Built to Scale

Building a healthcare business is not for the faint of heart. 

It is an arduous process, complicated by sales cycles that are long and ROI that is notoriously complex to measure. Early-stage entrepreneurs require considerable capital, time, manpower, and acumen as they work to build resilient infrastructures and establish traction in the marketplace.  

In this interview, Healthcare Practice President Naimish Patel discusses how Red Cell ensures that its startups are given every possible advantage to succeed and how the firm works with entrepreneurs to create transformative companies that will positively impact the healthcare industry and the people who rely on it.

Having spent many years working in the healthcare field for companies like Rally Health, Optum, and Hero, what are some of the most important considerations that go into building a new healthcare business?

Healthcare is not a billion-dollar market. It’s not even a $4-trillion market. It’s actually thousands of billion-dollar markets. As a result, when we set out to build a healthcare business, there are several vital pieces of information we need to understand before we can determine what we will build and in which category we will build it. To be successful, businesses need to understand from the outset the unit economics of what they’re doing, they need to identify and secure their primary distribution channel, they need to quantify their expected ROI, and they need to assemble a team that possesses a deep level of domain expertise. 

Beyond those things, the businesses we commit to building at Red Cell need to be supported by megatrends – the inexorable, multi-decade tailwinds that are influencing the market, shaping reimbursement decisions, and guiding priorities. Finally, to even consider building an idea into a company at Red Cell, we have to be able to clearly articulate the one specific problem that it is going to solve, why that problem is worth solving in the first place, and map, with extreme precision, the competitive moat that gives the company an edge as it executes that solution.

Tell us more about these megatrends…

There are three megatrends driving our strategic focus today.

The first is demographics. People are living longer; but they’re also living sicker. This is a problem that is further exacerbated by workforce shortages that often lead to gaps in care. From a pure supply-demand standpoint, it makes sense to build companies that are providing a range of support for providers, health enterprises, and our country’s aging population. The second megatrend is the sheer expense of the healthcare system. Simply put, healthcare is unaffordable. It’s too expensive for consumers, too expensive for employers, and even too expensive for the government. It’s a serious issue. The third megatrend we’re focused on is the likely multi-generational shift from fee-for-service to value-based care that centers on efficiency, care quality, and patient outcomes. We’re still very much in the early innings of this shift, but it is going to happen over our lifetime. 

When Red Cell sets out to build a new healthcare company, what areas does it target?

Red Cell’s Healthcare Practice builds technology-led companies that tackle problems in one of three categories: 

• Health Services, where our objective is to challenge antiquated models by using technology to be more effective and more efficient. Trase is a prime example.
• Care Delivery, where we are facilitating the shift to value-based care, as in the case of Savoy Life.
• Diagnostics and Therapeutics, where we focus on enabling patient access to novel therapies and facilitate improved outcomes, like we’re doing with Zephyr AI and TARA Mind.  

Within those three verticals, there are different areas that we’re either investigating and researching or where we have already built companies. 

We also have certain operating metrics that we’re targeting. But really what we’re spending a ton of time doing is deciding what areas we think are interesting and we’re out hunting to meet people who we think are the right fit to partner with us to build companies and bring those ideas to life. 

What differentiates Red Cell Healthcare Practice incubation process?

Here’s the reality of building a healthcare company: If you want to be in healthcare, you’re signing up for 10 years, minimum, if it’s successful. Basically, that’s a quarter of your working career. So, it’s a big leap and a risky commitment considering that most startups fail. Healthcare businesses, maybe more so than other sector, need to be designed and built with the ability to persevere. Most aren’t, and can’t, so they don’t. 

There’s a reason why entrepreneurs want to build with Red Cell and that’s because we do things differently. For one, we’re not a business-plan factory and we aren’t trying to be an academic institution running Incubation 101 classes. We also don’t outsource start teams; we are the start team. In order to get funded, Jack Rowe, MD, the former CEO of Aetna and the Chairman of our Healthcare Practice, has to buy into every company’s reason for existing. As we build more and more companies, our process and our time to market only gets tighter and faster.   

We find people with a ton of experience and know-how, we bring them on as incubation leads to co-develop businesses with us, we empower them to make decisions, and the whole time we are surrounding them with all the resources and support they need to be successful. While that exact formula is bespoke to every co-founder and every incubation, it’s the platform team that  enables that “lather-rinse-repeat” process that is truly the special sauce at Red Cell.

