Medsphere Layoffs

I have been hearing rumors that Medsphere has been laying people off. A few days ago, the rumors bubbled to Histalk, which they always do eventually.

This is a big problem. The main advantage that Medsphere has over its number one competitor, ClearHealth Inc, was its capitalization.

The idea of a funded open source medical startup is that you sell most of the company to VC’s or angels and, in exchange, you get a massive chunk of change to play with. (I have toyed with the idea of doing this myself for many years, but seeing with the Shreeves went through has always made me hesitate.)

Then with cash in hand you do three important things:

• Build a sales force; you will need to float your sales team as they ensure the long Health IT sales cycle.
• Invest in your technical support; supporting VistA is non-trivial, it is enterprise software and requires multiple high-payed experts to keep it running.
• Invest in your R&D; You need to have new shiny toys that give you competitive advantages.

In a software company, all of these investments are into employees.

If Medsphere is laying off anyone it means that they are running out of capital. This makes sense. They spent  enormous amounts of money attacking the Shreeves. Money that should have gone into one of the three buckets above.

I have taken to calling the “new” Medsphere Medsphere 2.0

Medsphere 2.0, lead by solid people in the CEO, COO and CMO roles, has made some pretty smart moves. These moves have lead me, and others within the community to start giving the new company some slack. But smart moves does not undo the stupidity of the past. Most of these good moves are exactly the things the Shreeves were sued for proposing.

While I am glad to see the company come to it senses, that does not undo the harm in the past. There are two important connections with the past that Medsphere 2.0 cannot undo: The same board and the same money.

The BOD of the “new” Medsphere is the same as the old Medsphere. That BOD has done some colossally stupid things. Larry Augustine is supposed to be the money guy who understands Open Source. But he utterly failed to serve either the interests of the community or the investors with Medsphere. It was his job to explain to the BOD that the Shreeves were not a threat to Medsphere. It was his job to keep the BOD from suing the Shreeves and gutting the original company. I, along with Eric Raymond, made an offer to him personally to help him in this role. He never replied to either myself or Eric. As far as I know he never reached out to anyone in the community. In his silence he failed the community at large too.

What does all of this have to do with the “new” Medsphere? Larry is still on the BOD. That means that no matter how much Mike Doyle impresses me, I cannot fully trust Medsphere. But Mike Doyle is an position to succeed with community trust where Larry has failed. The new Medsphere.org and releasing valuable software under the AGPL are evidence that the new leadership, if not the BOD, is trustworthy.

The other thing holding Medsphere back is the money. Medsphere spent a tremendous amount of money suing the Shreeves. This is money that Medsphere cannot afford. As an Open Source company, you cannot trap your customers using a proprietary license. That means you need to trap your customers with golden handcuffs, you need to make the service so reliable that they would never be able to consider the hassle of finding another vendor. Good service translates to “Good Employees” for an EHR company.

Now you see why Layoffs are such a bad sign. If Medsphere is laying off employees that means that it is running out of capital. But good employees are the only thing that Medsphere has as a competitive advantage. Any layoffs have to hurt their ability to do one of the three core functions above.

If Medsphere is laying off employees then it means that the ghost of Steve and Scott Shreeve (as employees of course… they remain very much alive) are coming back to haunt the company.

Normally when a company like Medsphere needs more capital it can go for more further funding rounds, it can sell to a larger company (like IBM or EDS) or it can make a public offering. The current market state renders going public impossible. For a sale or a new round of funding, the new money will come with the simple question “What are we buying?”. For Medsphere, here is the current answer:

• An infant community on Medsphere.org that the Shreeves wanted to start years ago.
• Lingering Mistrust from the larger VistA community
• A technical support and R&D team (valuable employees)
• A sales team (more valuable employees)
• Several important clients
• A massive lawsuit expense

Notice what is not on the list! Software! All of the really valuable software is already open source. The first two essentially mean that they have no community, although they will if they keep doing the same things they are now, and are given more time to earn back the trust of the community.

That means that the only really valuable things on the list are the clients and the ability to service those clients (translation: employees).

See why Layoffs are so concerning? If Medsphere is laying off people it means that it is reducing one of its few valuable assets in order to save capital. The only way that Medsphere could fully justify layoffs is if the company was profitable as a result. Otherwise they are just slowing the bleeding that will eventually kill the company.  Now the questions becomes what cards can Medsphere play, before the bleeding becomes fatal?

In any case, layoffs are not good news for Medsphere.

Please contact me through fredtrotter.com if you can confirm or deny the Medsphere layoffs.

-FT