How I killed my startup hours before closing a seed round

“What details should we use for the final closing documents” is something that every entrepreneur wants to hear. I’d been working on a new idea for over 6 months, had a great team lined up and was on the eve of closing a $1.5M seed round with some of the best investors in the world including Brad Feld (Foundry Group) and a small collection of amazing angels. And then I killed the idea. Below is the note I sent to my would-be investors.

I take my responsibility as a CEO very seriously and would only accept your capital when I had a damn good, defensible plan on the best ways to spend it to achieve success and at this point, I do not. After careful consideration, the original idea of our “personal health record (PHR)” has too many issues/risks for me to proceed with the adequate levels of confidence. Therefore, I am postponing fundraising until I have more clarity and conviction around an idea worth funding. I spoke with Brad Feld yesterday and he was predictably thoughtful and supportive, which is how I have come to know him and the main reason why I want to work with him (and Foundry) in the future.

I’m happy to connect with anyone who wants to discuss in more detail, but the combination of incentives (most providers don’t want you/us to have the data and will therefore actively make it hard to get), patient apathy (most people  aren’t proactive and data-driven about their health), potential costs imposed by the provider during records collection (for example, in WA state a provider could charge a $22 clerical fee, $.96/page for the first 30 pages and $.73/page for all remaining pages (deal killer/frustrating/stupid) and this is implemented differently in every state and varies a ton), lack of a “I need that” feature, the significant amount of coding needed to do to get a viable solution and the fact that several competitors (Gliimpse, Prime, Picnic) have a significant lead on us, all total out to the wrong foundation to build around. Startups are hard enough without all of these factors stacked against you.

I hope you can appreciate the level of frustration and disappointment I feel right now. I am an optimist, pragmatist, and enthusiastic competitor and I fully expect to do a new company, hopefully in the healthcare space, and I hope you will consider investing in me (and my team) in the future.

Thanks again for your belief in me, the idea and the future of health.

Obviously, this decision and email are pretty hard to write. But, it was the right thing to do and the right time to do it. But, how did I get there, what could I have done to prevent this outcome and what do I plan to do differently as I look for an idea worth funding?

As a collegiate athlete (I went to Purdue on a swimming scholarship) and then a professional sailor doing long, offshore events, I’ve always dreamed about systems that could collect data about me, learn and suggest ways to optimize my performance. Then my mother was diagnosed with colon cancer, my father had a stroke and my brother and I struggled to help them understand their conditions, coordinate their care and look for the best solutions (specialists, clinical trials…). This was frustrating, time-consuming and not very “smart” and it seemed like a software solution could really help in both cases, a “platform for personalized health”. Ideas percolated for several years, while I built and sold Gist (where Brad was an investor) and started Rival IQ. At some point along the way, Brad asked me, “what’s standing in the way of you building the health platform and doing it with us as investors?” I didn’t have a good answer, so I got to work.

My first steps were a blend of customer development and MVP creation. I set up this survey to learn about potential customers (would be great to have your input too) and started having conversations with users in my target personas (“self-advocates” — people with critical or chronic health conditions looking to take control of their own health and “optimizers” – people who wanted to use data and experimentation to get more from their bodies and minds). I was lucky as I have experienced both of these states so I was scratching my own itch, which is a good thing to do as an entrepreneur. Then, as I’ve done in the past, I got together a team of “night-time hackers” to build a rough MVP of our core idea. This team met on Wednesday nights and included 3 developers, 1 designer and me. All of us were interested in the problem space, working with each other and brought complimentary skills. We grabbed hours when we could on evenings, nights and weekends and focused our sessions on learning, data sharing and trying to get something working. The goal was to make a mobile app that worked something like; install, find your doctor, take a photo of your drivers license, “sign” on the phone (to validate identity) and then magically (after a few days time) you have copies of all your past health records, accessible on your phone. Obviously, we had many ideas of what you could do next (visualize your health history, find correlations and causation, compare with norms, share with others, enhance with other data…) but we wanted to make it fast, easy and free to get your records. After a few months, we had this working (with lots of issues) and it was really cool!

Starting a company requires some blend of imperfect data, reasonable assumptions and a collection of smart people who think the problem can be solved, but is ultimately some leap of faith. With a bunch of customer input, tons of research and an MVP, I decided to quit my day job and go for it. I went back to Brad, further articulated my plans, solutions to some of the issues we found, built a rough model with users, growth, team, revenue…and decided I needed 1.5M to get going at the pace I think the idea deserved. Brad was thoughtful in his questions and we agreed to fund the new company. I was on cloud nine and it was hard to contain my excitement!

