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How Sherpaa Transmitted Unrealistic Venture Capital Expectations

Why technology investors often do not understand that tightly regulated startups in the healthcare sector are not growing as fast as Internet companies.

In 2009, the star of Jay Parkinson rose. Called the “ Doctor of the Future ” in the media , Parkinson created an innovative Facebook-style app called Hello Health for doctors and patients. Then, fast-growing startup Tumblr invited him to develop a strategy for the health of his employees. The conversation in which Parkinson advocated switching to digital methods (such as SMS) for communicating with physicians inspired him to create his own company - Sherpaa .

At Sherpaa, employees at companies like Tumblr received an e-mail and phone number to contact their doctor at any time. In 2012, after the release of national TV material on the company's simple but effective approach, Sherpaa was able to hire its first experienced manager. Less than six months later, Parkinson hired another New York top manager with experience working with staff and raised $ 1.85 million. Everything went well.

In less than five years, Sherpaaa investors were almost completely disappointed in the company, and Parkinson was embroiled in a protracted struggle to save her. What happened?

The prospects of introducing new technologies in the backward in terms of the use of software and healthcare services attract many investors. Funding for digital medical technology, known as digital health, reached $ 4 billion by 2014, which the Rock Health venture fund called “terrific in many ways.”

The surge in funding initially gave digital medicine entrepreneurs much more influence in investor relations, which seemed like a positive trend. Even now, company founders receive term sheets from both health and technology investors, but Silicon Valley funds specializing in consumer technology are prepared to offer much larger amounts, as well as acquaintance with technology media and invitations to speak at conferences.

The difference in the order of the amounts is easy to explain: as I wrote earlierMany experienced health care investors are reluctant to compete in the appraised value of companies, because over the past decades they have made sure that most healthtech startups will never grow as fast as highly valued technology companies. Five years after the surge in funding for digital medicine, “we still have hardly seen successes in healthtech; Most companies in this category, such as ZocDoc and Oscar Health, still do not have IPOs, ”explains Nihil Krishnan, technology analyst at CB Insights.

This made me think about what happens when a moderately successful and organically growing healthcare company gets as much money as a technology startup. Jay Parkinson, founder of Sherpaa Health, decided to share his story with Fast Company as an instructive story for healthtech entrepreneurs.

Mismatch of expectations


Sherpaa was launched at a seemingly perfect time. After various health care reforms, money from technology investors who previously avoided medical startups went into digital medicine .

Parkinson did not make appointments with traditional health investors. Instead, he sought out investors with experience in consumer technology, suggesting that "we need people outside of healthcare to help change the system for the better." This turned out to be his first big mistake.

Looking back, he recognizes his responsibility for “insufficient education” of his investors about the difficulties of introducing innovations in healthcare - a deliberately complex and strictly regulated space.

As Sherpaa investor Bryce Roberts told me, from medical startups that raised money at the same estimated cost as Internet companies, they often expected the same growth as from Internet companies.

From the very beginning, Parkinson had clashes with company investors regarding growth expectations. A lot of stress, he said, was around sales. As Parkinson soon discovered, the HR services of many employers were not ready (and still are not ready) to spend more on medical care with a steady increase in costs and attention to them from dozens of vendors. Parkinson says Sherpaa has grown - especially among "young, hip companies" - but has not grown fast enough to satisfy investors and the board.

“Promising healthtech companies often get stuck because investors' expectations about the future of the company do not coincide with reality," adds entrepreneur Abhas Gupta, a former healthtech VC. He often sees how in 18 months the company has not reached the point needed for new cash injections. “They cannot go to the foreign market for money, so they are counting on new investments from insiders.”

But healthtech companies need more time to win customers than companies from other industries. In this area, one has to deal with rather specific issues, for example, ensuring compliance of technology with federal requirements for confidentiality and security; regulatory oversight, which verifies that companies are not exaggerating their capabilities and not harming patients; as well as long sales cycles, because in medicine it often takes years for technology buyers to start working with a new supplier.

An experienced healthcare investor, Dave Chase, has repeatedly said that he has witnessed situations where contracts were suspended because few buyers are “authorized to agree to something new.”

This company recently survived HomeHero, which stopped home care activities when it was unable to meet corporate sales targets; they failed to translate large pilot projects in large medical systems into permanent contracts .

Moreover, some companies fail after an agreement on promising pilots with large hospitals, it seems, not through their fault. Some prominent investors call this phenomenon “death by the pilot . ”

Another problem was that sales cycles typically lasted 9-12 months, but Parkinson said investors were pushing Sherpaa to hire and fire sales executives faster than closing deals. And so that the company could scale, the founders were asked to “move away from the sales process,” he says.

Unlike enterprise-tech, healthcare sales cycles can drag on. “I think for people who only work in technology, corporate sales are measured in weeks or even days,” explains Ambar Bhattacharia, Managing Director of Healthtech at Maverick Capital Ventures . “When companies come to the world of payers and healthcare providers, cycles are measured in months, and sometimes years.”

Ben Rucks, an experienced healthcare IT consultant, concludes: “Doctors don't like spending money on software; hospitals are not famous for rational and quick solutions; payers are harsh; and it’s not easy for employers to sell. ”

When the money ran out, Parkinson was desperate to prevent investors from writing off his company. Sherpaa had the opportunity to receive $ 20 million in strategic investments from a health fund, but the deal was closed after disagreements with the board. The offer was withdrawn and the company appointed a temporary CEO, who quickly fired all employees and tried to sell the company.

Realizing in the end that a quick sale would be impossible, at least because of the delicacy of the medical care that Sherpaa patients still needed, the interim CEO, according to Parkinson, resigned. After that, he was able to return most of the employees and restructure the company.

Pressuring companies to grow can sometimes be detrimental. Roberts believes that it is no coincidence that many of the biggest start-up scandals of the last few years have been linked to healthtech companies, such as Zenefits, which cut corners to achieve unrealistic development goals.. “A business must look and act in a certain way; to look and act like that, you have to be more creative, ”he explains. This may include a rejection of confidentiality and security that jeopardizes patient data, or a “neat” selection of data to expedite the clinical trial process.

Wise advice for medical startups


Does this mean that healthcare companies generally should not accept money from inexperienced venture investors? Not necessarily, Parkinson and others say.

Some experts say it’s better for startups to choose venture capital firms with a team of healthcare professionals. Quartet Health's Gupta accepted Google Ventures funding for exactly this reason (his investor, Krishna Yeshvant, is a doctor and entrepreneur who is still practicing medicine). Others say that any form of capital is risky, so the best thing an entrepreneur can do is educate his investors before signing.

Roberts Firm, Indie.VC, invests on other conditions than in the traditional venture model; she accepts payment through distributions of cash or shares of income. “We believe that you can extract very good dividends from a real business that is developing with a different dynamic than Google,” he explains. Roberts believes that venture capital is too glamorized, and the ecosystem of startups is in a hurry to " assess the size of ambitions by the amount of venture capital dollars raised ."

Parkinson eventually learned that independence is the key to serious business. He claims that investors on the board tried to close the company in order to write off investments and avoid any personal liability. Ultimately, investors presented him with a one-page document, exempting them from all responsibility; in return, they would leave the council and waive any voting rights. The whole council signed it, Parkinson says.

Now he has a small team that provides itself mainly from the proceeds and gradually repays the company's venture debt. “We will only invest in something that helps to delight our customers and thereby increase our income,” he says. “Although it’s not easy to turn from a VC-funded company into a self-funded company, I think it's a gift.”

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