Since we had selected prominent companies to gain their endorsement of our business model, we had to negotiate operating agreements with several of them as a condition of their investment.
Avoiding conflicts between our new corporate investors and our customers, who were in many cases competitors with our investors, presented a substantial challenge. But we faced a unique and even greater problem.
The representatives of many companies with which we were trying to negotiate were quietly slipping their résumés to us under the table. The closer to the IPO we got, the more résumés we received.
Everyone wanted to work at Neoforma. Everyone was fed up with the inefficiencies inherent to the healthcare establishment and nobody could deny the financial appeal of a pre-IPO company. While dishing out the usual cautions, threats and deal points, these business development representatives tried to make sure to negotiate with us very aggressively—so we would be impressed enough to hire them!
The trouble was, if we accepted their résumés, we would create an unacceptable rift between objectivity and familiarity. If we rejected their résumés, we risked the wrath of an indignant contract negotiator. It made for many awkward scenes.
To ensure that we had maximum focus and decision-making power on each deal, Bob assigned an executive to each strategic investor to work on these complex operating agreements. Jeff got J&J. I guess I drew the short straw. I got GE.
GE had a reputation for ruthlessness. Its contract negotiators were well trained in their aggressive tactics. They were not allowed to accept the weaker side of any deal.
My natural tendency is to go for the fair deal and waste no time with posturing. However, posturing was everything to them. They asked for absurd levels of control over Neoforma. They pounded me with demands. They asked for all kinds of sensitive information. The process was very unpleasant, but we seemed to be moving toward a generally acceptable conclusion.
Every time I held firm to a position, Chris, who was my primary contact there, would sigh and say that he’d have to run something this significant by Jack. He was referring—with practiced informality — to the legendary head of GE, Jack Welch. I strongly doubted that Mr. Welch knew any part of Chris’s name—first or last—but I played along, trying to look suitably impressed.
The other deals seemed to be moving along in a similar pattern. Some bumps here and there, but it looked like we might just be able to pull this off . . .
However well things seemed to be going with our primary group of investors, it was prudent for us to pursue alternative investment options. Bret was far less interested in working with strategic healthcare partners than Jeff, Bob and I. As far as he was concerned, big money was better than good money. So he lined up visits to a number of prominent venture capital firms.
One firm with deep pockets and a great name was Vulcan Ventures. It was run by Paul Allen, co-founder of Microsoft Corporation. Bret set up a visit for Bret and Bob to meet with one of the partners at Vulcan.
On the way into the meeting, Bob asked Bret, “How much do you think we should tell them we want them to invest?”
“When they ask,” Bret said, “we’ll say that we were telling them about the round so that they would have a good idea what was going on in the healthcare space. Then we’ll tell them that, we’re sorry, but the round is already fully subscribed.”
Bob looked surprised.
“Look, that’s the way these things work,” Bret told him. “Everybody wants what they can’t have.”
The presentation went very well. The partner asked about the details of the funding round. Bret played his card. The partner acted suitably startled that Bret would have had the nerve to waste his time, then excused himself for a few moments.
A more senior partner returned with him. The senior partner was quite persistent in his declaration of the great value that Vulcan brought with its investments. Perhaps Bret and Bob would reconsider their position on the funding round if Vulcan took a large part of the round.
Bret didn’t think so, but he vacillated. It was possible that we might be able to consider alternatives, under the right terms. In the end, they didn’t offer as much value as the strategic healthcare investors, but it was great to have a back-up plan.
Another investment firm with even deeper pockets approached us at about the same time. Softbank, the Japanese multinational conglomerate was at its peak in late 1999. Having made a fortune from its investments in such companies as Yahoo! and E*Trade, Softbank was aggressively trying to gain control of huge portions of the Internet. Its president and CEO, Masayoshi Son, was one of the foremost darlings of the business press. Through a series of intermediaries, we had been told that he wanted to meet with Bob and Bret at a very high-end business hotel.
They were met at the door by a somber security guard, wearing a communications earpiece. He guided them to the penthouse suite. Bob and Bret entered the huge suite at one end. Seated at the other end was Masayoshi Son.