I’m a big believer in creating a “big tent” of smart people who can help an idea succeed and while Brad was happy to take the whole 1.5M, I wanted room for angels who could help the company grow and/or add unique value. We agreed to carve out 250K, for up to 10 angels (@25K each) in the round. I articulated that I wanted 2-3 people in 4 categories;

  • Quantified-self geeks – people who used data to gain an advantage, often in sports
  • Medical disruptors – had experience changing the healthcare space with software, data and a focus on the patient/consumer
  • Platform innovators – companies that aggregate data and provide new value and/or had similarities to our approach around personal storage (e.g. Mint.com, Tripit.com, Dropbox, Evernote)
  • Company builders – CEOs who could help me be better, grow a big company…there is always more to learn

For each category, I made a list of my top prospects. With Brad’s support as a foundation, I leveraged my network, found connections and followed much of the advice I’ve given before in these posts. For each investor, I articulated the vision, our progress and why I wanted them specifically to be part of the company. Within 30 days, I had an awesome group lined up with several people I only dreamed of getting when I started the process. Time marched forward, we hired an awesome legal team with great experience in the space, drafted documents to form the company, raise the round and get started. I made my first offer to a full-time employee, who could add necessary medical expertise to the team. She chose us over an existing offer and gave notice to her current employer. I started talking about the idea more broadly and made plans for an impending public disclosure around the financing. All systems go with a plan to close in mid-October!

While I was raising the money, we were also working on enhancing the prototype, diving deep into policies and regulations, talking to medical providers and continuing our customer research. As my enthusiasm for working with the team and the investors was increasing, we starting finding serious structural issues in the overall business, mostly outlined in my note to investors. We looked hard at incentives (who wanted us to succeed and who might want us to fail) and I will do this much more deeply in the future. We considered many, many options on ways to incentivize the consumer more and solve the structural issues that seemed entrenched on the provider side (very hard to do). I was optimistic that we could find good solutions but as the days marched forward toward the financing timeline I had communicated, the negatives mounted and my confidence decreased.

During every startup, you reach points of critical inflection; when to narrow to a specific focus (vs. idle chit-chat about ideas), when to start coding an MVP, when to commit full-time and quit your day job, when to raise money, hire your first employees… Obviously, there are many more points in the future, but these early points are some of the most critical. As an entrepreneur, each of these points presents an opportunity to take stock, weigh the risks/rewards, make a plan and then re-commit to the next major milestone/inflection point. Knowing Foundry and the investors I’d lined up and the team I’d recruited, I knew that we were all committing to at least 3-10 years of our lives to work on this idea. I wrestled with the idea, brainstormed with the team, talked with other CEO’s I respected and discussed with my wife who has seen me succeed and fail in the past. The process of discussion and communicating my decision-making criteria helped it crystallize my opinions and in the end, the calculus was not right.

I was in Boulder for a Full Contact board meeting and I’d aligned our schedule around this date. It was planned to be a celebration of the financing, a new company, and a new adventure. Brad and I first met during a run along the river in Denver way back in 2008. While building Gist, we talked about many challenging issues while running or walking. On this day, we walked to Boulder creek trail and I explained my logic and decision. He seemed to know this was coming, which is likely just good investor intuition. I was sad, frustrated and even a little embarrassed. He was conciliatory, thoughtful and supportive. The next day, I sent my note to the other investors and the other partners at Foundry. Some were surprised, many appreciative and this made me feel even better about my decision.

I remain sad, frustrated by the systems and incentives at play in healthcare.   As for healthcare innovation, I do plan to keep working toward an idea worth funding. I hope the other players in the space succeed and I am inspired by people like Eric Topol, Jonathan Bush, Peter Diamandis, and Atul Gawande to find solutions that deliver better results and a life of “optimal health and peak performance”.

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30 Responses to How I killed my startup hours before closing a seed round

  1. T.A., it’s hard but you were willing to step back from the ledge. Like I said, getting into business is really easy but getting out of it is very hard and while entrepreneurs always have to take some leap of faith it was clear here that the marketplace was going to make it really hard to execute. Welcome to healthcare 😉 I really appreciate your sharing this story and it makes me think that unless my gut is saying “hell yes” then I should say “hell no”. There is too much opportunity cost to going into a venture without sufficient conviction. Well done.

