Cash-Colored Donkeys: Less Sexy, Less Likely to Go Extinct
(Also, a rejoinder to Rob Coppedge of Echo Health Ventures)
The blood sport of entrepreneurship demands a strong stomach (mine apparently wasn’t strong enough for medical school itself…Mom called it when I was a kid; blood makes me queasy). I have been called many things, but lazy isn’t among them: one of the greatest compliments I ever received came from Michelle Gittleman, a former administrator in Carnegie Mellon’s entrepreneurship department (where my business partner and I met), who said she knew we “would make our company work, if by sheer force of will alone.” Yet I am perfectly willing to accept that I am a bad businessman, if that is what it means to focus on growth that also turns a profit.
I was raised in a family of entrepreneurs who believed it was good (great, even!) to generate cash, and really bad to have to fire people because there isn’t enough money to keep them around. If such philosophies are wrong, then to paraphrase an R&B classic: “Man, I don’t want to be right.”
On September 6, 2017, Rob Coppedge, CEO of Echo Health Ventures, published an essay for CNBC, titled in part, “Digital health is dead.” In it, Rob advances arguments asserting that the digital health venture market — he is looking at digital health startups, not products or services, per se — is marked by “underlying concerns that threaten the return profiles of overcapitalized digital health portfolios.” Some of Rob’s admonitions are easily agreeable: “Many [digital health firms] have lacked expertise, underappreciated health care specific workflows, misunderstood the full health care consumer journey and seriously underestimated what it takes to break through enterprise health care sales cycles.”
But a failure to do one’s homework in business is not a digital health problem; it is a lack of savvy about how to sell. (Rule #1: Know thy customer!) Rob advances other positions that are more complex, since early-stage investors across industries ostensibly own some responsibility for backing hype-y firms that feed the fever and inevitably yield what Rob has called a market correction by another name (where “the ungrounded aspirations of well-meaning digital health entrepreneurs and venture capitalists collided”).
The headings below are text from Rob’s essay:
“Sales cycles are slow and adoption is more measured”…“The only thing that has grown faster than dollars invested in digital health has been the hype surrounding it.”
Perhaps because I was raised in a family of merchants (my grandfather ran a paper company, then started a sewing machine import business that my parents now operate; and if you ever shop at Costco, those twisty lightbulbs energy efficient light bulbs comes from my uncle’s company), I have never understood the notion of running a business underwater without aspiring for profit. Sure, some companies take time to pop above the cash flow line, but Beyond Lucid Technologies operates in the San Francisco Bay Area, where successfully turning a profit as a Health IT startup makes my business literally one of the most successful firms, by the numbers, when we walk into a room.
How does one build a business on borrowed money without a shred of sustainability? I must take care while writing an op-ed like this one, because someday I may want to raise growth capital from the very people who I am suggesting like to incinerate good money after bad, like the girl-next-door who dates the bad boy because she is convinced that she can change him. But if investors had less noise to filter out, they would find that while hockey sticks may seem as exhilarating as hockey games — it’s shots on goal that win games.
The lament above, regarding profit vs. expense, does not refer not to firms with growth rates like Amazon, which reinvested in infrastructure for years before turning a profit. Because here’s the kicker: if AMZN had stopped building, it would have immediately been cash-flow positive. I’m referring to companies that would recess — if not die — without investors from whom to suckle cash. Terrifyingly, some of these startups are dubbed “unicorns” and attract breathless headlines while teetering atop their pedestals. They trade Generally Accepted Accounting Principles (who needs ‘em?) for undisclosed deal terms, local celebrity, and reports that they are hiring small towns’ worth of mission-driven young people — many of whom count on consistent fat salaries to cover the rent or mortgage in overhyped neighborhoods. What happens when someone yells JEEEEEEEEEEEEEEEEEEEEEEEEEEEEEENGA?
It therefore scares me a bit that Uber pulled out of Oakland. Not because the company decided to consolidate its operations in San Francisco, but because a company that lost over a billion dollars of investors’ money last year was ever allowed to plan to buy and renovate a massive building in high-rent Central Oakland in the first place. How is that fiscally responsible? GAAP may seem passé (my friend Lisa Suennen likes to ask “What’s a non-GAAP principle — basically, anything you want?), but the ledger has to balance even amid the Silicon Valley froth. Investors in Theranos and Zenefits are poorer now. Their long-term prospects may be copasetic, but that doesn’t mean the money is coming back anytime soon, or in full. How do so many salty, skeptical, world -wise and -weary investors get fooled by fraud? Shoddy businesses thus make it harder for those of us building for the future to find unburned venture partners and demonstrate that our traction is legit.