Bob and Bret approached and greeted him. Bob then gave an hour-long summary about Neoforma. Masayoshi Son listened politely, but gave no indication of his thoughts, until Bob finished speaking.
Masayoshi Son presented a brief summary of Softbank.
Then he asked about the details of the funding round. Satisfied that he had the information he needed, he made a proposal. Softbank was only interested in investing if they could take the entire round.
In exchange for that exclusivity, Softbank would invest a greater sum of money at a greater valuation—say, $100 million, invested at a $400 million valuation. Simple as that.
Bob thought this sounded pretty good. So did Bret. They said they would review this offer with the other investors and get back to Masayoshi Son.
When I heard about this offer, I thought it sounded pretty good too — maybe even good enough to risk the ire of the strategic healthcare investors we had lined up. Maybe.
However, when we followed up with Softbank, something had happened. At first, we were simply told that Masayoshi Son was not available. Then we were told that he had changed his mind.
After persistent inquiries, we were told that someone from KP had heard about the Softbank proposal and contacted Masayoshi Son. They had informed him that an investment in Neoforma would be a bad idea. It would adversely affect all of the other deals that KP was bringing to Softbank. Anyway, Softbank was informed that they could get a much better deal if they invested in Medibuy instead.
This was very frustrating, but we felt confident that our strategic healthcare round was still a very likely and powerful alternative. That is, until J&J started to get cold feet . . .
Well into the final stages of the deal, an internal struggle within J&J surfaced with unpleasant suddenness. They told us that they weren’t so sure that this was such a good idea anymore. We found out later that they had been approached by several GPOs that had heard a rumor of J&J’s investment in us. The GPOs had suggested that perhaps J&J was being a bit rash in their decision, perhaps they should consider how such an investment might affect which products the GPO member hospitals purchase.
I am sure that nobody said anything about an actual outcome, but the threat of losing market share was present any time a GPO chatted with a manufacturer.
J&J and GE had formed a disconcerting bond during the term-sheet negotiations. They had been working in concert to bring an uncomfortable number of new terms to the table at the last minute. Now that J&J was reconsidering their position, the GE commitment seemed in jeopardy. And, if GE dropped out, Dell was likely to get skittish.
Once again, all of the progress we had made seemed to be slipping from our grasp. Why did everything have to be so damned hard in this industry?
While some of us were struggling to coordinate the perfect funding round, others were busy trying to line up the perfect IPO. And then there was the perfect banker to consider . . .
The biggest decision that a company has to make, when organizing an IPO, is who to hire as the banker.
There are usually several banks involved in an IPO, but the lead position is the most important. In 1999, there were many banks competing to take companies public, but there were two banks most associated with Internet IPO blockbusters: Goldman Sachs and Morgan Stanley. A third firm, that had an equally prestigious reputation, but less experience with Internet IPOs, was Merrill Lynch. We wanted one of these three banks to take top billing on our IPO filing.
In order to avoid any perception of conflict of interest, the major banks will not usually work with companies that compete with each other. Since we were the first IPO in the healthcare supply chain, we didn’t think it would be difficult to recruit one of the top banks.
We queried Morgan first. They had been the bank to take Chemdex public, so they were the logical one to work with us. We were immediately told by Morgan that they had a conflict of interest. KP, the investor in both Chemdex and Medibuy, had already requested that Morgan prepare for a future IPO by Medibuy. Since KP was the source of so many hot IPO prospects, who could turn them down?
Goldman was the obvious next choice for us then. At first, Goldman seemed like a go. They liked our story. They liked our press coverage. Everything seemed to be going well, until they started to shrink back from us. It was as though something had bitten them.
Then we heard, through the rumor mill, that Goldman had been hired by KP to explore strategic options for Medibuy. Exploring strategic options means looking for companies to buy or be bought by. The rumor was that, in classic keiretsu style, KP wanted Medibuy to get ahead of Neoforma on the way to public company status by having Chemdex purchase them. Since Morgan was already the bank and, by default, the lead mergers and acquisitions (M&A) representative for Chemdex, KP had to use a different banker to pursue this deal. It seemed far more than coincidence that this arrangement inhibited Neoforma’s ability to work with the two hottest Internet banks.
