7 min readingThe digital health market is a huge one, and, especially in recent years, it can often seem ever-expanding. With a 2023 market size of over $81B and a projected CAGR of nearly 20% through 2024, there is no shortage of digital health companies jockeying for position in their respective market niches. Even as the COVID-induced digital health hype settles, 2023 digital health investment still topped $10B, meaning there is also no shortage of innovative technology development in the field. Constantly battling to differentiate themselves for the diverse stakeholders in the US healthcare system (providers, payers, consumers, retail players, etc.), digital health start-ups can’t avoid the perennial build vs. buy dilemma.
So how can digital health start-ups decide whether they should develop a certain technology in-house or license it from an external company? There are five key considerations that digital health start-ups should explore as they navigate this question: (1) cost, (2) time to market, (3) technology quality, (4) maintenance requirements, and (5) connection to core competencies.
Cost
Start-ups typically have very limited resources and must be very deliberate and diligent with regards to their spending. The “sticker price” for licensing external technology can often cause business leaders to look internally for a development solution. However, with software developer salaries typically well over $100k and the common issue of underestimating internal development time, this can often be much more costly than it seems. Thus, a more detailed analysis is needed to better understand the true cost implications of building and buying. More specifically, business leaders should consider cost predictability, vendor business model, and opportunity cost. The biggest difference between building and buying is clarity. When licensing a solution, a start-up knows exactly what they will receive (as long as it conducts effective due diligence), what it costs, and how they will pay.
Regarding cost predictability, it is important for digital health start-ups to be realistic about their internal talent. Is the team capable of this development? Is it clear how long it will take to complete? It’s also important for start-ups to consider whether vendors’ business model aligns with their budget capacity. Does a subscription model or a flat licensing fee make more sense? Do vendors offer the business model you need? Lastly with regards to opportunity cost, it’s important to understand how internal development will impact the start-up’s ability to deliver in other areas. Will developing the needed technology internally take resources away from delivering on other key initiatives that will drive clear financial benefits?
Time to Market
Digital health start-ups can’t afford to underestimate the importance of time, especially time to market. With limited runway, every day counts on the path to scalability and profitability. Similarly, as competition continues to rise in the digital health space, first mover advantage is paramount, and the build vs. buy decision can make or break an organization’s ability to achieve that edge. Digital health start-ups should analyze the amount of time they’d expect it would require to bring a solution to market both through the licensing route and the internal development route and then weigh the scenarios against the competitive pressure they feel to get to market with that solution. Typically, licensing external technology enables organizations to bring a solution to market much quicker than they’d be able to deliver an internally developed solution. However, this can also require a longer-term compromise on the flexibility to modify that solution. Ultimately, digital health founders must understand that the cost of delaying a product launch due to the choice to internally develop a solution is not just the salary cost of the developers building the solution. Rather, it’s the cost of the entire company as it waits for the availability of the product component in development.
Technology Quality
Of course, cost and time to market are only truly relevant if the solution an organization brings to market can effectively fulfill the needs of its customers or end users. Even if developing a solution in-house is still relatively quick and less costly, digital health start-ups must be honest with themselves about the quality of a solution they’ll be able to develop compared to the solution(s) that are already available. Founders tend to have a lot of faith in their teams, but it is important that they do not allow this to cloud their judgment. Spending more time to develop an inferior product is a surefire way to slip behind the competition. Thus, decision makers in digital health start-ups must make sure they understand the “nitty-gritty” details and differentiators of the various solutions already available in the market to ensure they make fully informed choices about building vs. buying.
Maintenance and Enhancement Requirements
Different solutions require different levels of maintenance over time. It’s important to understand that the build vs. buy decision is not just relevant for the implementation of the solution; it remains relevant long after the solution has been implemented. Thus, as digital health founders navigate the decision, they must be sure to understand the long-term maintenance and support needs for the solution. A solution built internally that requires a high level of maintenance can occupy significant resource time and energy for many years.
Similarly, founders must understand the trajectory of the technology in question. Is the technology needed for the new solution evolving very quickly? Do the external vendors frequently improve the performance of their solutions? Digital health technology solutions, especially software solutions, seldom remain static and unchanged following an initial implementation. The tech landscape is constantly developing and advancing. This means that a decision to build a solution internally is not just a commitment to develop and implement it. It’s also a commitment to advance and improve the solution for years to come in order to ensure that it remains competitive.
Connection to Core Competencies
One of the most difficult things to do as a digital health start-up founder is to say “no.” With so many technological advancements happening so quickly in the field, founders can often feel excited and energized by the variety of opportunities in their niches. A key way to evaluate whether a decision is the right one is to consider whether it aligns with the company’s strategy. More specifically, for build vs. buy decisions, digital health start-up founders should evaluate the solution’s relationship to the company’s core competencies. If the solution in question will become the principal core competency of a start-up, then it typically makes sense to build and manage that solution internally. On the contrary, if a solution is peripheral to an organization’s core competency, then it often doesn’t make sense to pull resources away from key business areas to build and manage that non-core initiative.
Of course, the decision is not always that black and white. Even if a solution supports an organization’s core competency, or is directly tied to core capabilities, it’s important to understand how challenging developing that solution will be. Digital health start-ups strive to deliver on their core capabilities as effectively as possible, and sometimes licensing technology as a part of those core capabilities enables the organization to deliver a product that is far superior. If a digital health start-up can deliver a much stronger solution in significantly less time through licensing and can still add enough of its own value around that solution, licensing can be worth it in the more ambiguous situations.
