Why Diagnostics Is Hard: Three Extra Challenges And How Startups Can Still Succeed

2 min read

Diagnostics shares the same two key challenges as most of digital health. One, long sales cycles of 9-18 months into providers, often even longer for payors and pharma. Two, FDA approval that necessitates clinical trials and typically adds a couple years before the company can commercialize its product. But diagnostics has a high degree of some additional challenges.

And let’s not dismiss the backlash that Theranos caused — much has been written about it, including the bestseller “Bad Blood.”  This post offers a framework for how startups can tackle the beasts of recurrence, distribution and reimbursement — and still succeed.

1) Recurrence:

Most diagnostics are infrequent tests, for instance, blood tests done annually to measure your cholesterol or colonoscopies done every 5 years to detect cancer. Depending on a person’s risk factors the testing frequency can increase substantially but overall diagnostics suffers from low recurring purchase. This is further exacerbated by rampant non-compliance i.e., people neglecting to get a test when they should be.

The deck is really stacked against diagnostics startups but good news is there are wars around:

ConditionsExampleCase Study
where regular testing can help detect an early escalation and be critical to an interventionAsthmaPropeller, sold in Nov 2018 to ResMed for $225M
which you are unlikely to detect with a single test and become really evident with continuous monitoringArrhythmiaAliveCor, which has raised a total of $169M
which are simply too hard to detect conclusively with the current testsCancerGRAIL, sold in Sep 2020 to Illumina for $8B

Regular testing has its own dangers of becoming overtesting, making us all hypochondriacs and even leading to unnecessary treatments. But startups doing diagnostics should definitely be ready to answer to how they can maximize LTV aka lifetime value of their customers rather than having to constantly battle CAC aka cost of acquiring a (new) customer. And investors and consumers have a shared responsibility to make sure additional testing reduces stress and costs rather than increase them.

2) Distribution:

Mostly because of the overall infrequency, diagnostics companies typically necessitate access to a large population so at any moment enough people are getting a test. That is especially challenging for a startup with limited resources, which is why partnerships are even more important. Unless there are good reasons to do something different, entrepreneurs should make these agreements as (i) revshares to keep incentives aligned, (ii) have commitments from their larger partner on marketing spend, and (iii) push for co-branded tests rather than white-labeled.

Biotia provides a good case study (full disclosure: Tau Ventures is an investor). The company uses next-generation sequencing to detect infectious diseases — a bit slower than traditional tests in that results come overnight but in many ways the most accurate test available commercially. Biotia partners with two large public companies to ensure its tests were available more broadly: Twist for respiratory conditions such as covid and another large biotech one for urinary conditions especially UTI. Having these partnerships naturally helps with all other efforts, from hiring to fundraising to business development.

3) Reimbursement:

Can you build a testing company where consumers pay out of pocket? Absolutely, genetic testing ones especially come to mind, from 23AndMe (expected to go SPAC in Q2 2021) to Counsyl (acquired by Myriad Genetics in May 2018 for $325M). But these are exceptions to the rule as genetic testing becomes mainstream and in general D2C can get very expensive very fast as it typically requires significant marketing and shipping. At least in the US consumers expect their insurance to cover testing. In other developed countries the expectations are mostly the same if not more. Our experience at Tau Ventures is that a consumerized testing company is really best positioned for developing countries with weaker healthcare infrastructure and very big populations.

Diagnostics reimbursements have an understandably high bar because you don’t want false positives (telling someone they might have a condition when they don’t) or false negatives (perhaps worse, telling someone they don’t have a condition when they actually do).

Positioning the tests as screening, to help triage into a doctor’s care for further testing, is the well-worn path here. But entrepreneurs beware, there are far less VCs investing in early-stage diagnostics because of a much smaller appetite for the regulatory / reimbursement risk. Getting government grants and strategic investors can be especially helpful to bridge the gap.

Thanks to Nick Oza for inspiring this article and giving meaningful feedback. Originally published on “Data Driven Investor,” am happy to syndicate on other platforms. I am the Managing Partner and Cofounder of Tau Ventures with 20 years in Silicon Valley across corporates, own startup, and VC funds. These are purposely short articles focused on practical insights (I call it gl;dr — good length; did read). Many of my writings are at https://www.linkedin.com/in/amgarg/detail/recent-activity/posts and I would be stoked if they get people interested enough in a topic to explore in further depth. If this article had useful insights for you comment away and/or give a like on the article and on the Tau Ventures’ LinkedIn page, with due thanks for supporting our work. All opinions expressed here are my own.

Amit Garg I have been in Silicon Valley for 20 years -- at Samsung NEXT Ventures, running my own startup (as of May 2019 a series D that has raised $120M and valued at $450M), at Norwest Ventures, and doing product and analytics at Google. My academic training is BS in computer science and MS in biomedical informatics, both from Stanford, and MBA from Harvard. I speak natively 3 languages, live carbon-neutral, am a 70.3 Ironman finisher, and have built a hospital in rural India serving 100,000 people.

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