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Substance Use Startup? Avoid These 7 Mistakes


An image with a bright orange gradient background featuring a large number '7' on the left side in white, casting a subtle shadow. To the right of the number, the bold text reads 'BIG MISTAKES SU STARTUPS MAKE' in dark blue, followed by a subheading in smaller font stating 'AND HOW TO AVOID THEM'.

The substance use treatment industry plays an essential role in helping people recover from substance use disorders, but it's also one of the most challenging sectors to succeed in. Many startups in this space struggle due to unique regulatory, financial, and operational issues. By learning from real-world examples of failures and successes, aspiring entrepreneurs can better understand these challenges and navigate their startups toward sustainable growth.


In this blog post, we’ll explore why some substance use startups fail, highlighting real-world examples, and provide actionable steps you can take to avoid these pitfalls and build a thriving business.


1. Regulatory Challenges: Compliance is Non-Negotiable

Substance use startups must navigate an intricate web of regulations, and failure to do so can have significant consequences. Compliance issues range from obtaining the right licenses to following HIPAA guidelines and keeping up with state and federal mandates.


Real-World Example: American Addiction Centers (AAC), a large for-profit addiction treatment provider, faced legal and regulatory challenges over the years. In 2016, they were fined $7 million by the federal government for falsely billing insurance companies for tests that weren’t medically necessary. AAC’s compliance failures not only resulted in financial penalties but also damaged their credibility within the healthcare industry.


Actionable Steps:

  • Invest in Compliance Infrastructure Early: Startups need to prioritize legal compliance from day one. AAC’s example shows how expensive compliance failures can be. Hire compliance officers or legal advisors to ensure you're following the regulations. Having someone with experience working in the field can be a crucial first step in ensuring your compliance.

  • Regular Training: Provide ongoing training for staff on the latest regulations and ethical practices to prevent unintentional compliance breaches. Additionally, ensure all staff understand the policies and procedures for your startup, and who to go to with any compliance or ethics concerns.


2. Financial Constraints: Build a Resilient Funding Strategy

Many substance use startups fail due to a lack of sustainable funding. Reliance on grants, delayed insurance payments, and limited investor interest can make it difficult to maintain financial stability.


Real-World Example: Aware Recovery Care, a home-based addiction treatment service, succeeded by securing $60 million in funding in 2021 from investors like CVS Health. They were able to prove the effectiveness of their model by showing positive patient outcomes, which helped them gain traction and attract significant funding.


On the other hand, smaller startups like Tempest, a digital recovery platform, raised substantial venture capital but eventually had to wind down in 2023 due to unsustainable growth and financial difficulties.


Actionable Steps:

  • Intentional Funding and Revenue Sources: Like Aware Recovery Care, you should seek diverse funding sources—whether it’s private equity, public grants, or strategic partnerships with healthcare providers. This reduces reliance on any single stream of income. Additionally, Aware partnered with investors with experience in the healthcare space, increasing their likelihood of success.

  • Prove Value Early: Both Tempest and Aware Recovery Care highlight the importance of demonstrating value to investors and clients. Focus on gathering data that shows the efficacy of your treatment model, which can be key in convincing both insurers and investors to support you. While an idea, in theory, may be enticing, lack of impact and data to demonstrate efficacy will outweigh the most interesting of ideas.


3. Scalability Problems: Think Beyond Initial Success

Many substance use startups struggle with scaling beyond a single location, service or initial client base. Operational and staffing issues often make it difficult to grow, particularly in a field that relies on personalized care and human resources. Additionally, because of the fast-paced nature of startups, the time and attention to clear policies and procedures can be dismissed, resulting in errors and inconsistency when attempting to scale.


Real-World Example: Phoenix House, a well-established nonprofit addiction treatment provider, faced difficulties when they expanded too rapidly without a clear, scalable infrastructure in place. In the early 2000s, they attempted to grow nationally but encountered operational challenges and significant debt, forcing them to close multiple locations and downsize.


In contrast, Hazelden Betty Ford Foundation has successfully scaled by implementing strong administrative and clinical models across multiple locations while maintaining high standards of care.


Actionable Steps:

  • Develop Standardized Processes: Phoenix House’s struggles show the importance of having scalable systems in place before expanding. Hazelden’s success is attributed to consistent care models and operational processes that could be replicated across new locations.

  • Use Technology to Scale: Consider leveraging telehealth or mobile applications to reach new clients without the overhead of opening new facilities. Digital tools can help you scale efficiently while maintaining quality care.


4. Workforce Shortages: Prioritize Recruitment and Retention

The success of a substance use startup depends heavily on the quality of its workforce. High turnover rates and shortages of qualified staff are common problems in this industry.