  2. I love the “big tent” approach—thanks for sharing that.

    Congrats on making the hard choice. There’s always more good ideas, but you only get one reputation. I was pretty stoked to see what you came up with after talking about it at the Fenwick deck party. Excited to see where it goes from here.

  3. RJ Hamiel II says:

    Thank You T.A.! Your decision to share your story and how you came to your resolution is priceless to entrepreneurs taking the startup journey.

    I will use your insight as part of my startup journey and promise to pay it forward just as you have. Remain strong in your directions. Oh and as I continue to point out every chance I get…Brad & Foundry Group (I do not know the team personally, but through following for 7 plus years) are magnificent gatekeepers of the Startup Community.

  4. That’s an interesting story. It makes you credible for the future though, so sounds like you’ll be alright 🙂

  5. Georg says:

    very inspiring! I am trying to invent many wheels and I can feel what you are feeling or felt these days. Good luck – stay motivated.

  6. Ollie Jones says:

    Thanks for writing this up, and congratulations on figuring this out quickly.

    You are absolutely right that most providers jealously guard PHI, and have no incentive to make it easily handed off to patients or other providers. Lots of well-intentioned attempts to build community EHRs have foundered on that problem. (This isn’t a HIPAA-HITECH-ARRA2009 problem; it’s an information-is-power problem.)

    There’s another reason you should be happy with your decision. ARRA2009 pierced the corporate veil on liability for data leaks. It’s prohibitively expensive to obtain liability insurance for data safety as an associated-business-entity custodian of health data. You’d have to assume the risk, and a mistake could wipe out your business and personal assets. I don’t know whether this is an intentional or unintentional consequence of the law, but it definitely doesn’t favor entrepreneurs.

    Good luck in your next venture!

  7. Jebb Dykstra says:

    Stunningly impressive response to almost impossible obstacles presented by the healthcare space / market. Very sad that such a big market space is almost closed to disruption.

  8. James Janice says:

    Kudos to admit that you are not up to the task of realizing the vision.

  9. First of all, thanks for your post. I’d put here a fist pump emoji if I could. As the CEO of an early stage bootstrapped companying trying to find some traction in the muddy grey zone of MVPs and proof of concept, I found your story utterly fascinating. How did you convince all these angel investors that this was an idea worth funding? Clearly they thought it would be — they lined up with their checkbooks. How did you get super Angel Brad to have your back? Did you and he have a prior trust or working relationship? And at what point did you realize that the execution of this idea was way way way beyond your head? It had to have been more than 6 hours. You are far more experienced than me in the world of startups. But I am an expert at public policy and so I will tell you: Healthcare, public schools, prisons — all of these institutions in dire need of creative disruption — are like aircraft carriers that would resist an attack by high-speed, fully-equipped with the latest technology motor boats. The PHR you designed sounds like a great idea (possibly brilliant if we found, for children, a way to connect that to school records). But I don’t think clever ideas are what’s at stake here. I think that what you realized, which your insulated investors didn’t, have to do with the limitations of entrepreneurship and the challenges of monetization in the pubic arena. I think your solution might find success through multiple partners — in a public-private partnership. When you’re ready again, start there.

    • T.A. McCann says:

      Ellie,

      Thanks for the note. Brad and I have worked together in the past at Gist, so he has experience with me as a CEO, so that was pretty important. The specific angels I had on board either knew me, understood the value of a potential solution and/or had an audience that wanted this to exist. This blend of my background, approach and clear opportunity to create value made the difference in getting them engaged. And, I focused on using the early investors to influence the later investors.

      Every big idea has issues and challenges and it just takes work and time to see if we can create solutions to these. We had some good tactics to solve for some of them, but in this case, we would have been forced to fight the war on too many fronts. Maybe another general or army can be more successful.

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  11. Joy Rezineck says:

    I like this article and it’s a good read… however… your last paragraph makes me cringe. “… plan to keep working toward an idea worth funding… “.

    As an investor in the space, this makes me worry about the state of entrepreneurship. Why don’t you focus on an idea worth building, with customers who find value in it, and a mission / passion worth pursuing? If you build something of value then the money (if you need it even at all) will follow. But building focusing on the funding part? Ugh.

