10 Healthcare Startup Cautionary Tales (That Aren’t Theranos)
Ninety percent of startups fail, and healthcare startups— despite their noble ambitions— are not immune to this harsh reality. Even the most well-funded, well-intentioned, star-studded startups can find themselves going in the wrong direction. And some, under immense pressure to succeed, make horrible decisions that don’t just sink the company, but also tarnish their reputations.
I put together the below case studies for my class not with a sense of schadenfreude (for the most part), but with a resolve to learn. We look at the product, what supposedly happened, and where the founder is today (spoiler-alert: most the founders, even after losing tens of millions of investor dollars, are doing just fine). Thanks to Twitter folks for helping compile the list.
Some of the companies listed below faltered due to business missteps, while others collapsed under the weight of fraud. I was hesitant to amalgamate the two, as it seems unfair to compare those founders who may have made unfortunate business decisions with the likes of Elizabeth Holmes. But I’m too lazy to write two articles. So, with that distinction clear, let's dive in.
Funding couldn’t save them:
Proteus Digital Health
Raised: $492M
Backers: Novartis, Medtronic, Oracle, Otsuka, Sino Portfolio, Kaiser Permanente, Carlyle, Essex Woodlands, and ON Semiconductor
Business: Ingestible sensors, wearable devices, and companion digital health applications, aiming to change the way patients take medication with their ‘smart pill' technology.
Cautionary tale: If you’re doubling the cost, make sure you’re more than doubling the value.
What happened: Despite its innovative technology, Proteus struggled to convince insurers to pay for their product. Their first product was a sensor attached to an antipsychotic pill, combined with a patch, in theory to help with medication adherence. But the product doubled the price of the meds, and health plans couldn’t justify the value. Since they were burning $2M/month, without impressive revenue growth, they failed to fundraise and ended up filing for Chapter 11 bankruptcy.
Founder/CEO is now: Co-founder and Managing Director of Spring Ridge Ventures.
Pear Therapeutics
Raised: $409M
Backers: SoftBank, JAZZ Venture Partners, Novartis
Business: FDA-cleared, app-based therapy and tracking tools for patients with insomnia and substance use disorder.
Cautionary tale: Make sure your customer is actually willing to pay.
What happened: While the startup was a leader in clinical validation for its products, it failed to obtain widespread adoption. The CEO shared on LinkedIn, “we’ve shown that our products can truly help patients and their clinicians. But that isn’t enough. Payors have the ability to deny payment for therapies that are clinically necessary, effective, and cost-saving.” The price was probably a sticking point — app access cost an average of $1,300 for three months, higher than even most prescription meds.
Founder/CEO is now: unwinding the company.
Haven
Business: Haven was a joint venture by Amazon, Berkshire Hathaway, and JPMorgan Chase aiming to deliver simplified, high-quality, and affordable healthcare to their employees.
Cautionary tale: Healthcare is hard for even the richest and most well-connected. Be humble.
What happened: Despite the parent companies' extensive employee base, they lacked sufficient market power to negotiate lower prices with increasingly consolidated health systems. People also noted that the pandemic shifted the focus of providers and stalled any consideration for new, risk-bearing models, effectively halting Haven's efforts.
Founder/CEO is now: USAID Assistant Administrator for Global Health.
Mindstrong
Raised: $160M
Backers: General Catalyst, ARCH Ventures, Optum Ventures, Foresite Capital, 8VC, What If Ventures and Bezos Expeditions
Business: Virtual care for mental health.
Cautionary tale: Sometimes you have to go slow to go fast.
What happened: According to psychiatrist Dr. Roy Perlis, Mindstrong “simply couldn’t find a way to make money delivering the low-cost, high-quality care it had promised”. Stat reported that Mindstrong faced significant pressure from investors to commercialize the technology too soon. Pressure, combined with management shake ups, supposedly led to the company’s demise. Assets were sold to another startup.
Founder/CEO is now: Co-founder and Executive Chair of Vanna Health.
HealthSpot
Raised: $43.8M
Backers: Cardinal Health, Xerox
Business: A physical, kiosk-based telehealth service provider.
Cautionary tale: Don’t over-customize.
What happened: While initially successful in raising funds and building a product, some say that they spent too much time customizing the product for each customer, making it hard to scale. I would also imagine that the benefits of the kiosk compared to telehealth via an app would not outweigh the costs.
Founder/CEO is now: CEO at Caption Health, detecting disease early by leveraging artificial intelligence and ultrasound.
HomeHero
Raised: $23M
Backers: Social+Capital, Graham Holdings, TechStars, Science, Cedars-Sinai Accelerator, Tencent, The Launch Fund
Business: Senior home care marketplace
Cautionary tale: Avoid death by pilot.
