Chicago medical ad startup Outcome Health has been hit with a string of potentially company-crushing headlines this past month: First, it was the subject of a Wall Street Journal investigation claiming that Outcome Health provided clients with inflated ad performance data. Then prominent investors, including Goldman Sachs Group and Alphabet’s Capital G investment unit, sued Outcome Health and its cofounders, Rishi Shah and Shradha Agarwal, accusing them of committing fraud consistent with the allegations documented in the Journal‘s report.
Yesterday, the Chicago Tribune reported that approximately 200 of Outcome Health’s nearly 535 employees had accepted a voluntary buyout offer. A source close to the company confirmed to VentureBeat that this number was accurate.
All of this would be bad news for any startup, but Outcome Health’s troubles could also lead to some disappointment in the Windy City. As of Outcome Health’s latest round, a nearly $600 million raise in May, the company was valued at $5.5 billion, making it the most valuable startup in Chicago.
While Chicago has had notable IPOs in GrubHub and Groupon, the city still doesn’t attract as much interest from venture capitalists as New York and San Francisco, or even cities like Seattle and Boston, both of which are smaller in population than Chicago.
Successful IPOs or exits from multi-billion companies like Outcome Health can inject more money into a startup ecosystem. Early employees and cofounders can take the money they get from an exit and use it to invest in other startups. This effect is starting to play out in Indianapolis, for example, where ExactTarget was acquired by Salesforce in 2013 for $2.5 billion.
The investor lawsuit presents a significant hurdle for Outcome Health on its road to an IPO. Even if Outcome Health prevails, any timeline the company had for an IPO has likely been pushed back.
“Once you get out of California and New York, you have all of these cities that are trying to prove that they can produce big time startups — and they are all vulnerable to blowups,” Erik Gordon, a professor at the University of Michigan’s Ross School of Business, told VentureBeat in a phone interview. “Then your city is identified with a failure in a way that doesn’t happen in New York or San Francisco.”
For its part, Outcome Health, which installs tablets and other devices in doctors’ offices for health care companies to advertise on, says it’s staying put. A spokesperson said in a statement to VentureBeat that “Outcome Health remains committed to improving health care, creating technology jobs, and driving innovation in Chicago. The city’s technology and health care ecosystem make Chicago a unique atmosphere to attract a highly skilled and talented workforce and build a business.”
Shah and Agrawal have also been active members of the Chicago startup community in a number of capacities beyond their duties as cofounders. The pair launched JumpStart Ventures, an angel fund that has invested in nearly 50 companies, many of them in Chicago. In the past, they’ve also been frequent speakers at events promoting Chicago’s tech scene — Agrawal spoke at this year’s Chicago Venture Summit, one of the city’s most prominent tech events, and Mayor Rahm Emanuel was on hand for a September hiring announcement, when he praised the startup as a “testament to Chicago and the culture of this city.”
These events have further tightened the association between Outcome Health and Chicago. But most of the Chicago startup leaders who spoke with VentureBeat pushed back on the idea that the allegations against Outcome Health would have a significant negative impact on the city’s tech community.
“Chicago is in a position where we have quite a few startups that people can look to for role models and can aspire to be,” serial Chicago entrepreneur Mark Tebbe told VentureBeat. Tebbe is also the chair of ChicagoNEXT, a council of Chicago tech leaders that Agrawal is a member of. Tebbe says that Chicago has plenty of other startups to talk about, such as Avant, an online lending startup most recently valued at $2 billion, and Uptake, a predictive analytics startup launched in 2014 by Groupon cofounder Brad Keywell.
“I don’t think that [the controversy] sets us back to worse than where we were prior. [Outcome Health] just might not catapult us in the way that I think a lot of people were hoping,” Neil Patel, president of Healthbox, a Chicago-based health care innovation services firm, told VentureBeat.
Chicago is not a nascent startup scene, and it does have a few advantages over other, smaller startup markets that might also see their hottest startup eventually stumble. For one thing, it’s home to a variety of larger corporations (including 10 Fortune 500 Companies) and institutions of higher education that can help create spinoff companies. Shah and Agarwal, for example, launched Outcome Health while they were students at Northwestern University.
Second, it’s likely that Outcome Health employees who did accept the company’s buyout will take jobs at other startups in the city, given that Chicago does have a relatively high density of startups.
“The people who leave first are typically the people that are most confident that they can quickly get something else,” Gordon said, adding that Chicago isn’t a small town where “there’s nobody else within a hundred miles. So I think what’s going to happen is the talent is going to stay in Chicago.”
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