Degrees of Revenue and their impact on business viability

As I was reading the article on TheKen today about MyGate- a well funded startup that's still deep in red trying to figure out a sustainable revenue model to justify its $70Mn fund raise, valuations and create a platform for its next fund-raise, I noticed this was becoming too common a theme for startups.

I came across a similar example in the MedTech space as well. Here was a well funded AI startup looking to disrupt the diagnostics space.

First Degree of Revenue: They would sell the hardware to labs and charge the labs per report generated. This revenue model did not work as labs were not willing to pay the extra cost for the report as they already had equipments and pathologists to generate the report.

Second Degree of Revenue: They then pivoted to starting their own chain of labs. Hoping that underlying technology could provide a significant cost advantage, improve speed and quality of report delivery to patients and also showcase a proof of concept to the labs. This would also accelerate access to patient data which is vital for building an AI product. Their core revenue model would remain the same. But the profits from the lab business would accelerate the adoption of this model.

Third Degree of Revenue: As they started building this network of labs, they ventured into distribution of lab equipments and consumables. They were anyway investing millions into lab infrastructure, why not sign distribution agreements with the MedTech companies, benefit from the economies of scale and build deeper relationship with the labs by offering them equipment and consumables at a cost advantage. The profits generated from this could itself fund expansion of the labs and in turn accelerate the adoption of thier AI Tech platform.

How different is the organization structure, the skill set and the business model required to realize these different degrees of revenue. Running a profitable laboratory, let alone a chain, is such a complex operation.

Building a successful distribution business in the MedTech space requires much more than a few percentage cost advantage. You need deep therapy, application and technical know-how, build deep relationships with pathologists and lab technicians so that can trust you with your offerings and lastly build a responsive and competent service support structure.

Needless to say, after writing off its investments and laying off its employees, its now in search of another pivot.

Building a viable business is hard enough. If the core business model does not work, pivot to a business model that brings you a profitable first degree of revenue. When your underlying road to profitability is a series of ‘if-else’ statements engineered to showcase a high TAM and LTV to justify the burn, you are set for the inevitable.