What happened: When the Department of Labor upheld a federal ruling stating that home care workers qualify for the Fair Labor Standards Act, they were forced to shift their home care workers from 1099 (contractors) to W-2 employees (who receive overtime and benefits). The added cost meant they would no longer be competitive, so they shifted to an enterprise model with large hospital systems. But they soon experienced “death by pilot”. In a post-mortem Medium post, the Founder said “It became evident that most of our pilots were being constructed solely for case studies and had slim chances of turning into sustainable contracts.”
Founder/CEO is now: the Founder & CEO of Brave Wealth, a robo-advisor for diverse portfolios.
Accused of fraud / breaking the rules:
Zenefits
Raised: $584M
Backers: A16Z, TPG, IVP
Business: Cloud-based software for HR, with a particular focus on helping businesses with health insurance coverage.
Cautionary tale: There are no short-cuts in healthcare.
What happened: Zenefits found itself in hot water over regulatory issues for allowing unlicensed brokers to sell health insurance and also letting employees cheat on the online broker license course, resulting in a $7 million fine by the California Department of Insurance. Zenefits' aggressive growth strategy and lack of compliance controls, combined with a “hard-partying” culture, led to the founder resigning.
Founder/CEO is now: the Founder and CEO of Rippling, a company that helps businesses manage their HR and IT.
Outcome Health
Raised: $533M
Backers: Goldman Sachs, Alphabet, Pritzker Group
Business: Pharmaceutical companies, including Novo Nordisk, paid Outcome Health for advertising their products on video screens in doctors' offices and waiting rooms.
Cautionary tale: Don’t lie to customers.
What happened: Outcome Health sold advertising space that didn't exist, yet billed clients as though they had fulfilled their contractual obligations. Executives and employees allegedly hid their underperformance, inflating engagement metrics and manipulating third-party reports to maintain the illusion of success. They reportedly misrepresented the situation to auditors and investors, perpetuating the scheme until it eventually unraveled.
Founder/CEO is now: awaiting sentencing of up to 30 years in prison after being found guilty on multiple charges of fraud.
Health IQ
Raised: $140M
Backers: Greylock Partners, First Round Capital, A16Z, Menlo Ventures, Rock Health, CRV
Business: “Precision Medicare” to help seniors find the right Medicare plan.
Cautionary tale: Get ahead of cash flow troubles. And pay your vendors!
What happened: According to Forbes, Health IQ was recording the full commission from selling Medicare plans in the first year for each policy, even though they are paid over a three year period (and only if the customer doesn’t switch plans). “That mismatch between revenue and cash flow meant Health IQ had to take on increasing amounts of debt in order to pay its bills”, according to the reporter. The company owes vendors over $17M, and has $75M in loans. More than a dozen lawsuits accuse Health IQ of intentional misrepresentation and fraud.
Founder/CEO is now: Co-founder and CEO of Hippocratic AI (backed by A16Z).
uBiome
Raised: $110 million
Backers: 8VC, Y Combinator, A16Z
Business: Direct-to-consumer product to sequence the human microbiome
Cautionary tale: Don’t let the pressure to grow compromise your values.
What happened: They were initially lauded for their pioneering microbiome testing, but their downfall began when they thought billing insurance was their ticket to scale. The company was accused of overbilling insurance companies, pressuring doctors to approve tests without proper reviews, and utilizing improper billing codes. These practices caught up with them, leading to an FBI raid in April 2019, which ultimately resulted in the company's bankruptcy later that year. uBiome declared bankruptcy in 2019 and eventually faced federal fraud charges in 2021.
Founder/CEO is now: a fugitive on the run.
So what can we learn from these case studies?
From Proteus, HealthSpot, and Pear, we are reminded that payers are price-sensitive, underscoring the cardinal principle of affordability. A superior product is often not enough to convince them to cover the cost.
From Haven, we are reminded that even the most resource-rich organizations can grapple with healthcare's complexities, urging us to approach this sector with humility.
HomeHero's tale cautions us that pilots generally do not lead to prosperous outcomes. Be careful with how you spend your time.
The fall of Outcome Health and uBiome starkly reminds us that fraudulent practices have an expiration date, often culminating in a spectacular downfall that will ruin your company and reputation. Zenefits and Health IQ reinforce the timeless wisdom that shortcuts may expedite results but compromise the foundation of business integrity. In those four cases we are reminded that the pressure to grow may be intense, but don’t let this compromise your values.
As we dissect these cases, the key takeaway isn't the failures themselves, but what we can learn from them. It is a call for future entrepreneurs in healthcare to step forward, learn from the past, and venture boldly into the future, armed with lessons hard-earned by these predecessors.
Read Part II: Five More Healthcare Startup Cautionary Tales (That Aren’t Theranos)