How Sherpaa Survived Venture Capital’s Unrealistic Expectations

Why tech investors often fail to understand that highly regulated health care startups don’t grow at internet-company pace.

How Sherpaa Survived Venture Capital’s Unrealistic Expectations
Photo Illustration: Joel Arbaje for Fast Company Photo Illustration: Joel Arbaje for Fast Company

Jay Parkinson’s star was rising in 2009. Hailed in the media as the “doctor of the future,” Parkinson had created a transformational Facebook-style application for doctor-patient conversations called Hello Health. Then he was brought in by a fast-growing startup called Tumblr to devise a strategy for their employees’ health care needs. That conversation, in which Parkinson advocated for a shift to digital methods (like SMS) of communicating with clinicians, inspired him to start his own company, Sherpaa.


Through Sherpaa, employees at companies like Tumblr were given an email address and phone number, which they could use to reach a doctor at any time. After a segment aired on national television in 2012 about the company’s simple but effective approach, Parkinson says Sherpaa was able to hire its first seasoned corporate executive. Less than six months later, Parkinson brought on another New York-based senior executive with human resources experience, and raised $1.85 million. Everything was going well.

Less than five years later, Sherpaa’s investors had all but given up on the company—and Parkinson was locked in a protracted battle to save it. What happened?

The promise of bringing new technologies to the health care industry, a notoriously outdated sector when it comes to software and services, has been a lure to many investors. Funding in health technology, known as “digital health,” had reached $4 billion by 2014, a milestone that venture fund Rock Health referred to as “staggering in many contexts.”

The funding frenzy initially meant that digital health entrepreneurs had a lot more leverage when it came to their investors, which seemed like a positive trend. Even now, founders are getting term sheets from both health care investors and the technology-focused Sand Hill Road firms—but the Silicon Valley consumer-tech firms are willing to offer much larger checks, introductions to tech press, and invitations to speak at conferences.

The disparity in funding isn’t too hard to explain: As I’ve reported before, many experienced health investors aren’t willing to compete on valuations because they’ve seen over the past several decades that the vast majority of health-tech startups will never experience the type of rapid growth associated with highly valued tech companies. Five years after the funding explosion in digital health, “We still have barely seen any successful exits in the [health-tech] space, with most of the category makers, such as ZocDoc and Oscar Health, still private,” explains Nikhil Krishnan, a technology analyst with the research firm CB Insights.

That prompted me to wonder what happens when a modestly successful and organically growing health care company gets funded like a tech startup. Jay Parkinson, founder of Sherpaa Health, was willing to share his story with Fast Company as a cautionary tale to fellow health-technology entrepreneurs.


Mismatched Expectations

Sherpaa hit its stride at a seemingly ideal time. In the wake of various health reforms, dollars were starting to flow into the digital health arena from technology investors who had previously shied away from health startups.

Parkinson didn’t set up any meetings with investors who had traditional health care experience. Instead, he sought out investors with consumer technology backgrounds based on a hunch that “we needed folks outside health care to help us change it for the better.” That proved to be his first big mistake.

Looking back, he takes responsibility for “failing to sufficiently educate” his investors about the challenges of innovating in health care, a notoriously complex and highly regulated space.

As Sherpaa investor Bryce Roberts tells me, health startups that raised funds at an “internet company valuation” were often expected to grow at an “internet company pace.”

From the beginning, Parkinson butt heads with the company’s investors over growth expectations. A lot of the tension, he says, was centered around sales. As Parkinson soon learned, many employers’ HR teams were (and still are) reluctant to spend more on health care, with costs steadily rising and dozens of vendors competing for their attention. Parkinson says Sherpaa was growing, particularly among “young, hip companies,” but it wasn’t fast enough to satisfy the investors and the board.

“What could be a promising health-tech company will often go to shit because investors’ expectations of where the company is going and the reality is mismatched,” adds health VC-turned-entrepreneur Abhas Gupta. One scenario that Gupta often sees: After 18 months or so, the company has failed to reach the “inflection point” necessary to secure an additional infusion of cash. “They can’t go to the outside market to raise money, so they are relying on their insiders to double down.”


