Scaling is Hard. Case Study: athenahealth

There are many companies that are competing to be the “operating system” for small businesses. The theory is that with the advent of the cloud in the digital age, small businesses can leverage a suite of services from a technology vendor to manage all aspects of their work – from payments to record-keeping to marketing to customer communications.  Among those competing for this vision are PayPal/eBay, Square and Groupon, with each struggling to pull together pieces of the equation and, importantly, reach the small business in a cost-efficient manner at scale.

One company in Watertown, Massachusetts has been executing on this vision for over a decade with a winning approach for one vertical slice of the small business market:  physicians.  Although this is not typically how athenahealth is described, it is one way to describe what they are doing that mainstream members of the technology community might understand.  I have found it pretty amazing that so few people in the tech community know their story or understand the scale and scope of what they have achieved.  That is why I’ve chosen athenahealth for the third in my series on scaling (following Akamai and TripAdvisor).

Founding Story:  A Pivot

Athenahealth version 1.0 was a complete failure.  The company was originally founded in 1997 by Jonathan Bush (1st cousin of George W.) and Todd Park, a pair of Booz Allen consultants, as a physician practice management company for obstetrics.

As they tried to execute on their original vision, the pair became incredibly frustrated with the difficulty of turning medical claims into cash.  Payers took months to reimburse their practice for patients’ medical claims.  Park began to write software to try to speed up the process, automating countless manual steps and creating a user interface that would be simple enough for doctors and medical clerks to use.

It turned out, the physician practices loved the software, but didn’t love the practice management services.  The doctors wanted to run their own practices, but use athena’s software to speed up billing.  Bush and Park remembered the advice one of their early angel investors had given them:

“Get close enough to your customer to understand what they really want.  And once you understand what they really want; once that opportunity comes knocking on the door; for crying out loud, answer the door.”

The founding pair realized that they needed to pivot into becoming a software company, and in late 1998, completely shifted their focus to delivering athenaNet, their Web-based medical billing platform, as a cloud-based software service for all doctors.  Scaling Lesson #1:  get close to customers early, really close, to help inform your pivots.  And when you do pivot, pivot hard.

Over time, the functionality athena delivered to doctors expanded, all with the vision of simplying the administrative burden on medical practices.  From collections and revenue lifecycle management (called Collector) to clincial documentation and electronic medical records (Clinicals) as well as patient communication (Communicator) – athena now provides a full suite of cloud-based automation software for doctors.  In effect, they have become the Salesforce.com of the health care vertical.  Scaling lesson #2:  Once you find product-market fit with a customer segment, scale up by offering other products that solve other hard problems to that customer segment.

Athena’s financial performance has steadily grown alongside their product footprint and physician penetration.  In 2012, analysts estimate they will do $425 million in revenue and $85 million in EBITDA.  The company’s market capitalizaiton is $3.2 billion.  See chart below:

The reach the organization has achieved is impressive, but still only a fraction of the market opportunity.  Below you can see the number of doctors in the athenahealth network – which is over 25,000.  There are nearly 1 million physicians in the US.

Athenahealth’s Culture

For the 15 years since inception, CEO and cofounder Bush has run athenahealth end-to-end.  A remarkable entrepreneurial story, similar to TripAdvisor and Akamai, where the founder (or near-founder in the case of Akamai’s Paul Sagan) lead the business over many years.  Cofounder Todd Park, who is now the Chief Technology Officer for the United States, joked in an interview that medical billing is hardly “sexy”, but that by emphasizing the “doing well by doing good” aspects of their vision, athenahealth was able to create a powerful, mission-driven culture.  Bush and Park both emphasize culture in all aspects of the business.  Scaling Lessong #3:  A mission-driven culture (as opposed to green-driven or fear-driven) endures, particularly when the mission connects to a greater social good.

But athenahealth’s culture is more than just a bunch of do-gooders.  Their performance management system is very sophisticated.  One former executive described to me how transparent the organization is with respect to goals and metrics and how well-designed their Balanced Scorecard is for each individual and department.  The company shares that Balanced Scorecard on each quarterly earnings call as well.  As a result, everyone in the organization has a clear view of what the priorities are.  The scorecard includes five major components:  stability, operational performance, client satisfaction, financial performance and growth.  Scaling Lesson #4:  performance management systems and communications systems need to mature and be implemented as the company grows to maintain clarity and transparency.

Visionary CEO

As anyone who has met him can tell you, Jonathan Bush is a unique founder/CEO.  He is open, transparent and (at times painfully) authentic.   I love that his candor and humor haven’t changed, even as he has matured into the CEO of a multi-billion dollar market cap company.  Read the recent Q2 earnings call transcript, and you’ll get a clear sense of what I mean.  During the Q&A, when he’s talking off script, you’ll see a few funny quotes:

Well, one of the great lessons that we all learned in The Princess Bride is never get involved in a land war in Cleveland. [in reference to a slow roll-out at a hospital]

Life, Anthony. It’s a contract for life. All of our contacts are for life. They can all leave whenever they want, but hopefully, we don’t get boring. We keep changing our outfits, and they stay forever. We cut our hair short, we let it grow long. We have contracts for life. [when asked how long the term of a particular large deal was]

Jonathan’s humor stands out, but his willingness to put himself “out there” and be so authentic and direct is not unusual for many founders.  The athenahealth lesson is about passion, endurance and perserverance.  Much like Akamai and TripAdvisor.  Those appear to be the consistent attributes for scaling companies.

Jeff Bussgang is a general partner at Flybridge Capital Partners. He is the author of Mastering the VC Game, is an insider’s guide for entrepreneurs on financing and company-building. Follow him at his blog Seeing Both Sides where this post first appeared.