How to Exit Smart: 7 Mistakes Healthcare Founders Should Avoid

Roadmaps for how to launch a healthcare startup are plentiful, but savvy founders should also seek advice to plan their exit strategies for success. Not doing so can mean the loss of a multi-million dollar offer.

At SiS New York, a recent conference held at Cure for entrepreneurs in the women’s health space, three healthcare entrepreneurs with exit experience shared lessons learned from their mistakes and what startups could do instead to get it right, noting how best exits go well beyond valuations.

Mistake #1: Waiting until you're ready to sell to think about buyers.

When you start a company, consider your ultimately buyer. If you can, connect with those companies to learn what they’re looking for in an acquisition.

Also talk to investment bankers who might have ideas about where you could exit, as well as what metrics are important to various companies. Those metrics will be what you’re judged on, whether it's growth, profitability or the number of customers you have. It’s better to know early on what “good” looks like to potential buyers, so you can build your company with those things in mind.

Mistake #2: Entering a partnership without considering its impact on your exit.

Ideally, founders looking to exit want to create competition among their potential acquirers. So, they should avoid tying their core business too closely to one larger company.

“Companies spend so much time and money to go through an acquisition process, and if there's a competitor of theirs that has you in their pocket, they’re not going to touch you,” explained Mike Satow, JD, a serial entrepreneur with four nine-figure exits, including Bonafide Health and Nutrition 21. “They’ll think, how are we going to compete when this other company has all this inside information?”

Startups that align too closely with a single big player risk losing the ability to spark a competitive auction.

Mistake #3: Being naïve about protecting your IP.

When a Fortune 500 company explores a new space, they often reach out to startup founders to learn more. But founders should tread carefully because big companies can misuse their power by extracting insights without investing in return.

“It’s not hard for them to steal the tech after you’ve shown it to them,” warned Jenny Carillo, PhD, a healthcare executive who served as president of Ovia Health during its acquisition transition with Labcorp.

Rather than getting too close to a company operating in your exact space, Carillo recommends looking for partnerships with businesses in adjacent industries. “If a company is not directly going into your space, they could be great partners,” she said.

Mistake #4: Hiring the first investment banker you meet.

Hiring an investment banker is an important part of the sales process to help create demand and, ideally, a competitive auction. But beware: Bankers are good salespeople.

“They’ll tell you what you want to hear, but many times what they say is not true,” said Satow.

He advised to get to know the bankers who are prominent in your sector and talk to them about your business. And do your due diligence. Look at past exits they've done. Talk with other entrepreneurs they’ve worked with.

“Ask them: Is what they told you in the beginning the way things worked out? Were they truthful? Be direct and ask questions,” Satow said.

Mistake #5: Compromising your values when you get a big offer.

When a company offers to buy you for a big price tag, it can seem like a dream come true. But don’t jump at the biggest offer if it means compromising your values.

Roya Pakzad, founder of Feminate, a digital health platform for hormone care, faced this dilemma when approached by the male founders of another women’s health company looking for a female executive to join their team.

“It sounded like an amazing win-win situation,” Pakzad recalled. She was clear about her non-negotiables, which included protecting her investors, retaining equity, and keeping the Feminate’s product intact. But the founders backtracked just before signing.

Pakzad had to decide whether to accept a deal that went against her principles or start over. An investor suggested she speak with Superpower, a company like Feminate. She already knew the co-founder, so she had a level of trust from the get-go.

“Our values totally aligned. It was the easiest contract I ever signed,” she said. “I am so happy I hung up on that Zoom call with that other company.”

Mistake #6: Overselling your company's strengths during the sales process.

Startups must keep their data clean and accurate and be transparent during the sales process. Not only does this ensure a good relationship after acquisition, it protects you from legal trouble. [M2]

Case in point: Pakzad mentioned the cautionary tale of Frank, the financial aid software platform acquired by JPMorgan Chase for $175 million in 2021. When Chase began its marketing campaigns, the bank discovered that Frank founder Charlie Javice had inflated her customer numbers and many of her emails were fake. Javice now faces fines and jail time.

The moral of the story? Be truthful about your assets, your customer base, and your revenue, because any fraudulent claims will quickly be exposed once you’re acquired. From the start, take steps to protect your company, like creating a compliance program and setting up best practices to avoid fraud.

Mistake #7: Hiding information from your founding team.

Founders who massage or try to hide what’s happening from their team create a lot of confusion after they get to the other side of the sale. Carillo recalled acting as something of a mediator when she joined Ovia Health, after it was acquired.

“It was interesting to hear what the folks who had been acquired had been told, and hearing the story from Labcorp’s side. I ended up serving as this bridge in between these two stories,” she said.

Like you, your team has put their heart and soul into your business, and you want them to feel good about their new company. Be as transparent as you can with them as you go through the acquisition process.