Venture capital firms provide essential funds to keep start-upcompanies afloat before they are ready to tap more advanced formsof financing. But the price for venture support is diminishedmanagerial autonomy. When entrepreneurs and investors don't seeeye
Venture capital firms provide essential funds to keep start-upcompanies afloat before they are ready to tap more advanced formsof financing. But the price for venture support is diminishedmanagerial autonomy. When entrepreneurs and investors don't seeeye to eye, the results can be disastrous.
This was the case for American Medical Imaging (AMIC) of Horsham,PA, according to former president Robert Kane. AMIC, once a leadingshared-service ultrasound supplier (SCAN 10/26/88), closed itsdoors in April following a year in bankruptcy court.
Kane resigned from his position in June of last year aftercontinued conflict with his venture backers. He had invested muchof his own savings in AMIC and owned half of the company untilthe end, Kane told SCAN. "The venture capital peoplewanted an immediate return. That didn't coincide with the needwe had for training and quality assurance programs. These programshave to be in place to set the company apart from others in thefield," he said.
AMIC expanded two years ago from its mobile ultrasound baseto provide assistance to hospitals in setting up vascular ultrasoundlaboratories (SCAN 9/12/90). The new business was proving moreprofitable than direct shared imaging services, he said.
The firm's venture backers wanted to dump the old businessto focus on hospital vascular labs. Kane argued that AMIC neededto maintain its base of trained ultrasound technicians to providethe type of quality imaging that would help ensure reimbursementunder tough new Medicare guidelines.
"We couldn't keep all of the techs we had trained andput them into the hospital market. You need a well-trained technologistbefore you can do anything," Kane said.
AMIC's VENTURE CAPITAL SUPPORTERS failed to grasp the implicationsof changing Medicare reimbursement for ultrasound services, Kanemaintains.
"They didn't understand the turn the market was goingto take when the Medicare RBRVS came in," he said.
Vascular surgeons are gun-shy about declining reimbursement,he said. If they understand the system and make their case well,however, they can avoid many pitfalls.
"The government will pay for quality patient care. Theywon't pay for fly-by-nights," Kane said. "They are goingto eliminate reimbursement on some machines and for people whoare not trained properly in doing the tests and for labs thatcannot show evidence of a quality-control program."
A relative value unit miscalculation in Pennsylvania resultedin $35 payments for duplex scanning rather than $145. When themistake was corrected in May, many doctors did not know that theycould receive compensation from Medicare retroactive to January,Kane said.
"Physicians try to fight battles on their own. They throwup their hands when the reimbursements come back and don't dealwith the carriers," he said. "I deal with the carriersstraight up, and I have never lost a (reimbursement) battle--evenin front of an administrative law judge."
According to Kane, his venture capitalists originally encouragedhim to grow AMIC. They indicated they would provide bridge loansto keep the effort going until institutional investors could belined up for a mezzanine round of financing. The investors increasedtheir asking price, however, just before Kane and other AMIC managerswere to speak at a venture capital conference in 1989.
"The (conference) seemed to go fairly well, but the termsthey (the venture capitalists) wanted were twice the originalterms we had discussed at our board meeting," Kane said.
Kane started a new firm a year ago with the help of some still-supportiveprivate investors from AMIC. Horsham-based Cardiovascular Laboratories(CLI) grossed over $1 million in its first year and is profitable,said Kane, who is CEO. The firm uses no venture capital.
"I would never do that again," he said.