Startup, Survival, Scaling: Kareo CEO Dan Rodrigues (Part 6)

Sramana: So the medical billing companies were not the ones paying you?

Dan Rodrigues: We sold our software as a monthly fee to the doctors. For us. the revenue was about activating licenses with the doctors via the medical billing offices. We were building out forecasts around a quicker adoption cycle. Doctors were not adopting as fast as we had forecast, mainly because at the time the product was not mature and there were still a lot of features that the older client–server character-based systems had that we had not developed.

Healthcare is one of those industries where the requirements of their software systems go deep and wide. While doctors loved the vision we had, we did not have all the functionality they needed. It took us a couple of years to get the product built out to the point where it was considered feature complete. Once we did that, we were able to compete favorably with the legacy solutions in the market.

Over that time we used more capital than we expected. The interesting thing about the second investment we received from Halsey was that it was structured as a series of tranches that the company could call on. That was nice because if we did not need the additional capital, we could avoid taking the associated dilution that unnecessary capital would bring.

Toward the end of our first act, the startup phase, we were running out of capital and we called for a tranche of that money. Unfortunately, the investor was unable to fund. That was really the first major challenge that we hit as a company. We had a month of cash flow left, and that put us into our second act, the survival period.

Sramana: How long into the business were you?

Dan Rodrigues: About two years.

Sramana: At this point, how much revenue were you making from your customers?

Dan Rodrigues: We were probably only doing $2 million to $3 million in annual revenue. The interesting thing is that at the tail end of that we started to see an increase in word of mouth from doctors offices themselves. We started getting approached by doctors directly. At that time we were not selling to doctors offices directly, so we had to start saying yes. That is when we realized that our software was really good for individual doctors’ offices. We found it was really easy to on board them as clients and that they were also very satisfied with the product.

We then started to challenge the conventional wisdom that you could not sell to small doctors’ offices. We were just making the transition to selling to doctors offices when we ran out of cash. I had to take a long, hard look at the business. We only had four weeks, which meant the timing would make it difficult to get more funding from another investor. I made one of the most difficult decisions that I have ever had to make. I reduced the size of the team from 30 to seven people. We moved out of our expensive office space, and we all worked remotely.

We made that one month of cash flow cover 12 months of operations. We got really good at collecting from our customers. We transitioned them away from invoices to online credit card payments. We got really good at supporting a large number of doctors with a very small support team. We had 900 doctors on our platform at that time. We also got really good at selling to doctors online, which everyone thought was impossible. We bought display ads and AdWords. We built a website to educate doctors about our software. They were able to see our product demo online, on-demand at any time. We were very transparent with our pricing and they could signup online at any time. We were able to convert prospects to customers online. We grew our way out of the cash flow challenges, and 11 months later we were cash flow positive. We made it, but just barely.

This segment is part 6 in the series : Startup, Survival, Scaling: Kareo CEO Dan Rodrigues
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