“When the ungrounded aspirations of well-meaning digital health entrepreneurs and venture capitalists collided, it created an explosive environment where considerable capital was burned without building truly sustainable businesses.”
If I’ve done one thing right as a CEO — and maybe it’s all I’ve done right — it’s to commit to paying down debt. With every dollar I recompense, I buy even more stability. Now my team gets to ask whether external funding can grow an already stable business that much faster? Most of our investors have asked whether they can double down; thoughtfully, not desperately, we will get to decide whether we want to take more money and sell more equity. The answer will “Yes” if we love the folks on the other side of the table and believe the partnership with forge a stronger venture that we will have without them.
Profits buy companies the freedom to stand on their own feet and realistically justify the “hard value” (in terms of “hard costs” vs. “hard revenues”) enjoyed thanks to their innovations. As CEO, my commitment is to serve our shareholders, employees, partner-clients, and their patients (in no specific order). I have been saddened to see some of my CEOs forced to the brink — or beyond — by investors who failed to realize that good things take time to build, and that the world might not need another glucose monitoring app.
“Even those that survived the 18-month sales cycle often found that successful piloting and implementation once inside required subject matter expertise, outcomes measurement capabilities and political savvy… In this market, distribution is more valuable than capital…Quality allies and partners are often more valuable than capital.”
One reasons that I love the EMS business — complex, complicated and dramatic though it is — is because the “siren is the soundtrack of the city,” a ubiquitous presence around the world. Yet few people know how EMS works. Even as our heroic partner-clients run toward the crisis, and provides the background hum in many American neighborhoods, 9–1–1 seems like a genie to much of the public, including the investor community.
(I sometimes wish my partner-clients had less to do each day, because when they go to work, it means someone is having a bad day. Case in point: I am writing this the week after Hurricane Irma slammed Florida.)
Even the savviest, smartest investors I know tend to start sentences with, “But I thought EMS…” before they advance a theory of the business that is usually fractionally correct but mostly “not right.” (I can’t say “wrong” because there are so many local flavors of EMS, that every iteration is probably correct somewhere.) I don’t blame anyone for lacking knowledge about an industry in which they don’t operate daily; however, I do blame anyone for assuming that his / her /their preconceptions are correct just because they think they know the entire healthcare business enough to make snap judgments in seconds.
When I explain that there are four primary types of EMS in this country — public, private, hospital-affiliated and fire (plus Community Paramedicine emerging)— and that we serve them all, and that 9–1–1 is far from automated, eyes widen. Yes, there are mandates and incentives akin to Meaningful Use that have started to impact the EMS industry. Yes, preventing readmissions is a real goal nationwide, even though doing so is controversial to many Fire and EMS agencies. Yes, ambulance agencies buy stuff: emergency response vehicles aren’t powered by smiles and coffee. Gasoline and payroll cost money, ECG monitors and saline cost a ton of money. The documentation that justifies this investment is what my company does, and we get paid for it.
Yet I can count on one hand the number of entities in the prehospital space that have received venture investment. That’s weird, because I am an investor in companies, too, and a key criterion I look for most of all is what they call in business school a “market discontinuity,” or in other words, an opportunity that no one expected. Away from the crowd, where big money can be made before increasing competition starts limiting returns. Companies that meet compliance standards, are not embezzling, have not flouted the law, are not at war with any union, and do not have Jennifer Lawrence starring in a movie about their dénouement perhaps could turn out to be longer-term successes.
Wouldn’t emulating Warren Buffett’s model be a good thing? Yes, he says to “invest in what you know,” but he hasn’t always been an expert in trains and chocolates and fractional jet ownership. He takes time to learn about the businesses in which he invests — to ensure that they are making money serving their makes — and thus ensures that his investments will be lasting, if not super-fast in their returns. Who says, then, that sustainable is boring just because the shape of its adoption curve doesn’t look like a checkmark…that may be doomed to look like an “A” if the graph extended out further in time?
My old friend Abhas Gupta is sometimes credited with pointing out that the opposite of a unicorn isn’t a smaller mythical creature, but rather a donkey. I’d add that if a company is a donkey, then its CEO could be an ass, if only due to a lack of self-awareness that strong fundamentals — like cash — are still king.
Jonathon Feit is Co-Founder & CEO of Beyond Lucid Technologies, a health-and-safety IT firm that develops software to make emergency services and medical transportation safer, more efficient, and more cost-effective. (He is also a member of the National Press Club, who spent the first half of his career as a magazine editor, publisher, reporter, and university lecturer in journalism.)
Contact the author: Jonathon.Feit@beyondlucid.com