We often highlight the deals and “wins” of our digital health startups, but just as important are the lessons that come from deals that fail. These stories are rarely told, yet they offer critical insights that can help others avoid the same costly missteps.
In this article, we share a case study of a startup that had to terminate a contract with a pharma company (not a member of PharmStars). While the startup and pharma had experienced a productive relationship for years, internal shifts at the pharma led to an unfortunate ending. The startup has asked to remain anonymous but generously agreed to share their experience and advice to benefit the broader startup community.
The Backstory: A Promising Start to a Pharma-Startup Collaboration
The relationship began like many successful pharma-startup engagements: a warm introduction led to a small initial project. Because the startup delivered under budget and exceeded expectations, the initial project was a mutual success. As the startup CEO shared, “We hit that small project out of the park, and the pharma was super happy with it.” This laid the foundation for an expanded engagement with increased pricing and scope over time.
For several years, the startup and pharma had a productive and positive relationship. “The pharma stakeholder we had done this work for had a really good year and ended up getting promoted, partly due to the generative AI work we did,” explained the startup CEO. Delivering innovation that was both timely and strategically valuable for the organization led to the pharma stakeholder reaping tremendous benefits.
When Pharma Champions Change Positions
However, trouble began in the pharma/startup relationship when the pharma champion received a promotion. Their replacement, new to the role, inherited this 6-figure contract and quickly approved it. But a new VP came in above the new champion and began reviewing expenditures.
As the startup CEO recounted, they were eager to introduce the new champion to their ongoing work for this company: “We put this presentation together about all the great work we'd done over the four or so years with them. The VP thought it was great and said they might have a few additional things for us to do.”
Despite this initial excitement, the company needed to cut budgets. And soon this startup’s payment was to be cut by 33%. “They sent a very formal legal email two weeks later saying, ‘orders from corporate and higher ups — we need to slash our budget. We're going back to all the people we've already signed deals with and cutting the amounts,’” the startup CEO recalled.
The timing was particularly bad for the startup as they were in the process of fundraising and low on cash. With the total payment reduced and now to be spread over a year instead of delivered as previously agreed in a single installment, the startup faced a cash flow crisis. So, they saw no other choice but to attempt to force the pharma to honor their contract. “We ended up having to get legal counsel involved, and that totally blew up the deal,” the startup CEO explained. The pharma firm ultimately terminated their engagement with this startup.
Learnings From a Failed Deal
While the startup did many things right and had success in this pharma engagement, several factors contributed to the deal’s collapse. Here are the takeaways:
1. Don’t Rely on a Single Champion
It’s critical to cultivate relationships beyond your primary stakeholder. Secondary champions can help stabilize a project when personnel shifts occur. The greater the internal support for a project within pharma, the less likely it will be disrupted by personnel changes.
2. Anticipate Transitions in Stakeholders
Pharma roles are in constant flux, so be prepared and anticipate that there may be changes. Knowing about a stakeholder’s promotion early can allow you to build relationships with the incoming decision-makers to establish the value of your collaboration with them and ensure it continues.
3. Watch for Contracting Red Flags
If contract renewals seem too easy, take note. In this case, the six-figure contract was “renewed” by someone without the appropriate level of authority. Check in with departing stakeholders to confirm that a contract is safe and will be supported by the right people with the necessary signing authority.
4. Diversify Your Client Portfolio
While it’s tempting to focus your effort on a small number of large, successful clients, relying too heavily on any one of them is risky. Ensure your business can survive if a major client unexpectedly withdraws.
Final Thoughts
We’re grateful to this startup for their honesty and for allowing us to share their experience. Their advice is a reminder that even seemingly strong pharma-startup engagements can change directions quickly. So, prepare, diversify, and manage these relationships thoughtfully to ensure the health and longevity of your startup.
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