in order to compensate our cost in making the product and/or providing the service.
Competition Analysis
A healthcare start-up can be successful only if it can compete in an effective manner with those that sell similar products or services. The competition analysis should ask:
In what space our start-up is going to compete? Where will it be in the future? The entrepreneur should analyze what companies can be considered as competitors and the characteristics of their products. It is important to analyze if these products or services are better than our own and why. Similarly, it is necessary to define also the geographic locations where we are going to compete: Only in the United States? In Europe as well? Globally?
Do barriers of entry exist for our future and potential competitors? All we do can be copied. It is very useful from the beginning to anticipate those imitators and see what circumstances could make their entry easier or more difficult. There are six types of barriers to entry: economies of scale (forcing new players to have a specific size in order to compete in the best conditions); differentiation of the product (trying to lock in the market making product change more difficult on the part of the buyer); access to the distribution channels (if the existing competitors have exclusive agreements for distribution, for example, they can make it very difficult for a new competitor to enter the market); important capital needs (very frequently in the health sector if the product or service is very capital intensive); structural disadvantages (learning curves, forms of intellectual property, and so on); and, finally, state or government intervention, (that at times can limit or impede the entrance of competitors in strongly regulated sectors such as healthcare, establishing licensing requirements, regulations, norms, and so on).
Viability
An idea should also be “technically possible” and “profitable” for it to be considered a good opportunity. In order to analyze the viability, it is necessary to take into account the technical aspects (competitiveness) as much as the economic ones (profitability).
The entrepreneur should take into account the technical viability of the product or service. If the competition, for example, is capable of manufacturing a similar product with a clearly lower cost compared to ours, this can point to our idea not being as viable. If, on the other hand, our technology allows us a better quality, speed, or a lower cost, we will be in a good position to compete.
The problem of viability is not only technical. Economic viability is also important. Besides having a good technology, we should be sure that considering the quantity of money that we will need in order to move forward with the initiative, the expected revenues and margins we might get for these sales create a profit potential, a return to our investment that justifies the project.
These three parameters—necessary investment, margin, and profitability—are closely related, and any modification of one of the three components of the triangle will directly impact the other two. Healthcare entrepreneurs should be capable of understanding this relationship and evaluating how to manipulate it to their benefit.
Capital Needs: What resources will I need and what investment do I estimate now for my project? Am I aware that I will not be able to generate cash flow from the first day? Healthcare entrepreneurs usually underestimate the necessary time to begin and get cash. Sales do not go from zero to 100 percent in the first month, but, rather, they need time to reach “cruising speed.” Therefore, it will be important to structure well the financial needs so as not to compromise proper progress of the company with cash problems (availability of money).
Sales and Margins: The margin of sale is the difference between the price that the buyer pays and what it costs us to manufacture the product or to provide the service. This margin should allow a start-up not only to compensate for the cost of manufacturing the project, but also the fixed expenditures (independent of manufacturing) that are generated during the normal activity of the company. Here the healthcare entrepreneur should begin planning the right price for the product (looking for a sufficient margin) and asking if this price is competitive compared to the competitors.
The profitability and economic viability depend directly on those two analyzed factors. The idea will be capable of arriving at the market only if it is capable of generating benefits.
Let’s remember that ideas in and of themselves are not enough: no one invests in an idea but, rather, in its execution. For this reason, the business plan is our road map toward the construction of the project that we believe in, the proof of our ideas put in front of those that can make them a reality: the investors, administration officials that manage public sources of capital, or our team members, for example. Evaluating the opportunity is the first step in the process.
Excerpted from Innovation and Entrepreneurship in the Healthcare Sector: From Idea to Funding to Launch, by Luis Pareras, MD, PhD, MBA