The roster of investors for Nashville-based HealthStream reads like a Who's Who of the city's healthcare community. All the familiar names are there, including some Frists, a couple of McWhorters and a Martin.
Although a respected name alone does not a strong company make, HealthStream-a privately owned on-line interactive healthcare education company-has benefited from the connections among Nashville's healthcare elite.
The company was founded in 1990 as NewOrder Media by Robert Frist Jr., son of cardiac surgeon Robert Frist and nephew of Columbia/HCA Healthcare Corp. Chairman and Chief Executive Officer Thomas Frist Jr., M.D. The company's co-founder, Jeff McLaren, was a college friend of Frist's and is HealthStream's president. Frist is CEO.
"The last name Frist does not hurt by any means," says Seth Frank, a securities analyst at SunTrust Equitable Securities Corp., Nashville. "The fact that Robert Frist-Bobby-is at the helm brings an instant degree of credibility to bear."
In August 1998 the company changed its name to HealthStream to reflect a narrowed focus on interactive healthcare education.
In late April, the company completed an $11.3 million round of private financing, which boosted its name recognition and piqued the interest of investors outside of Nashville, sparking talk of an initial public offering this year.
"I think this is a clear example of the Nashville expertise in healthcare being available, being apprised of an opportunity and pursuing the opportunity within a limited time frame," says Ken Melkus, a consultant with New York investment bank Welsh, Carson, Anderson and Stowe, and a HealthStream investor.
Other investors are Russ Carson and Andy Paul, also of Welsh Carson.
Among HealthStream's institutional investors are Coleman Swenson Hoffman and Booth, a Franklin, Tenn.-based venture capital firm; Dauphin Capital Partners, a New York-based venture capital firm; Morgan Stanley Dean Witter Venture Partners in New York; and a venture fund of J.C. Bradford and Co., a Nashville-based investment bank.
Other individual investors include William Frist, son of Columbia Chairman Frist (and cousin of HealthStream's CEO); Joel Gordon, chairman of Nashville-based Cardiology Partners of America; Charles Martin Jr., CEO of Vanguard Health Systems and former head of OrNda HealthCorp; and Clayton McWhorter, former Columbia chairman. McWhorter manages venture capital fund FCA Venture Partners with his son, Stuart McWhorter.
Over the past three years, HealthStream has doubled its revenues and employees for each of those years. It now has about 68 employees, but Robert Frist Jr., 31, says that number could soon jump to nearly 80 as the company prepares for the potential acquisition of a division of another company he declined to disclose.
"Once you have the momentum moving in a certain direction, things just seem to start to happen in front of you," says Michael Pote, a senior vice president at HealthStream.
That seems to describe HealthStream's growth. Although the company has yet to turn a profit, last year it recorded revenues of $1.9 million. Frist declined to specify the company's losses.
Frist says he approached Martin with his business plan to start rounding up financing. He knew Martin's reputation for jump-starting new healthcare companies in the Nashville area.
Martin founded Vanguard in 1997 after Santa Barbara, Calif.-based Tenet Healthcare Corp. bought OrNda. He has invested in several other healthcare start-ups.
"I announced Charlie Martin was funding the company, and within three hours, we had meetings with Morgan Stanley, who ultimately became an investor, and GE Capital, which also was an investor," Frist recalls.
HealthStream has built an on-line university tailored to healthcare and has developed technology to manage, deliver and measure the use of educational content over networks.
Health publisher Lippincott Williams and Wilkins distributes HealthStream's product, and HealthStream clients include Columbia and Brentwood, Tenn.-based Quorum Health Group.
Until its recent $11.3 million round of outside financing, HealthStream was financed internally, says Frist.
During this latest round of financing, Frist says, the company attracted more investors than it needed, to the tune of $16 million. HealthStream ended up allowing some interested parties to invest only a fraction of what they initially wanted to put up.
"As we announced the completion of this round, we were swamped with phone calls regarding investment opportunities," Frist says. "We had many more dollars and commitments than we ended up taking.
"As important as the money is, more important was the group that came to be investors, their knowledge of healthcare and their track record in building companies," he adds.
That street seems to go both ways.
Because of his managerial experience at Tenet-owned Brookwood Medical Center in Birmingham, Ala., Stuart McWhorter appreciated HealthStream as a potential investment.
His memories of the complex educational process for accreditation increased his enthusiasm for HealthStream's products and business plan, he says.
And it certainly didn't hurt that the Frists and McWhorters are not strangers to one another in Nashville circles.
"I've known Bobby for four years," McWhorter says. "And of course, I've known the family all my life."