But health-tech companies need more time than their counterparts in other industries to land customers. There are fairly unique issues to be dealt with, such as making sure the technology meets federal requirements around privacy and security; regulatory oversight to ensure they don’t overstate their claims or put patients in harm’s way; and long sales cycles, because it often takes years for health IT buyers to take the plunge on a new vendor.

Experienced health investor Dave Chase says time and time again, he’s witnessed situations where contracts are stalled when so few buyers are “empowered to say yes to something different.”

This scenario played out recently with venture-backed HomeHero, which shuttered its home care operations after it failed to meet enterprise sales targets by failing to convert big pilots at large health systems into ongoing contracts.

Moreover, some companies fail after securing a promising pilot from a large hospital, seemingly through no fault of their own. Some prominent investors call this phenomenon “death by pilot.”

Another challenge was that sales cycles typically last nine to 12 months, but he says that the investors pushed Sherpaa to hire and fire sales executives in less time than it took for a deal to close. And in order to ensure that the company could scale, the founders were asked to “step out of the sales process,” he says.

Unlike enterprise-tech, sales cycles in health care can drag on. “I think for folks who only have experience in tech, enterprise sales are measured in weeks or even days,” explains Ambar Bhattacharyya, managing director at health-tech firm Maverick Capital Ventures. “When companies move into the payer and [health] provider world, cycles are measured in months and sometimes years.”


As Ben Rooks, a veteran health IT consultant sums it up, “Physicians don’t like to spend money on software; hospitals aren’t known for making rational and rapid decisions; payers are tough; and employers aren’t the easiest to sell into, either.”

With cash running out, Parkinson was desperate to avoid his company getting written off by investors. Sherpaa had an opportunity to take $20 million in investment from a strategic health care fund, but the deal was scuppered after tensions with the board simmered over. The offer was rescinded, and the company brought on an interim CEO who fired every employee at the company in short order before trying to sell it.

Eventually, after realizing a fire sale wouldn’t be possible in part due to the sensitivity of the ongoing medical care still needed by Sherpaa’s patients, Parkinson says that the interim CEO resigned. After that, he was able to rehire most of the staff and restructure the company.

The pressure to grow can occasionally lead to nefarious ends. Roberts believes that it’s no coincidence that many of the biggest startup scandals of the past few years involve health-tech companies like Zenefits taking short cuts to meet unrealistic growth targets. “The businesses need to look and act a certain way, and to look and act that way it takes getting more creative,” he explains. That might include deprioritizing privacy and security, which puts patient data at risk, or cherry-picking data to expedite the clinical trial process.

Sage Advice For Health Startups

Does this mean that health-tech companies should avoid taking checks altogether from inexperienced venture investors? Not necessarily, according to Parkinson and others.

Some experts say that startups will be better off if they favor venture capital firms with health experts on the team. Gupta from Quartet Health took Google Ventures’ funding for that reason (his investor Krishna Yeshwant is a physician and entrepreneur who still practices medicine). Others say that any form of capital is a risk, so the best that an entrepreneur can do is educate their investors before they sign on the dotted line.


Roberts’s firm, Indie.VC, makes investments in a different way than the traditional venture model, by taking payment through cash distributions or a portion of revenues. “We think there’s plenty of opportunity to make really great returns on real businesses that don’t follow Google-shaped timelines,” he explains. Roberts believes that venture capital has been overly glamorized, with the startup ecosystem too quick to “peg ambition to venture dollars raised.”

Parkinson has ultimately learned that the key to a meaningful business is independence. He claims that the investors on the board tried to shut the company down to write off the investment and avoid any personal liability. Ultimately, the investors presented him with a one-page document that released them of all liability; in exchange, they’d resign from the board and terminate any voting rights. The entire board signed it, Parkinson says.

Now, he has a smaller team that primarily sustains itself on revenues and is slowly paying off the company’s venture debt. “We’ll only invest in things that contribute to delighting our customers and, therefore, grow our revenue,” he says. “While it’s uncomfortable to go from a VC-funded to self-funded company, I feel like it’s a gift.”

About the author

Christina Farr is a San Francisco-based journalist specializing in health and technology. Before joining Fast Company, Christina worked as a reporter for VentureBeat, Reuters and KQED