Reversal of Fortune

When Web-based Sapient Health Network was on the brink of failure, CEO Jim Kean quickly reinvented the entire company. A look at how cyberspace has spawned a new, more resilient breed of business.

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On the Web a company can change its direction almost as easily as its founder can change his or her mind about what the company should be

"With 52 employees, here's where we would have died."

Jim Kean stood before the remaining 34 employees of his Internet-based start-up, Sapient Health Network (SHN), and pointed to the month of August on the calendar projected on the wall by his PowerPoint presentation software. It was already mid-June 1997. Kean, the company's president, had spent the morning laying off workers--18 of them--in groups of twos and threes. He'd downed two stiff scotches at lunch and then returned to face the shell-shocked survivors. Now he had to make them understand that what he'd done was amputate a limb to save a life. "Because we've done these layoffs," he told them, "the venture capitalists on the board will be encouraged by the fact that our burn rate is lower, which will help us with our next round of financing."

Things hadn't always been so bleak. From the moment it began operations, SHN, which is based in Portland, Oreg., had had no trouble raising more than enough cash. In fact, within 12 months of its founding, in November 1995, it had more than $5 million in venture capital in its coffers, raised in its first two rounds of financing. But when the health-care-information subscription service failed to generate significant revenues in its first year of operations, the once-enthusiastic supporters began to back off. "In May we were down to a point where we would run out of cash by the end of August," Kean, 36, says now. "You could almost feel this thing ticking. It's like you're a sick patient who's been told you have nine months to live, and you'd better figure something out between now and then."

In the real world, triage would have been pointless. SHN's crisis would have been followed by a series of cash-flow crunches and then an accelerating death spiral. But SHN doesn't live in the real world; it lives in cyberspace. And cyberspace has spawned a more resilient type of business. As SHN's story illustrates, sans physical plant and inventory--and even preconceived notions about what form it should take--a Web-based company can reinvent itself in midflight in a matter of weeks. And so, on the same June day that Jim Kean announced the layoffs to his demoralized staff, he also introduced them to a new business model and a restructuring of the organization. On the Web, he says, you can be whatever you want to be whenever you want to be it: "It's like a map of the world from the 15th century. There's all this unknown space."

SHN's original business model--a subscription service providing health-care information to people in virtual communities set up along disease lines--collapsed. Yet Kean knew that even in its death throes, the company had two things going for it: it had created a valuable piece of technology ("expert system" software called intelligent profiling engine, or IPE, and intelligent query engine, or IQE), and it was in a burgeoning market (medical informatics, the analysis of health-care data for the purpose of measuring costs and quality of care). Instead of giving up, he and his partners refocused that technology to go after a completely different customer--pharmaceutical houses and other health-care companies. In retrospect, the changes the company made seem to have been part of a natural evolution, says SHN board member Susan Clymer, but actually the company's executives backed into it. "There was a lot of scrambling around trying to figure out how we could wring value out of what we'd already accomplished," she says.

SHN was founded with the idea of creating communities of Internet users with specific chronic illnesses. Through its expert system it would provide members with personally tailored news and information about their diseases, and through message boards and chat groups it would give them the ability to interact on-line with others suffering from the same condition as well as with health experts, who would make guest appearances. Users would pay $10 a month for the service. SHN also planned to earn revenues from banner advertising and sponsorships by drug companies and other health-care players.

SHN's business plan was nothing if not optimistic. Kean and his cofounders, Bill Kelly and Kris Nybakken, projected the company could pull in $6.3 million in 1997 and more than $42 million in 1998. The three men, all former managers of Creative Multimedia Inc., a Portland-based CD-ROM development company, were undaunted by the fact that other than the Wall Street Journal and certain pornographic sites, they knew of no examples of successful Web-based subscription businesses. "Everyone knows health care is going to be consumerized," Kean explains. "It seemed like something people would spend money for--to get detailed information. There weren't a lot of examples out there, but I think it's fair to say that somebody is going to make some type of subscription business work. You just don't know when it's going to be. So being optimistic entrepreneurs, we thought it was going to be us."

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