All too many entrepreneurs get into business ventures that
are doomed from the outset. Either there is no market, too much
competition, major barriers to entry that can’t be overcome with
available resources, or the entrepreneur himself simply doesn’t
understand enough about the industry he plans to enter. It
amazes me that so many people spend so much time and money
getting a business off the ground without first doing the most
basic information gathering. This is a case in point:
Three engineers, all with extensive backgrounds in medical
instrumentation, decided to go into business. All agreed they
could design an innovative machine that could measure problems
with blood f low through veins and arteries. Such machines
have been around for years, but their device would be easier to
use, cheaper, and more reliable. Because their machine would be
usable and affordable by small medical practices, it would allow
tests to be done in the doctor’s office that at that time could only
be done in a hospital. This would be more convenient for the
patient and more lucrative for the doctor, as he could bill for the
test instead of letting the hospital collect the test fees.
The engineers built the machine, successfully tested it, and
achieved the requisite FDA approval ahead of schedule. The group approached me for assistance in raising investment funds
to market their innovative product. Their plan to raise money
seemed reasonable enough; they would find about 20 physicians
who would each invest between $10,000 and $20,000.
Before getting involved in a project like this, I always do a little
evaluation of the marketability of the product or service being
launched. To this end, my first step was to take the young company’s
brochure to a cardiologist friend of mine to ask his opinion
of the device. His reaction at first seemed quite positive: “If
this machine can do what they say it can, it’s quite an accomplishment.”
It looked good so far.
I next asked the most important question from the point of
view of launching a product: “Would you buy one?” His answer
came without hesitation: “I doubt it.” He then explained that the
kinds of disorders for which this machine could test are relatively
rare. He said he sees no more than four people a year who would
be good candidates on which to use this device and he guessed
that his two partners see about the same number. He went on to
explain that the test would generally be given to a patient once
only, unlike medical tests that are given repeatedly.
To recover the $13,000 cost of purchase over two years (ignoring
for the moment interest, maintenance, and other costs) would
mean that each of the estimated 12 patients would have to be
charged almost $550 for one test.
The doctor also explained that most patients who need the
kinds of tests this machine would perform are elderly. Because
most elderly persons in this country are covered by Medicare, the
doctor’s fee for the test would essentially be dictated by Medicare.
My next step was to check with Medicare about rates paid for the
types of tests this device could perform. The average amount that
Medicare pays for these tests is $125, meaning that for this threedoctor
practice, the machine would yield about $1,500 per year
($125 ? 12 patients). Based on the $13,000 price tag, it simply
wouldn’t be a worthwhile investment.
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