Outcome Health, investors call a truce

Outcome Health CEO Rishi Shah has struck a deal with his investors to end a monthslong, bitter and very public feud, allowing them both to focus on rebuilding a once high-flying medical advertising company that has been hurt by lawsuits, allegations of fraud and defections of both customers and key employees.

Shah and co-founder Shradha Agarwal, both 32, will step aside from day-to-day management as CEO and president of the company, respectively, to become chairman and vice chairman. They'll also join their investors—including Goldman Sachs, Pritzker Group Venture Capital and Google parent company Alphabet—in putting another $159 million into Outcome to pay down bank loans and recapitalize the company.

It's a surprisingly quick end to a very high-profile battle that made plenty of headlines.

"All parties are reinvesting and share a common belief that the business model works," Shah said in a statement. "This is an important milestone event that will instill confidence in the company among our valued employees, customers, partners and key stakeholders."

"The resolution is based on our conviction in the company's mission and path to growth that will be beneficial for all stakeholders," the investors and founders said in a joint statement.

The deal ends at least some of the drama that has engulfed Outcome, a digital advertising company that has suffered an abrupt and stunning fall from its perch as one of the most closely watched and highly regarded companies in the Chicago tech and startup community.

The settlement doesn't end the troubles for the company, which erupted about three months ago, when Forbes and the Wall Street Journal first reported allegations that Outcome had overbilled pharma customers for ads on more screens than it actually operated and reported inflated results of prescriptions related to the ads. Outcome, founded in 2006 as ContextMedia, operates a video network in doctors' offices that displays educational medical content and advertising from pharmaceutical and medical-device companies on TVs and tablet computers.

MORE BOARD SEATS

Shah and Agarwal continue to own a majority of the company, which raised nearly $500 million and was valued at more than $5 billion less than a year ago. And Shah remains the largest shareholder. But the board of directors will increase from three members (Shah, Agarwal and a representative from Goldman, the largest investor) to seven: the founders, two investors and three independents.

Nandini Ramani, a recent hire from Twitter who was named chief operating officer in December, will lead the company's day-to-day operations while the CEO search is underway. Shah said the company will conduct a nationwide search for "an operating leader who has the experience and skills required for the future success of Outcome Health."

Specific details of the deal between Shah and Agarwal and their investors, worked out over the past couple of months, weren't disclosed. The investor group led by Goldman dropped its fraud suit in Delaware against Shah and Agarwal.

Among the unanswered questions: How did Goldman and others, who claimed in the lawsuit that they were duped into a deal based on fraudulent claims by the company, decide to double down? Five weeks of intensive due diligence helped.

Outcome also reworked its deal with lenders, paying down $77 million in debt and arranging for a new, unspecified line of credit. The lenders did not get an equity position.

PICKING UP THE PIECES

Although Outcome has resolved its litigation with investors, it still must win back the trust of advertisers, some of whom, such as Bristol Myers Squibb, say they are no longer advertising on the company's network. It also must restore the faith or, at the very least, the confidence of its workforce. One-third of the company's 600 employees took buyouts offered in late November, and several top executives have left. Shah must also work to rebuild the company's status in the Chicago tech community, where it went from hopeful breakout success to cautionary tale in a matter of months.

Outcome hired an outside firm, starting in July, to audit past advertising campaigns and to verify customers were getting what they'd paid for. The company said most of the audits are complete but declined to offer specific results.

"We have settled, or are in the process of settling, with customers" in any cases where there were shortfalls in meeting contractual commitments, the company said.

There's no way to know for sure who is still spending on advertising with Outcome and who's not, or how much of a hit Outcome's revenue has taken. The company says it has added new customers this year. "We've had customers renew and grow their spending," Agarwal says.

The company also is awaiting results of an investigation by Dan Webb, a former U.S. attorney in Chicago and past chairman of high-powered corporate law firm Winston & Strawn whom it hired.

Shah and Agarwal have denied knowledge of deliberately overbilling customers or inflating results.

The company declined to comment on Webb's investigation, which is supposed to be an independent review, or say when it might be complete. It also declined to comment on possible investigations by the U.S. Department of Justice and the Securities & Exchange Commission, other than to say the company is continuing to "cooperate fully."

RETHINKING A DEAL

Lawsuits between venture investors and portfolio companies are rare. Usually such problems are resolved quietly. But Outcome was no ordinary deal. It raised $488 million early last year from some big-name investors, including Goldman; Pritzker; Alphabet's CapitalG fund; Emerson Collective Investments, and Norwest Venture Partners. Emerson Collective is the fund run by Apple co-founder Steve Jobs' widow, Laurene Powell Jobs. Outcome was valued at $5.5 billion, propelling it into "unicorn" status—companies worth at least $1 billion that haven't gone public—that is coveted by startup founders.

It was seen as a hot deal—buying into a profitable, fast-growing unicorn that seemed destined for an IPO. But a lot of investors passed, according to some who looked at the deal but didn't invest, in part because of an unusual structure that was more like a loan than a venture investment.

Investors got a guaranteed return of 20% annually, plus a 10% stake of the parent company of Outcome. If all went according to plan, the parent either would go public or be sold at a valuation of $5.5 billion.

That structure is gone. Investors all have a traditional equity stake in Outcome. "We all win together," Shah said. He declined to disclose the valuation of the revised deal. "We have done right by our lenders and our outside shareholders," he said.

What made Outcome's situation even more unusual, and opened the door to a lawsuit, was that a big part of the $488 million hadn't been spent. As part of the original investment deal, Shah and Agarwal were guaranteed a payout of $225 million. That money was still parked in a subsidiary because the founders and their financial advisers hadn't finished planning for the tax consequences of such a large windfall, when investors began asking questions about whether they'd been given incorrect data in due diligence. Complicating matters was that Outcome had borrowed hundreds of millions to buy a large competitor in the months before it raised funding from Goldman and others—which meant it had significant creditors, who generally get paid before investors if things go south.

It's not clear how much of that money Shah and Agarwal are investing into Outcome.

Litigation, by definition, is adversarial. But things seemed particularly caustic between Outcome's founders and Goldman. Shah and Agarwal initially denounced the investor suit as "a money grab," leading outsiders to wonder how they and investors could ever walk back some very public allegations of fraud and greed and work together to pick up the pieces.

We're about to find out.

"Outcome Health, investors call a truce" originally appeared in Crain's Chicago Business.