Can you tell us more about the support and resources you provide to your incubations? 

While every business is going to have its own journey, there are things that are standard across all our incubations. First of all, co-founders are given a salary while they work here. That means they’re not leveraging all their personal assets to start a business, which, frankly, is capital- and time-intensive, especially early on.

At Red Cell, we also have a broad network that co-founders can utilize to accelerate the path to product-market fit. This is something we work to establish early in the process, so the entrepreneur is not burning cash while trying to figure it out.  We’re also connecting entrepreneurs with top-level buyers early, giving them a shot on goal that they wouldn’t have had otherwise. And because we’re doing the intense diligence up front, we’re hiring the right people and scaling the team appropriately as they mature. That means we’re not firing half the team two years in and having to start over. That happens in almost every startup. But that’s not happening with Red Cell incubations because we are super intentional from the very beginning, and that goes a long way toward engendering a strong culture, strong focus, and, ultimately, positioning our companies for long-term success.

Finally, we build companies for exits. Our goal is to stand up successful businesses that are built into known demand with the ability to scale and scale fast.  

Tell me about the Red Cell Network.  

I would say there are three flywheels that make Red Cell’s vast network effective. 

The first is our connectivity to the commercial space. Between our investors, our employees, and our co-founders, we cast a deep and wide net in most areas of healthcare.  That really does open a lot of doors, which helps to solve problems faster and get things done faster, the first time. 

The second flywheel is our commitment to driving really great outcomes for our co-founders and for our investors. Our goal is to set up win-win situations. We want to play the long-term game with long-term people. This mindset combined with results on the board helps us maintain a steady inbound stream of great talent that wants to work with Red Cell.  

The third flywheel is our ability to recruit key players to our incubations’ teams. We have so many people at Red Cell who have been part of successful businesses over the course of their careers that we’re able to put really elite teams together that otherwise I don’t think would have ever come into existence. We never take a fill-the-seats approach. We’re trying to get the absolute best people for each role, and we’ve got a big network to help us do just that. 

What is your process for building a new healthcare business?

To launch the best healthcare companies with the highest probability of long-term success, our process is designed and phased to ensure that only high-quality, viable concepts move forward through each phase, while those that don’t measure up fail quickly, reducing the amount of time spent and resources invested in an idea that ultimately won’t succeed. 

The lifecycle of each business begins with a hypothesis that’s developed during the Curation Phase of our incubation process. At this point, we’re doing a ton of general research to try to understand everything about how the idea fits within our identified megatrends. The ideas with the highest potential move into the Discovery Phase, where they are researched and pressure-tested to establish market viability. Following Discovery, ideas are presented to Red Cell’s Investment Committee for initial pre-seed funding and, if approved, move into the Startup Phase where we work to validate unit economics assumptions, develop an operating plan, identify product requirements, form a team, and determine initial customer traction before returning to the IC with a request for additional capital that allows the company to move into the NewCo Phase. During this period, the company works with the Red Cell platform team to position the business for its public launch and develop its minimum viable product, form a fundraising strategy, grow its team further, and establish a path to scale. When a company receives seed funding from external investors, it becomes independent from Red Cell.

What does Red Cell do to ensure that a company is successful long after it’s become independent?

Once an incubation has taken on external capital, it is considered independent from Red Cell. At that point, the entrepreneur is the captain of their ship. But that doesn’t mean they’re completely on their own and that we are no longer involved. That’s actually not the case at all. It’s like when your kid graduates from college and moves out. They are financially independent and free to do all the great –  and stupid – things they want, but they can always call home and you expect to get some phone calls. When we invest in a company, we want them to win. That means we’re always going to be there; we’re always going to be their partner to ensure they don’t fail in the long-run, which is a real concern for new businesses.

By some accounts, about half of small businesses fail within five years. Why do they fail? Three reasons: product, process, and people. Throughout our incubation process, our goal is to compress an incubations’ time to market and reduce the obvious failure risks. On the product side, we are laser-focused on building a great product that delivers measurable value to relevant stakeholders. On the process side, we want to ensure that our incubations have identified the right distribution channel or channels early to facilitate a smooth and expedited market entry. And on the people side, we are helping the entrepreneur hire for gaps that they may not have even known they have. We help them to see around the corners because we’ve got a team that has done this before. 

Thank You, Naimish!