New Rules for the New Economy
Twelve dependable principles for thriving in a turbulent world . . . 12: The Law of Inefficiencies . . . In the Network Economy, don’t solve problems, seek opportunities.
Wired - September 1997
I was getting frustrated, and a little bit insecure. Thousands of people — the keepers of the world’s health — were telling us that we were helping them...
In our early days, I had taken the lead over Jeff in talking to potential investors during our presentations. I knew more about the details of our services and I was good at convincing investors of the value of our services. But it had become clear that I was not as effective at promoting the financial potential of Neoforma.
Potential investors wanted us to show them that we were going to build a huge demand, very quickly, for something very expensive. Ultimately, that’s what I wanted too, but in a much more organic way. I wanted to build the value for the customers, then prove the value to the company. Investors wanted us to prove the value to the company, then build it for the customers.
Jeff was much more adept at telling investors what they wanted to hear. With stunning aptitude, he became skilled at using the investor’s language, painting pictures of what we would grow into and how we would leverage the huge size of the healthcare market. He was comfortable with the lack of connecting dots to a particular destination, such as an IPO. I was not.
We argued about whether it was right for us to project an image of ourselves as a very large corporation selling hundreds of millions of dollars of software and services each year. We didn’t doubt that this was possible, but frankly, we would have been quite happy to sell a few million dollars’ worth of software each year.
Investors did not want to hear that. They wanted large returns in exchange for taking the risk of investing early. Ten times their investment within a year or two was the absolute minimum acceptable return. A number of companies had recently proved that these kinds of returns were possible and they wanted to achieve the same thing.
So we painted a picture of how we might be. How we would be. A big picture. And once we started displaying that picture, we caught intriguing glimpses ourselves of what could happen to us with a company that matched that picture.
In one of our many discussions with our potential angel investor, Shawn, he asked us, “So, what do you see as your roles in Neoforma, when it grows large?”
We both had the same answer to this one. “We are certainly experienced enough to run the company, however it grows. But our real interest is in building the company and its services, not in running the company for the long run.”
And this was completely true. But answering this question out loud made us truly examine what we might get from the company, beyond the obvious satisfaction of knowing we had created a livelihood for hundreds of families and improved a part of the world that affects everyone.
Some light was shed on this when Alexander and JP set up a meeting to check in with Jeff and me. Even though they had put us off for now, they didn’t want to miss out on some positive change in our status. During the meeting Alexander asked us, “What do you want to get out of Neoforma . . . You know, how much money would you need to get if, say, someone offered to buy the company from you right now?”
Jeff and I looked at each other, then took turns trying to respond to this question. We knew that he wanted us to say some big number, as an indication of how driven we were to make money, but we had no idea what that number might be. And we had no idea how much we would really be willing to sell the company for. We hadn’t thought about that possibility before. We had always seen ourselves as integral to the business, not separate from it.
Our responses were awkward and uncertain. “We know we’re building a business that will be worth a lot some day ... and ... we wouldn’t want to miss out on benefiting from that growth. However, we are realistic. You know, if someone offered us $10 million today, we would probably seriously consider it.”
Now I must stress that neither of us had ever imagined getting more than a million dollars from Neoforma, let alone $10 million. But $10 million seemed like the right number to use that day.
Alexander grinned briefly, then turned very serious and said, “Well, that is a lot of money. Now just how do you think you would get a valuation that would get you that kind of money? You certainly can’t do that without a huge shift in your business model. You need to capture, and get a cut of, every transaction going through the website. And you need to get big . . . fast. You are the First Mover in this space. To benefit from the huge returns that go to the First Mover, you have to be very aggressive!”
The way that he said this implied that, if we hadn’t thought about what we wanted from Neoforma—besides goodwill and a salary—we were far too timid to pull off something big. Something really significant.
Then Alexander and JP abruptly ended the meeting and hustled out of the conference room. That was the last we would hear from them for some time.
Jeff tried to convey in a follow-up message that we really were greedy enough to promote and sell the business, if that sale would return value to the investors. But Alexander did not respond, relying on his silence to speak for him.
That’s how our transition from founders to investors began. Even though we had yet to receive any outside investment, we began thinking very differently about the company. Suddenly, we realized that shareholder value might be as much of a factor in our decisions as customer value.
We needed to balance our desire to adopt this new vision with our desire to keep the doors open and our families solvent. But the more we talked about it, the more we agreed that we could do all of that and accommodate this new criteria. We could be founders and investors.
After all, if our other investors were going to make money, so would we.
It was a very odd feeling for me to think that making money might be an acceptable pursuit unto itself. It didn’t feel all bad. If we were able to build everything we wanted to, faster and more grandly than we’d ever thought possible, maybe that was okay.