Jumpstart Capital founder and managing partner Vic Gatto has been investing in early-stage health care businesses for nearly a decade. His organization — Jumpstart Foundry, Jumpstart Health Investors and Jumpstart Capital — works to bring innovation to what could be considered a timid but also complex industry. And because of that disposition, many startups fail. That's why Gatto says he spends a lot of time thinking about risk management.
"My job is essentially to invest in very high-potential opportunities, and then try to help them manage risk and not get in trouble," Gatto says. And so I've thought a lot and measured a lot about what are the cause of death? What causes these startups to not have success?"
In thinking about this, he's come up with a few reasons. One issue is that it's just too early. The technical capabilities are there before the health systems, physicians and insurance companies are ready to use them — a company that starts, say, five years too early could end up failing, even though they're right.
"You can have a great innovation, but if the customers aren't ready to use it, that's going to fail," he says.
Another piece that is really challenging is integrating the unique innovation into the overall workflows of the existing infrastructure.
"The existing health care infrastructure is Byzantine and complex and slow to change," he says. "And a lot of entrepreneurs will try to force the industry to change to the way they are suggesting people do it. And that doesn't work. They're not willing to change all of that. So, you have to configure your system to fit with the existing workflows."
Another issues is team dynamics, which can be challenging.
"The profile of a successful set of two or three founders, it's sort of a Three Musketeers culture where we're all for one, one for all. We're doing whatever it takes to get this idea in our head actualized into the world," he says. "That is the culture early on. And then you end up bringing in 1,2,3,5 believers, really passionate people that want to help, too. And what happens — and it's my job to help people through this growth process — what happens is that team of five to 10 people has some early success and then they need to begin putting systems and division of duties and now let's get to repeatable, easy to scale-up procedures, and things that (are) common practices, standard operating procedures. The profile personality and experience set of those early core group, typically they're a jack of all trades. They can do everything kind of well, but they're not the best in the world at accounting, sales, operations, customer support. And so that team dynamic of Three Musketeers early on, but then how do we transition to dividing up the duties — I trust you to do sales, you trust me to do all the product operations. That's a hard emotional journey to go through because I used to be involved in every decision and now, you're going to do your part and you have to trust me to do my part. That transition often causes challenges."
At Jumpstart, he says they try to teach people that these are the steps, and so to have success as a startup, know this transition is coming. And when it arrives — and in some cases, when it doesn't — there could be significant changes.
"This is natural," he says. "We have to go through this process, here's what to expect. And then we try to help them evolve into that. What it means is that people are going to leave, and that is fine as long as we are honest with them, we respect them, they understand what's coming. Maybe they go off and they do another startup or they go do something else that they're passionate about. What I found is the transparency and the honesty, almost like a teaching point of view, helps with that team dynamic."
Gatto spoke on the Smart Business Dealmakers Podcast about the formation and evolution of the venture capital firm, and the opportunities he's seeing in these early-stage ventures as well as their challenges.