Real-World Example: Caron Treatment Centers successfully tackled workforce shortages by offering competitive salaries, career development opportunities, and a supportive work environment. As a result, Caron has been able to retain qualified staff, which ensures consistent patient care across their facilities.


On the other hand, smaller startups like Granite Recovery Centers faced staffing issues, leading to inconsistent care. This contributed to their acquisition by a larger provider in 2021, after struggling to operate sustainably.


Actionable Steps:

  • Create a Supportive Work Environment: Like Caron Treatment Centers, startups should focus on creating a positive work culture that promotes staff retention. Offer competitive salaries, mental health support, and career growth opportunities.

  • Build a Recruitment Pipeline: Partner with local universities or training programs to develop a steady pipeline of addiction counselors, nurses, and social workers. Having access to trained professionals helps you avoid workforce shortages, especially during growth periods.


5. Poor Market Fit: Know Your Audience

Understanding your target audience is crucial to success in the substance use space. Many startups fail because they don’t accurately assess the needs of their target demographic or offer services that are out of touch with local demand.


Real-World Example: BrightView Health succeeded by offering a personalized, community-centered approach to outpatient treatment in underserved areas. They recognized that many clients needed access to Medicaid-funded services and built their model around that need. Their data-driven, patient-centric approach allowed them to grow across multiple states.


In contrast, Element Behavioral Health initially focused on luxury, high-end rehabilitation centers but struggled with a poor market fit in some locations where demand for luxury care was low. They eventually had to restructure their services.


Actionable Steps:

  • Conduct Thorough Market Research: BrightView Health’s success is rooted in understanding community needs. Before launching, conduct surveys or focus groups to learn what services are most in demand.

  • Adapt to Local Needs: Be willing to pivot. If your original business model isn’t resonating with your target audience, consider adapting it—whether that means offering more affordable services, adjusting treatment methods, or adding new service lines.


6. Stigma and Engagement Barriers: Overcome Resistance to Care

The stigma associated with addiction remains a significant barrier for those seeking help. Some startups fail because they don’t address the deep-rooted stigma that prevents potential clients from engaging with services or they lack awareness of how stigma impacts access to innovation.


Real-World Example: Shatterproof, a nonprofit organization focused on ending addiction stigma, launched successful public education campaigns to raise awareness and change public perception of addiction. This helped improve access to care by reducing shame and fear among potential patients.

In contrast, some startups that didn’t prioritize combating stigma faced low engagement rates and struggled to retain clients.


Actionable Steps:

  • Focus on Stigma Reduction: Like Shatterproof, invest in public awareness campaigns that promote understanding and reduce shame around addiction. This will help potential clients feel more comfortable seeking your services.

  • Engage Local Communities: Partner with community leaders, faith organizations, and people with lived experience of addiction to foster trust and reduce the stigma around substance use treatment.


7. Technology and Innovation: Use Tech Wisely

The use of technology in substance use treatment, such as telehealth and mobile apps, can expand a startup’s reach. However, poor implementation of technology can result in low engagement or ineffective care.


Real-World Example: Boulder Care, a telehealth-based addiction treatment service, has successfully used technology to provide comprehensive addiction care, particularly in rural areas. By offering virtual medical services and counseling, they’ve expanded access to care where brick-and-mortar facilities may not be available.


On the other hand, Pear Therapeutics, known for its digital therapeutics like reSET for substance use disorders, initially struggled with low engagement because the technology wasn’t fully integrated into patient care pathways. Over time, they adjusted by partnering with providers to improve patient usage.


Actionable Steps:

  • Prioritize User Experience: Like Boulder Care, focus on making technology easy to use for both patients and providers. Invest in user-friendly interfaces and offer training to ensure clients know how to access your digital services.

  • Integrate with Healthcare Systems: Ensure your tech solution is part of the broader healthcare ecosystem. As Pear Therapeutics learned, partnerships with medical providers and insurers are key to boosting engagement and adoption.


Final Thoughts: Build Your Substance Use Startup to Last

Starting a substance use startup is a daunting yet rewarding endeavor. By learning from the successes and failures of real-world examples like Aware Recovery Care, BrightView Health, and Shatterproof, you can navigate challenges related to regulation, funding, scalability, and patient engagement.


Remember, substance use startups aren’t just a business—it’s a mission. By focusing on compliance, workforce development, market fit, and technology, you can create a business that not only survives but thrives, making a lasting impact in the fight against addiction. With persistence and the right strategies, you can create a startup that thrives, making a lasting impact on the lives of those who need it most.


 

Ready to avoid these mistakes and build a successful substance use startup? Connect with us at Transcendworx! Our team of experts is here to assist you with compliance, funding strategies, scaling, and more. Let’s work together to bring your innovation to life and create lasting impact in the recovery space. Reach out today to get started!

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