Response to the Wall Street Journal’s “For Silicon Valley, the Hangover Begins”

I worked at Practice Fusion.

The Wall Street Journal’s February 20–21 weekend edition featured an article on the front page titled, “For Silicon Valley, the Hangover Begins.” My former employer, Practice Fusion, was featured throughout the article as an example of a previously high-flying tech startup in San Francisco that is now struggling to deliver on its previous valuations, and remain financially solvent. From the article:

“Not long ago, employees at Practice Fusion Inc. reveled in the technology boom, munching daily on free healthy food, enjoying “Phenomenal Friday” gatherings and racing around the office on tricycles.

Today, the Silicon Valley extravaganza is waning. The San Francisco electronic medical-records company has booted its founding CEO, laid off a quarter of its staff and cut back on projects to save costs.”

They further describe the culture and perks at Practice Fusion later in the article:

“Practice Fusion offered free food with no starches like pasta, unless it was “cheat day” when they might get white rice. Photos posted under its Instagram account showed employees filling the CEO’s office with balloons to celebrate his birthday last May, engineers dressing up in animal onesies, and races around the office on hot pink tricycles for the company’s annual olympics.”

I understand how the so-called “perks” of a Silicon Valley company are easy to mock from the outside. It sounds ridiculous to me now, reading it in print. Certainly such perks don’t come for free. It was a big deal when Ryan Howard, the then-CEO of Practice Fusion and Robert Park, the then-CFO announced that we would be getting free lunch every day. For a long time, the company had been trying to compete for developer talent with bigger companies like Google, who offer perks that are far beyond the realm of possibility for a company that doesn’t generate profits. This makes sense, of course, but not in the world of Silicon Valley. However, I believe any discussion of these perks is a red herring that distracts from real problems in venture-funded technology companies today.

Indeed, to his credit, the author gets to the main point:

“A year ago, startups with nascent business models were scoring billion-dollar valuations as investors raced each other to write checks. Today, venture capital is drying up for less successful startups. Investors, eyeing collapsing tech stocks and economic sloth, are culling their portfolios and forcing cash-starved companies to retrench or shut down.

Investors funded fewer U.S. startups in the fourth quarter than any period in more than four years. Since November, at least a dozen tech companies, which combined raised well over $2 billion in venture funding, have announced layoffs, letting go hundreds of people that in most cases represented at least 15% of their staffs. Other companies are closing money-losing projects and raising debt to tide them over.”

In short, Practice Fusion, like so many of its contemporaries, raised and spent money on the premise that an IPO was imminent. The process of rolling back spending and ongoing projects and product development is difficult, and Practice Fusion apparently struggled to properly forecast the revenue from new initiatives.

Last year, things started to change. Practice Fusion’s founding CEO, Ryan Howard, was replaced by the board of directors. The company raised a $20M bridge loan from investors. Then in early February, 25% of the workforce was laid off.

It’s easy to point fingers, but no single person is responsible for the success or failure of a startup. The core, central component of a startup is hubris. Hubris and the belief that there will be funding, an acquisition or an IPO around the corner. Now, with more than a year’s distance from the Bay Area and this world, I understand the failings of that model in a very real way. Anyone with a business degree or even a lick of common sense is probably shaking their head right now, decrying “Millennials” or something similar. I get it.

Was this a shared delusion? Are all Bay Area startups under the same shared delusion? I can only hope that the market correction that is happening and will continue to happen refocuses the tech world on building sustainable businesses and limiting expenses and “burn” before it becomes a problem. I hope that entrepreneurs will explore opportunities to bootstrap (self-fund, grow slowly) their businesses, rather take money from venture capitalists who may not be fully aligned with their best interests.

Here’s my take on Practice Fusion’s business from a now-outsider point of view:

Here’s how Practice Fusion still has value:

• It remains the only fully cloud-based, free EHR for small and medium office-based medical practices in the US of any size (6.7% of the market, as reported by SK&A). Given the high cost of technology adoption for medical practices and the continuing shift towards electronic reporting of quality measures, Practice Fusion’s free, user-friendly software (Practice Fusion invested heavily in design and user experience) with included support is well-positioned to grow and gain more users.
• EHRs are sticky, and doctors don’t like change, especially when it comes to something so crucial to their daily work and how they get paid.
• Practice Fusion’s new CEO, Tom Langan, has solid experience in commercialization (read: driving revenue), and most of the top executives who were brought in under Ryan Howard have now been replaced with more experienced, sales-focused people. Indeed, Practice Fusion reported a 70% increase in revenue YOY recently.

Here’s how Practice Fusion is at risk:

• EHRs are becoming a commodity, providers and federal regulators are demanding that platforms support real interoperability and data sharing. Furthermore, consolidation among vendors is continuing. This is no small threat, and the viability of smaller players is unclear.
• Meaningful Use, the EHR Incentive Program is ending, and most providers are no longer getting a subsidy from Medicare or Medicaid. Furthermore, Meaningful Use drove a significant uptick in the number of doctors using Certified EHR Technology, and the low-hanging fruit is gone.
• Unlike its more-successful competitor, Athenahealth (note: also with a larger-than-life CEO, Jonathan Bush), Practice Fusion does not offer its own billing or other practice management products or services. These services are highly lucrative and potentially would have served to offset the high cost of building and updating a full-featured EHR. Instead, Practice Fusion integrates with popular billers (and earns something off the top), some of whom also offer EHRs and other competing products. This one might be a smaller threat, but it’s one of the many strategic decisions that Practice Fusion made under the former CEO that may have limited revenue growth.
• All of that talk about culture and perks from before — in a sense, Practice Fusion has lost its raison d’être. The culture was built around growth. Silicon Valley isn’t building companies that last, it’s building companies that can only exist at a frenetic pace. Practice Fusion was one of those companies. Experience and careful decision making weren’t valued; speed and big bets were. Now, the new CEO has to rebuild the company around this new meaning, and create a new culture that supports it. This is no easy task. Venture funding further reinforces this kind of thinking, and user growth is valued above creating a great product that provides true value for customers, employees and investors alike.

As for myself, I’m now a student in public health, focusing on health policy. My experience at Practice Fusion played a big role in my decision to educate myself further on the U.S. health system and the policies and regulations that brought it initial visibility and growth. I hope very much that the company and its digital health contemporaries can build sustainable, valuable businesses that materially improve health and healthcare quality; reduce costs; and drive innovation in healthcare forward.

Disclaimer: I am a former employee of Practice Fusion, and I own shares in the company that I acquired through my employment. I left the company in January 2015, and have no inside knowledge of their business today.

One more thing (shameless self-promotion):

I’m moderating a panel at SXSW in March on the future of health data APIs — here’s the blurb:

“APIs have reshaped the web into an interconnected network of products and services that provide a seamless user experience and have enabled SaaS companies to take over the consumer and enterprise world. However, healthcare famously suffers from a matrix of siloed, dated technologies.

But where are the healthcare APIs? They’re coming. A generation of startups are taking on the enormous task of building simple, portable APIs for health data. These companies are building solutions that will finally bring about the interconnected health system that we are all desperately waiting for, and could hold the keys to cracking open the health IT market.”

I believe that there is still an important role for entrepreneurs, startups and innovative companies in healthcare technology. If you’re going to be there, please join us!