    And yeah, yeah, I know what you’re going to say, “an idea worth funding is an idea worth pursuing”. I would point to the 90%+ of failed investments to say that of that gigantic pile of data, much of it points to ideas that might have been worth funding in the eyes of those funding it, but not proven their value in the eyes of the market.

    Build something worthwhile. Forget the funding.

    • T.A. McCann says:

      Joy,

      Thanks for the note. I generally agree and that is my focus. I am not planning to reverse engineer something with the goal of funding, but approaching more in line with you suggestion. I am already hard at work developing ideas and talking to customers, with a goal of finding the right match of something that solves a real pain and and something that we can build in a differentiated way. Funding the company to accelerate success could be the result, but is not the goal for sure.

    • T.A. McCann says:

      Thanks for the thoughts. I generally agree with your sentiment, but since this was a post about killing a funded idea, I chose to end it in the way I did.

  12. Chirag P says:

    Well written TA, it’s just do hard to keep people from eating Krispy Kremes and listening to pop culture junk to help them focus on what matters most — their health.

    Perhaps an MVP – App just to keep track of the number of Krispy Kremes consumed per month would go a long way! 🙂

    • T.A. McCann says:

      True for many, but not all. We (the developers and healthcare providers) just need to do a better job of communicating a better alternative reality. One with good food, long-term health, lower costs, more energy and productivity…This is an information and education problem to be solved.

  13. Nicole says:

    I’m dealing with a Parent’s multiple health challenges over a number of years. If you can crack that nut on personal health records the world will be grateful. So many of the most powerful and slow moving groups to either bring into the fold or to disrupt.

    Kudos for not taking money yet.

    • T.A. McCann says:

      Nicole,

      I encourage you to try the other solutions and give solid, constructive feedback to the developers. I had a good call with the Picnic team last week and shared everything I know. We should all want them (or anyone else working this problem) to be successful for the good of all patients and people. Get active in the solution!

  14. Farhan Thawar says:

    TA, a great and insightful post. As I move onto my next stage (founding a company, and testing hypotheses as we speak), I can emphasize with your situation directly.

    Ballsy move on your part, but the right one to *wait until the right hypothesis* comes along.

    Cheers

  15. Rich Keck says:

    Thanks for this candid post. I spent 18 months working in this arena with the funding support of a client in an adjacent market. When the client relationship ended, I made a similar decision to not invest my time or investor funds in heath-care arenas. I still believe in the fundamental need you’re describing. However, the risk-reward profile of this market is not very attractive in my opinion. If you ever want to discuss it, please let me know.

    • T.A. McCann says:

      Thanks Rich. What was your idea? Was there a specific reason you killed it? For me the “cost to get the data” was the one that broke me. Very hard to code around and severely limiting my ability to create a freemium and/or wide-spread consumer service. These costs should be outlawed as we force providers to send the data electronically. Hopefully, the future iterations of meaningful use will improve this. I am sure this group would like to know more details of your own story.

  16. TA,
    A thoughtful post that is super valuable given the detail you shared about your thinking at each stage of the process. I found your “big tent” approach to defining your round to be the most interesting part of the article for me. I took a similar approach with our seed round and have been grateful I did.

    In my experience some of the most important decisions we make in life are those where there is considerable inertia to keep going but the facts say you should stop. You will never regret focusing on the facts!
    Grant

    • T.A. McCann says:

      Thanks Grant. Part of the job as a leader is to get lots of people running in the same direction. This includes team, investors, early adopters, customers, partners… And it works much better when everyone has some skin in the game and aligned incentives for success.

  17. Arjun says:

    Great post T.A. Appreciate you sharing your journey and articulating your process.

  18. Liam O"Dowd says:

    Really interesting read T.A. Takes a brave person to admit that something isn’t going to work knowing a lot of people might be disappointed or let down. Thanks for writing this up.

  19. JM says:

    Hmmm, it’s good being honest in public about your failure, but you did not quite spell it out: you rushed forward like a tornado before understanding the space, the business case, the competitive landscape, regulatory requirements and the necessary technology, i.e. ALL the basics.
    The most concerning aspect is that you persuaded people to leave full time employment to join you, which is extremely irresponsible and not a sign of a good founder and CEO.

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  21. Parnian says:

    It was such a great well-written article.
    Thank you for sharing your journey.

    I am just wondering how did you find those late night hackers? 🙂

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