A Caution for Digital Health Entrepreneurs: Avoid “Death by Pilot”
It’s not that hard for a digital health startup to land a pilot these days. Many health systems, health plans, and other organizations have set up dedicated innovation teams to try out new products. Some even charge startups cash or equity for the privilege.
But while landing a pilot might feel like progress, it often leads nowhere. Startups can burn months of time and resources in test environments without ever converting to real contracts. We call this “death by pilot.”
If you’re building in digital health, you should understand why this happens and how to avoid it. Here are some questions to ask yourself to avoid falling victim to this scenario:
Why are you piloting your product?
A “proof of concept” or “validation” pilot is a provisional agreement to test a product's technical capabilities and value proposition in a controlled manner.
In academic medical settings, these pilots are often used in research. Some academic medical centers have standard “unfunded research collaboration” agreements, where a Principal Investigator (or “PI”) at the university agrees to collaborate on a short-term research project with a startup. In exchange for the time and effort of that researcher, he or she is given the right to publish any findings.
A validation pilot can be helpful for a company introducing a new innovation. It reduces the technology risk for investors and future customers. The results of a pilot can also be valuable for marketing purposes (I think about Virta Health, which partnered with Indiana University Health on a clinical trial following participants using the Virta app and basically proved it worked). But a validation pilot should not be confused with a real customer relationship.
Who's actually responsible for buying your product?
Make sure you are working with someone at your target customer organization who is invested in and capable of taking your product as far as possible. I suggest finding a champion who is directly responsible for implementing new technologies that can reduce administrative overhead or improve the patient experience.
The ideal person has business and finance responsibilities and views pilots as just the first phase of a larger partnership. Try to talk to department heads or executives. Avoid groups that are solely focused on research, or worse yet, departments with the entire business model to make money off startups.
I also recommend asking questions early on about which departmental budget you will be paid from so there’s no confusion later down the line. Realize that you’ll be working with slow, bureaucratic organizations. To grow quickly, reduce the number of staff members who need to sign off on your product.
Take Kit Check (now Bluesight), an early Rock Health company that specializes in helping hospitals manage inventory in an internal pharmacy. Their product has three components: RFID tags for each medication, a scanning machine, and cloud-based software.
Originally, the Kit Check team sold the scanning machine, which required the approval and budgets of procurement, IT, and the Head of Pharmacy. They quickly switched to giving the scanning machine away for free and only charging for the RFID tags, which only requires approval from the Head of Pharmacy. By making this shift, Kit Check scaled to over 1,000 hospital customers.
Are you getting paid?
Only pursue deals where both parties are willing to invest the time and resources to succeed. If a customer is unwilling to pay, then they are either the wrong customer or you’re selling the wrong product. It’s not sustainable for any company to work on projects without compensation. Additionally, if another potential customer finds out you’ve worked for free, they could demand the same.
If the customer really values your product, they should pay you, not the other way around. I’d suggest limiting your free pilots to one. If you do a complimentary pilot, make sure you are getting paid in other tangible ways, such as having the rights to use that customer’s name and validation results on your sales materials or having them make introductions to other customers and serve as a reference.
If a partner truly doesn’t have money to compensate your company for a valuable service or product, they are probably not a good target, and you should move on.
Is your deal an opt-out or opt-in contract?
If you have no other option than to offer an unpaid pilot, structure the pilot as part of a multiphase agreement with clearly defined milestones leading to a paid customer agreement.
Multi-phased, definitive sales contracts are up-front agreements that give each partner in the deal the choice to opt out if certain milestones are not met. These contracts align the business goals of both parties. It’s a larger upfront commitment from the customer, but it also ensures that your startup will get paid if the product works as promised. These agreements also help startups focus on the product and implementation rather than the sales process.
Many large organizations are eager to experiment today, but not all of them are serious about scaling what works. Before agreeing to a pilot, understand whether it’s truly a path to revenue or just another test for them to learn from. A few unpaid pilots might help you build early credibility, but stacking up logos without contracts is a quick route to “death by pilot.” Focus on deals where both sides are aligned on outcomes and committed to moving beyond the trial phase.
This is updated from an article I wrote for KQED on May 19, 2015.