Were you unable to attend Transform 2022? Check out all of the summit sessions in our on-demand library now! Watch here.

Since I first started investing in digital health in 2007, the sector has exploded. Digital health startups raised over $4 billion in venture capital in 2014 and will likely raise even more this year. Based on my observations, a large proportion of these startups are founded by folks who want to apply their background in tech to healthcare. Many are young, successful engineers and product managers who have a negative experience with healthcare and want to fix it. These pitches often start with a personal story. They want to disrupt the system from the inside.

The smart ones quickly realize that trying to change healthcare without understanding the system is like trying to turn a doorknob by banging on it with your head. Here’s my advice to avoid the most common pitfalls:

1. Listen to the market. It’s tempting to try to take technology you already know well – mobile apps, gaming, SaaS, sensors – and go direct-to-consumer. When you have a hammer, every problem looks like a nail. I think it’s much better to take a market-driven approach and figure out what innovation is needed. I like to see founders that have thoroughly analyzed the healthcare ecosystem and can explain to me exactly why the hospital executives they are selling to are begging for their product.

2. Hire people who know how to speak the language. Tech-speak and health-speak are very different. For example, “health insurance companies” vs. “payers.” “Hospitals” vs. “providers.” (Pharma is still pharma.) You need people who have connections in healthcare. They are invaluable for guidance and opening doors. They’ll improve your salesmanship, product, and overall strategy. Senior healthcare professionals don’t come cheap, but they are worth what you’ll pay.

3. Understand how the money flows. It is vitally important to see the big picture in terms of how different groups are incentivized and where there are opportunities to add value. It’s a complex ecosystem with lots of different players. Going direct-to-consumer is a cop-out. Even though high-deductible plans are becoming more popular, the vast majority of dollars will continue to flow through (or be driven by) payers, self-insured employers, and providers.

Christine Lemke of Evidation Health (full disclosure, a portfolio company) put it quite nicely: “As a new founder in healthcare, you have the urge to jump in and ‘disrupt.’ But in reality, you need to partner with established companies to win.”

4. Read the Affordable Care Act. The ACA is much more than healthcare.gov. Not only are millions of previously uninsured Americans signing up for health insurance, but many people are switching from employer-based plans to individual healthcare purchased on an exchange, thus forcing payers to directly market to consumers and compete on price like never before. The law is fueling an already powerful trend towards pay-for-performance, which strongly incentivizes payers and providers to invest in preventative measures and cost-effective technologies. I could go on and on, but instead I encourage you to do your own research and come up with your own hypotheses about how each new change tilts the system.

5. Plan for the long haul. Government moves much more slowly than tech. Already implementation deadlines have been pushed back two or three years. Being right about when a shift is going to happen is just as important as being right about what will happen.

6. Beware of death by pilot. The primary way to prove a tech solution works is to run a pilot. It’s tempting to jump right in. Many startups believe that being associated with a brand name provider adds credibility right away. However, pilots can actually be an enormous time sink. Even worse, some hospitals are now charging startups to conduct pilots.

Here’s how I see it: If your product is used by payers, providers, or pharma to improve workflow, increase efficiency, or lower costs, then your users should pay to run a pilot where they get to try out the product before rolling it out more widely. In this case, make sure you pick the right partner who is willing to accommodate the technology and ideally have very specific milestones after which a broader rollout will follow, per contract.

If, however, your company is developing a mobile intervention and you need providers to validate the clinical efficacy, then it’s more like a clinical trial or study. These take up the time of physicians and the provider infrastructure, and your company should pay for this validated study much like pharmaceutical companies pay for their clinical trials. (It’s also effective to apply for grant funding for trials like this.) In this case, it’s even more important to pick the right partner.

Pitfalls aside, the influx of tech knowledge into healthcare is a very good thing. If you are an entrepreneur looking at the healthcare space, I would love to hear your thoughts and questions in the comments and on Twitter.

Skip Fleshman is a partner at Asset Management Ventures where he invests in early stage companies in digital health, mobile, and big data. He is an advisor to Stanford’s StartX, Rock Health, and Boston Children’s Hospital. Follow him on Twitter: @SkipFleshman.

VentureBeat's mission is to be a digital town square for technical decision-makers to gain knowledge about transformative enterprise technology and transact. Discover our Briefings.