“The power of a wrong financial model”
If financial models are always wrong, why bother?
By Haley Schwartz, Catalyze Healthcare
Wall Street, startups, venture capitalists, and investors are steadfastly obsessed with financial models even though they are perpetually proven wrong. The quantitative practice remains a necessary evil yet is perceived as a directional north star filled with hope and inspiration. Or rather, aspiration. If every model is a hockey stick, why bother?
The answer: Diligence.
What is routine:
Though the numbers within a financial model are rooted in assumptions, a quantitative foothold allows everyone in the room to start from the same square one. Engineers, investors, and other stakeholders begin by asking: “how big is the market?” and “how much of it can we take?” Industry reports inform the former while price and volume are levers driving the latter.
What is worthwhile:
In healthcare, useful financial models will consider multiple scenarios including reimbursement cuts, price ranges, production costs, and pending partnerships to drive sales. More importantly, to get to these numbers, the team must take a deep dive into all factors that will influence their business. A financial model forces a team or product manager to think through internal and external forces, uncover gaps and opportunities, and identify risks and mitigations to create a wholly successful launch.
In terms of simple market share, traditional financial models will cite a pie chart with incumbent players divvying up the market explaining that large players are too bureaucratic while smaller competitors lack resources for expansion. In the pursuit of more diligent financial models, each competitor can be broken down “SWOT and PESTEL”-style to understand headwinds and tailwinds, product pipeline, and how the money flows to anticipate key strategic moves. It would be nice to know if upcoming legislation will be a roadblock to a new device’s adoption – check out the graphic here depicting considerations of the lesser-known PESTEL tool from my commercialization talk at DeviceTalksWest in 2022.
By way of profitability, financial models may be myopic solely focused on revenue without truly respecting the overall business. Cost control including back-up suppliers and alternative operations also force the team to engage other vendors, test various materials, and creatively drive efficiencies without simply raising price.
Lastly, a common pitfall is “I don’t need to be an expert on each competitor, I have other things to do.” This belief is held by many founders and while it may not be their job (though debatable), it has to be someone’s job to ensure a grandiose idea does is not bleed itself dry. Some call this is building a moat, while others say it is becoming bulletproof. Regardless of the analogy, the principle holds that in order to quantify opportunity and risk, qualitative diligence cannot be overlooked.
AUTHOR BIO
Haley Schwartz is a passionate commercialization expert with over 10 years of sales and marketing experience in medtech. She started Catalyze Healthcare to work with medical device companies struggling to commercialize in the U.S. by focusing on developing marketing plans, launch plans, go-to-market strategies, competitive analysis, pricing models and more. Contact her at inquiries@catalyzehealthcare.com or via LinkedIn for advice on your next product launch.