It’s Saturday, and I’m sitting with my son Jack watching the Netherlands beat the US in the World Cup thinking about the week.
Weekly Accounting was in board meetings with four companies this week.
Two are struggling for cash:
1. A consumer fintech mobile app that has never really gotten the plane off the runway.
2. An enterprise software health tech company is in its seasonal cash crunch on its path to profitability.
Two are swimming in cash:
3. A consumer legal tech platform with marginal but improving unit economics.
4. A healthcare company with negative gross margins.
Our Chautauqua for today is about Quality and its the story of what happened a healthcare company with negative gross margins that we’ll call VentureHealth.
Venture versus Mom & Pop Unit Economics
VentureHealth was founded by a management team that exited their previous company together for hundreds of millions of dollars. VentureHealth recently closed on tens of millions in funding from a new investor.
For the purposes of this case study, we’ll compare it to a similar company that we work with that was self funded. We’ll call that company Mom&PopHealth because it’s literally a self funded husband and wife team.
Both of these companies serve a particularly acute need in the healthcare system so they are growing very rapidly. Mom&PopHealth has grown 5x profitably in the last few years. In that same time VentureHealth also 5x’d but is many times bigger.
Like a lot of venture backed companies recently, VentureHealth was financed to pursue revenue growth aggressively. Mom&PopHealth did not have that luxury.
Selling dollars for 94 cents
When you compare both companies on a per appointment basis, the result of these two different financing strategies becomes clear. So we don’t disclose any proprietary data, we’ll normalize their revenue per appointment to $100.
Sometimes too much money is too much
The story these numbers tell is that tens of millions of venture capital has enabled VentureHealth to build a bigger but less sustainable company. Too much cash enables businesses to develop bad habits.
When we confronted the CEO with this comparison, she didn’t sleep well that night, she said
I literally felt like I was going to throw up.
She asked me if I thought she should continue to be the CEO. I told her definitely – she’s both a genius and an empath who cares very deeply about the mission of the company. Most importantly she knows this business better than anyone else. I told her she’d have to perform a mental trick though:
You’re going to have to mentally fire yourself tonight – and come back tomorrow morning as the turnaround CEO.
After absorbing the reality of the situation, and letting the emotions pass, the team could see what had to be done.
At the level of a business school case study, the strategy is simple.
- Increase revenue per appointment
- Decrease costs per appointment
When it comes to executing that strategy, Jeff says I “yada yada” the work. Guilty as charged. In our role as Weekly Accountants we merely present the reality of the business as it is. We can lead the horse to water but the company has to choose to drink it.
VentureHealth will have to negotiate with payors to get paid more and reconfigure its operations to reduce all costs per appointment. The payors maybe willing to pay more if VentureHealth can prove to the payor that it reduces other healthcare costs in its system. We have evidence to prove this point, so it should be doable.
Let the disappointments pass
Its never good when you present slow revenue growth to VCs. Its even worse when its the first board meeting with a new investor.
As an experienced, CEO, she knew this would be a difficult task. She would have to allow them to understand, be agitated and mourn the situation just as she did.
She walked the board through the reality of the situation and then she presented a plan that showed revenue declining for a period of time while we stopped servicing unprofitable customers and started to negotiate with payors.
She did a great job. The board was happy that there was a plan and they were supportive. We were all surprised how the negative energy manifested.
One point did trigger them, and rightly so. While presenting the numbers and talking about our process, I referenced the Instrumentation Pyramid and gave the definition of Level 1 metrics as the minimum set of metrics to forecast revenue and costs.
And because I frequently say it, I added:
Quality is not a Level 1 Metric.
Whoops
For a company that has people providing health care to patients, this was a terrible thing to say.
For a person writing a blog based on Zen and the Art of Motorcycle Maintenance which is about the Metaphysics of Quality this was a big whiff on my part.
The book starts with the following quotation alluding to Quality.
And what is good, Phaedrus,
And what is not good–
Need we ask anyone to tell us these things?
What is good and what is not good is something we all intrinsically know, but its not something that we can define. It has an ineffable nature like obscenity, strangely, as defined by the Supreme Court in 1964 “I know it when I see it” one Justice argued.
Quality and its Opposite
The board member’s reaction was dead on. Quality is the most important thing in business, particularly this business.
Quality has an unmeasurable nature to it. You can point at it with NPS score, you can point to it with outcomes, you can point to it with high repeat customer purchases, and top of mind brand awareness. But you can’t really define it.
On the other hand, when a business lacks Quality its obvious. Jeff told me the story of one of our clients that sold thousands of customers on a lead generation services that cost each one of them over $1,000. Guess how revenue their customers generated from the services? Zero. Jeff said:
You know, this is like stealing money from these people right?
A business without Quality is extractive.
When a business seeks Win-Win relationships Quality follows.
When a healthcare company seeks win-win-win relationships with its providers, patients and payors it is demonstrating Quality for all of them.
If you can enable win-win-win relationship systemically and at scale, then you can improve the entire healthcare system one provider and one patient at a time.
Shouldn’t that be the ultimate goal of every company in healthcare? Certainly. But companies won’t last very long if they don’t have positive gross margins. Business is quirky that way.
P.S. “Let the Disappointments Pass is part of a song lyric Jackson Browne’s “The Only Child“
Let the disappointments pass,
Let the laughter fill your glass,
Let your illusions last until they shatter.Whatever you might hope to find
Among the thoughts that crowd your mind
There won’t be many that ever really matter
also, the image of the doctor and her patient above was created by Dall-e using the prompt “A impressionist painting of a doctor and her patient”
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