Randy McClain: Specificity, winning culture lift ventures (The Tennessean)

It’s not every day that entrepreneurs as savvy as Robert A. Frist Jr., CEO of HealthStream, and Herb Fritch, chairman and CEO of HealthSpring, tell a few of their fundraising secrets.

Couple that with getting to hear pearls of venture capital wisdom from investors such as Fred Goad of Voyent Partners and David Swenson of Coleman Swenson Venture Capital, and you have a special event worthy of attention.

So, let’s cut to the chase. The four key things this heady group told a Nashville Health Care Council gathering about cooperation between entrepreneurs and their investors boils down to this: Be specific about the money you’ll need and how you’ll spend it; create a winning culture and explain it to any investor willing to listen; use the people and venture funds that invest as add-on experts to help your company succeed; and network now, even if you don’t expect to need outside money until later.

“This city is a tremendous place to make connections,” said Frist, who has built HealthStream into an online powerhouse in health-care education.

Skeptics might argue that the young Frist needed very little help making connections because his family founded hospital giant HCA. But the truth is that having a winning plan to build a business means a lot more to the venture capital crowd than your nameplate does.

Frist recalls going hat-in-hand to the home of Charlie Martin, a legendary Nashville investor who has put money into a number of HCA spinoffs through the years.

Martin and Frist already had gone through several negotiating rounds, and a deal was almost done to put money into the company that would become HealthStream. But Frist had a notion he could wrestle just a little bit more out of Martin.

“I went to his house thinking I could catch him relaxed and get what I wanted,” Frist said. The duo talked for a while, but Martin wouldn’t budge or improve the offer he already had on the table.

“I was practically begging, down on my knees. ‘Charlie, you’ve got to give me something else that I can go back to my board of directors with and say, “Look, I got something from these negotiations.” ‘ ”

Martin excused himself for a second, walked into another room and came back with a garish tie, brightly colored and better left buried deep inside one’s closet.

“Here,” Martin said, “show them this and tell ’em you didn’t walk away empty-handed.”

The lesson learned: Know when to take the deal that’s already been offered and stop negotiating.

How to tap the pros

Fritch started in business with $2.8 million in capital using a pretty basic concept.

He’d buy broken HMOs that were bleeding cash, turn their operations around to profitability and sell them at a higher price than he had paid for them. Today, HealthSpring has morphed into an operation that sells Medicare Advantage insurance plans.

Fritch is a big proponent of doing business with people you know and trust.

“We were fortunate; a lot of people followed me (from a previous company) to HealthSpring – and even today some of our company leaders have worked with me in multiple companies over 15 or 20 years,” he said.

Venture capital pro Goad says outside investors can be a source of knowledge and smart advice for entrepreneurs.

Giving outside investors seats on the company’s board – or at least using them as part of an informal advisory board – is a way to tap their expertise on strategy, debt financing and access to later-stage financing.

Frist agrees with that idea, but adds that the type of investors he relates to best are those who want to dig deeper into a company’s culture.

“Some investors ask me about the kind of culture we have at HealthStream – but not all of them.”

Jack Laporte, who managed the T. Rowe Price New Horizons Fund for 22 years, met with Frist at least once a year to discuss “innovation, our performance and the culture we were building,” Frist said. He took the time “to understand our persistence and our methods.”

Too many outsiders quiz company principals only on financial metrics, things such as debt ratios and whether they have too much or too little cash in reserve. The smartest investors seek a deeper understanding, Frist said.

Even boards of directors (especially at public companies that trade stock on Wall Street) sometimes spend what seems like too much time on risk analysis, audits and governance issues.

“Sometimes I miss the early days when it was more about board members offering ideas about how we could grow the business,” Frist told the health-care council crowd. “We have a strong, diverse board today, and we’re still able to get there, but we have to work harder at it.”

Of course, none of this means business owners can slide by without paying close attention to the minute details of how they’re going to make money or how much it will cost to get from Point A to Point B.

Swenson, who has run several investment pools, offered this advice to business owners seeking outside money from venture funds: Be specific; master the details.

“You have to know the answers to questions like this: How will I get my first 5,000 customers? How many salespeople will I need to get there? What’s my cost of goods?”

Just talking a good game won’t be enough.

Randy McClain is business editor of The Tennessean.