Goldman had been comfortable with the idea that M&A activity for Medibuy could be run by a separate team, isolated from their IPO team. They had been so comfortable, in fact, that they had failed to mention this potential conflict to us. Unlike what we observed in their recent IPO activity, they had been coaching us to wait six months for an IPO. Their attitude did not make sense to us, until we discovered their relationship with our primary competitor through KP.
Bob was angered, but not overwhelmed, by the knowledge that the mighty keiretsu was fighting us with such fury. Business was business, but he didn’t like being messed with. He immediately dumped Goldman and pursued Merrill. Bob was actually quite content with the idea of working with Merrill. His background in a more conservative industry gave him confidence in the more conservative Merrill.
Many weeks had been wasted on Goldman. To enter the IPO window before the end of the IPO season, Bob had be very aggressive and work very fast. And, Merrill wasn’t sure yet how far they wanted to go into the wild world of Internet stock. They wanted time to think about it.
If Merrill didn’t lead the IPO, then Neoforma would have to select a less prestigious lead banker. That would affect everything. Our perceived value upon an IPO would be smaller. Our appeal to the current group of strategic corporate investors would be reduced. Our IPO would be delayed by months. Our competitor might beat us to an IPO, and they would be led there by a more prestigious bank. Regardless of anything they or we did, they would then be perceived as the market leader, which would reduce our ability to work with the larger industry partners and customers.
So, our minds became quite free from idle moments of pleasant thoughts. Each day brought new and increased tension.
Jeff and I had expected a reprieve from such pressure when Bob joined us, but we hadn’t let ourselves relax so much that this new volley attack could do much damage. We just resigned ourselves to perpetually living life on the edge.
I wondered what Bob, so new to this bizarre world, must be thinking about this seemingly endless, upstream struggle. In each email or call from Bob, I expected to hear him say he was leaving immediately.
Finally, we were able to negotiate an acceptable deal with Merrill. They would lead our IPO.
When it became clear that our IPO could not be stopped by limiting the choice of banks, KP thought they might be able to slow us down by entertaining the idea of a merger between Neoforma and Medibuy.
They were quite willing to consider a fifty-fifty merger. In spite of their gains in the press, we knew very well how little Medibuy really had. A marriage of equals was absurd, but discussing a merger between the two companies could not be summarily dismissed. The combined companies could add even greater distance to the growing pack of pursuers. But it soon became clear to us that their exploration of a merger was little more than another delaying tactic.
J&J eventually confirmed our fear. They were not going to invest in our funding round. GE got very shaky. As their primary contact, I spent an extraordinary amount of time severing the bond that Neoforma had formed between J&J and GE. Some conversations went well. Others were very tense.
As the completion of our IPO paperwork approached, I couldn’t get GE to firmly commit one way or the other to our funding round. This was making several other of our investors very edgy. A certain investor was particularly edgy, though in an opposite way from the rest.
Flip had made a fortune selling his company to Computer Associates. He had used his money and experience to create his own investment fund. A big, self-made man, with long hair braided into a ponytail, Flip was not one to follow the flock. But his faith in Bob was without bounds.
When Flip heard about GE’s waffling, he told Bob not to worry. He would encourage the group of investors to make their final decisions.
Bob scheduled a conference call with all of the investor representatives. By this time, we had only a week before we were scheduled to file our IPO paperwork. We needed to include all the details of the funding round. Bob was firm. Everyone had had enough time to make the decision. The round was closing today. He wanted to know who was in and who wasn’t.
When some of them started to waffle, Flip interrupted and said, “We could go on about this forever, but I know enough about this company and have complete confidence in Bob and his team. If anybody wants to drop out at this time, I’ll be very happy to take over their investment, up to fifty million. I’ll sign the paperwork today.”
There wasn’t much to discuss after that. GE and the others stayed in the round.
The lawyers and accountants and investment bankers and strategic investors were properly groomed and lined up with the company. It was time to get on with the show.