The Startup Ripoff!!

Late Capitalism has made it a speciality of going from one scam to another to sustain itself. It all began with the bursting of the dotcom bubble that ushered in the new millennium followed by the subprime loan catastrophe less than a decade later and now we have the startup ripoff which too is bound to bite the dust sooner or later. Companies that use software that can aggregate demand for products and services and link them to suppliers who are similarly aggregated, the whole process being facilitated by online payment systems, have become the toast of the global financial institutions and high net worth individuals. These latter are lavishly funding these companies basing their investments on the number of people using their websites regardless of the fact that in most cases these companies are running up huge operative losses.  The revenues they are earning are miniscule compared to their operating costs partly because of huge salaries that they are paying to the management staff and the deep discounts being offered on purchases. Instead of the standard metric of profit earned, a new metric called Gross Merchandise Value or the value of the total sales on the website is being used to value the company. Here is an analysis by a friend of mine of a set of companies which claim to provide customers with the services of doctors that will make clear the extent to which this is the latest con game in capitalist development.  

A company named Practo, in India, has raised $124 million over 3 rounds of investments as an aggregator of the services of doctors. Their recent investment of $90 million values the company at $525 million. Is this valuation justified. How useful is the service to users and how is it making money? To understand this let us study similar U.S. companies Zocdoc and Vitals on whose model Practo is based.

Zocdoc raised $223 million over 4 rounds of funding from reputed investors like Khosla Ventures, Goldman Sachs and Founders Fund. During its latest round of funding they were valued at $1.8 billion. To understand their application a simple test case was executed. A search was given for an orthopaedic doctor near Newport Beach, California in both Zocdoc and in Vitals. Dr. Assad M Moheimani was listed in both the websites. 

Zocdoc contained 9 reviews of Dr. Assad and gave him 5 stars. Interestingly some of the reviews do not have any date and they are not listed in any order. 2014 review is listed before 2012, which is listed before 2015. Vitals contained 7 patient reviews of Dr. Assad and gives him 2.5 stars based on 19 ratings and 7 reviews. The reviews were listed in reverse chronological order (the latest review is dated May 29, 2014 and the earliest review is dated Jan 14, 2011). Additionally, you could apply filters like Board Certified, Quality of School Attended, Years of Experience etc. to find a doctor in Vitals. Vitals has raised $86.32 million over 5 rounds of funding. In its latest round of funding (D round), Goldman Sachs has invested $41 million in the company. Goldman Sachs invested $75 million in the C round in Zocdoc along with another partner. So it appears that Goldman Sachs is betting on both the horses. The Vitals healthcare portal are as much crooks like Zocdoc. Doctor Paul S. Lee gets a rating of 4.5 on Vitals based on 90 patient reviews and 753 patient ratings. His rating on Zocdoc is 5 and on Patient Fusion is 4.5 based on 287 reviews. So how did Vitals give Dr. Paul S. Lee a rating of 4.5 stars based on 90 reviews. It incorporated 88 anonymous reviews from Patient Fusion in the score. How could Vitals incorporate ratings from Patient Fusion? And why would Vitals incorporate ratings from Patient Fusion? Patientfusion was incorporated in 2010 but it has not taken any investment till date. Further Patientfusion is owned by Practisefusion. What is going on here? PatientFusion is free for doctors and patients. Then how are they making money. It appears that PatientFusion is a front end to generate rankings that Vitals can incorporate into their website. So they don't have to face uncomfortable questions about how they ranked their doctors.

Why couldn't Vitals depend on its own system to rate doctors. Because it is difficult to generate money that way. Vitals and Zocdoc depend on subscription fees from Doctors to show their enormous valuation. Doctors will not pay them the subscription fee if they get negative reviews or if the system does not bump up their rank quickly. So the promoters develop crafty ways to fool people by having a free site like PatientFusion. Zocdoc and Vitals cannot generate revenues by taking a percentage of doctor's fee due to a U.S. law which prohibits such activities. 

Practo is modeled like Zocdoc. A search for an endocrinologist in Bangalore yielded a list in which an unknown doctor named Dr. Anantharaman got listed at the top with 772 recommendations and 88 feedback. Whereas Dr. Prasanna Kumar with 35 years of experience and an M.D. degree from the All India Institute of Medical Sciences got listed much lower down with 35 recommendations and 1 feedback. Since there is no law here in India to prevent Practo from charging a commission to a doctor from the consultancy fees earned by him from appointments routed through the website, this is a valid earning source. But to get people to opt for a doctor the website can charge a fee to the doctor for promoting him with false recommendations and feedback, this is what is most probably going on. When you're looking for a good doctor, you would check how have patients reviewed a doctor against 1) Diagnosis, 2) Time spent listening to the patient, 3) Follow-up. Additionally you would check the Doctor's Certification, Years in practice, and Educational institution. Practo does not provide any filter to identify doctors based on verified reviews, years in practice, educational qualification. Moreover they don't incorporate diagnosis, time spent with the patient and follow-up in their rating system. The patient reviews are mostly eulogistic ones saying that the treatment was good without any details and of a repetitive kind. And like in the case of Zocdoc the reviews are not in chronological order but haphazardly listed giving cause for suspicion that they have been cooked up.

How is Practo earning revenue? According to their portal, Practo charges doctors a fee of Rs. 999 - 1,999 per month for accepting patient appointments through their system. They can take a commission from every appointment accepted through their system. But that is not all. They are also probably making money by promoting doctors through their ranking system which is opaque. However, even after this it is unlikely that they are earning profits and like more famous startups like Flipkart, Ola etc they are also running up operating losses which they do not reveal. In the case of Flipkart and other popular web retailers an enterprising journalist prised out their annual reports to the Registrar of Companies and found that their subsidiaries registered in India are all running in huge losses eroding all the millions of dollars of funding that they have secured in the various rounds.

Are the funders fools then since they at least must be privy to the heavily bleeding accounts of the companies that they have funded. Well there is another part of this fraudulent eco-system that helps to keep it afloat. There are company rating agencies that continually rate these startups as great investment options and glorify their potential to become profit making ventures in the future. There have been a spate of stories in the business periodicals and dailies recently about how all these startups are soon going to become profitable. Amidst this kind of a rosy picture the investors of these companies then push them into an Initial Public Offering for listing on the Stock Markets and cash in as the gullible people buy the shares of these companies thinking that they will become profitable soon and give them good returns. However, while Facebook and Google, the two startups that have fuelled this boom, succeeded in developing a good revenue model through advertising based on their huge user base, the revenue models of these other e-commerce based websites are shaky as they depend on the users paying for the goods and services they buy. To attract users the e-commerce websites have to give heavy discounts and this burns a hole in their finances. Its not long before many of these startups will be laid low but not before their investors have made their exits through IPOs and fleeced the gullible public. The possibility of economic justice for the poor and deprived is low when such blatant fraudulent financial shenanigans are not only allowed to go on but are enthusiastically welcomed by the powers that be.