Sramana: When you started Modernizing Medical, you focused on dermatology specialists. How many specializations do you sell to today?
Daniel Cane: We have also launched products in ophthalmology and optometry. This quarter we are launching into plastic surgery and orthopedics. We also have derivative products. For example, the plastic surgery product has a cosmetic derivative product which is an even bigger market opportunity. The orthopedic product has a physical therapy product which is also a big market opportunity. We have five major product lines, which opens the door to a handful of derivative products.
Sramana: You established this company later in your career, so you likely had cash of your own to invest. How did you build this company? Did you bootstrap?
Daniel Cane: I was in the enviable position of being able to bootstrap this company myself. I am a very cautious CEO with my own money. Those two things do not go well together. If you are too risk averse, you make bad decisions. While I was able to fund the company on my own, I knew that if I did not take on outside investment, I would not take appropriate risks.
We did go out to raise capital, and a funny thing happened. When I called on the original cast of characters, they all told me that I had some huge exits and that they would be happy to take a look at this business. However, they all mentioned that they knew very little about the medical field and asked if they could speak to some of our users. I had not bothered to contact any potential investors until I had enough of an install base to provide those types of references, so I told them I would be happy to get them in touch with our users.
I then proceeded to call together all of our beta users and asked them to be references to investors so I could raise a few million dollars. The doctors who were using the product all said they would be willing to be references for me, but they also asked if they could invest. History tells me that doctors do not make the best investors. It is hard enough to get doctors to sign a monthly contract, let alone figure out how to handle valuations. I decided to do a convertible note, and I told the doctors that I was not willing to haggle over the valuation but that I would be willing to give them a Series A discount.
In my mind, I was raising a bridge with the doctors to last me through to me Series A round. However, the most amazing thing happened. All of my beta clients signed contracts with the company to give us real revenue, and then they invested. We ended up raising $3.1 million in investments from beta clients. We funded this company through our users.
We then took a $4 million check from a private investor because I wanted someone to lead the round who would set the valuation, and I wanted that valuation to be independent of me and my customers. That was the only fair thing to do. We ended up closing our Series A at $7.1 million.
A year later, the company had grown substantially and I decided it was time to do a Series B. I called my investors and told them how grateful I was for them. They had evangelized the technology, and I could not have asked for better investors. When I announced that I was going to do a Series B, all of the same investors asked if they were going to have the chance to participate. I told them they were certainly welcome to invest but warned that it was a much higher valuation, so they should not feel obligated. They answered with their checkbooks. Some of my investors who put in $100,000 for the Series A turned around and put a million dollars into the Series B. Once again I avoided using outside money, and I was still able to raise $8 million of equity financing and $4 million of debt financing.