Clark insisted that WebMD ultimately will succeed
Published Sunday, November 12, 2000, in the San Jose Mercury News
Net icon reflects on hard lessons
CLARK'S 1ST INTERVIEW SINCE LEAVING WEBMD
BY ELISE ACKERMAN AND TRACY SEIPEL
Mercury News
Jim Clark's low-key departure from WebMD Corp. last month was not an ordinary executive's exit from yet another troubled dot-com.
Clark, after all, is the man who set off the Internet boom, a gifted engineer whose uncanny vision and serial successes have made him a Silicon Valley icon. WebMD was his boldest venture, a risky demonstration of how the Web could create both efficiency and wealth in the biggest, most inefficient market around -- health care.
So when Clark resigned as a WebMD director Oct. 12, days after the shutdown of another Web venture he had backed, it was only natural to ask: Had Clark been wrong about the Internet? Was WebMD a failure?
Clark, in his first interview since leaving WebMD, said his departure was neither an indictment of the Net nor of the struggling company, which began life as Santa Clara-based Healtheon. But the interview highlighted how even one of high-tech's most admired entrepreneurs can burn out amid the scrutiny and tumult of a public company. In hindsight, Clark can admit he made some bad calls.
The tale of Clark's frenetic years with WebMD illustrate how a valley veteran could be seduced by the Internet's seemingly limitless potential, rushing into a health care market about which he knew little. ``I think we were probably a bit naive in a few ways about how to go at that market,'' he said last week, adding, ``It's a massively political marketplace -- one that I would not enter again.''
Clark, a 56-year-old near-billionaire, said he no longer wants to be involved in publicly traded companies, in effect turning his back on the system responsible for his phenomenal wealth.
He has also grown wary of the ``manic'' stock market, which he thinks has overvalued many high-tech companies. He has liquidated his shares in all public companies, including Microsoft, AOL and Cisco, except his 12 million shares in Atlanta-based WebMD.
At the same time, the indefatigable Texas native said he will continue to pursue what he considers his strength -- being a mentor to start-ups that range from genetics research to digital photography. ``I'm sort of a venture capitalist now,'' said the co-founder of Netscape Communications, whose browser opened the Web to the world. ``I have enough money to put money into all these things.''
Alternately defensive and reflective, Clark insisted that WebMD ultimately will succeed. The stakes are high, not just for Clark, who has poured $60 million of his personal funds into the company, but for untold investors who have seen the company's stock plunge 85 percent this year, closing Friday at $11.13. Among the biggest WebMD investors: Janus stock funds.
Created by a merger with Healtheon last year, WebMD recently announced it will lay off 1,100 workers as it retools its business model and struggles to absorb more than $10 billion in acquisitions. When the company announces its latest quarterly earnings Monday, its total losses for the year so far will likely exceed $1 billion. But Clark remains positive.
``WebMD is still going to be a big, successful company,'' he said. ``In terms of business, I don't feel like I've failed anyone.''
The road to WebMD
Twenty years ago, as a Stanford electrical engineering professor, Clark created a computer graphics chip that became the impetus for Silicon Graphics Inc. The Mountain View firm is best known for its computers that fashioned the dinosaurs in the movie ``Jurassic Park.'' Silicon Graphics (now known as SGI), Netscape and Healtheon all have had market capitalizations of more than $1 billion, helping to propel Clark into something of a Silicon Valley folk hero, whose endeavors were chronicled in the book ``The New New Thing.''
Joking that he was bored at Netscape, Clark co-founded Healtheon in December 1995 with a sweeping mandate to exploit nascent Web technology to make health care more efficient. As Healtheon's plan evolved, its programmers worked to connect patients with providers and payers. They built services to handle, for example, patient enrollment, doctor referrals and patient data exchange.
Health care was a trillion-dollar industry that squandered more than one in every four dollars on unnecessary care, redundant tests and excessive administrative costs. If Clark moved fast enough, Healtheon could claim at least a percentage of that wasted money. By eliminating just a small fraction of the inefficiency, Healtheon would be a billion-dollar company.
If anyone believed Clark could pull it off, it was Pavan Nigam and Kittu Kolluri, two of the smartest engineers at Silicon Graphics. ``He's got an ability to smell something, and sometimes it's just a gut feeling,'' said Kolluri. ``It's not always that he is right, but more often than not, he is.''
The technical challenge confronting Healtheon's engineers was enormous.
``Basically what we were trying to do was to build a system using Internet technologies that would be 24/7 in terms of availability and would also provide the security and privacy of data,'' Kolluri said. No such comprehensive Internet model existed.
Attempting to explain Healtheon's giant task to investors, the company's executives constructed what they called the ``chart of many bubbles,'' with each bubble representing a different industry sector.
Clark had joked, using an expletive to refer to the 13 sectors Healtheon would supplant. ``We are going to get rid of those,'' he said, ``and we are going to replace them with one -- right in the middle -- and that's us.''
In retrospect, Clark said his off-color comment was a mistake. It antagonized the insurance companies whose cooperation was crucial to Healtheon's success. The spending Healtheon hoped to capture represented their revenues. ``People don't like to give up their top line,'' Clark recently reflected.
In October 1998, Healtheon was forced to pull its planned initial public offering because of adverse market conditions. Undaunted, Clark poured $20 million of his own money into the company to keep it going, one of several personal infusions. His generosity inspired eager bankers and venture capitalists to invest, too.
In February 1999, Healtheon held its IPO. The stock soared 300 percent during its first day of trading and kept rising. Within three and a half months it had tripled in value, giving the company a market capitalization of more than $2 billion. Its revenues the year earlier: $49 million. Its loss: $54 million.
Armed with the valuable currency of the company's shares, then-CEO Michael Long called Jeffrey Arnold, the head of WebMD, an Atlanta-based competitor, to talk about combining the two companies.
Like Healtheon, WebMD was using the Internet to solve health care problems, although it focused on attracting consumers and physicians, rather than on processing transactions. Though it had never been profitable, WebMD had raised $450 million.
In May, the companies announced they were merging in a deal ultimately valued at $6 billion.
Arnold became the CEO of Healtheon/WebMD, which was eventually simplified to WebMD. A 29-year-old college dropout, Arnold proved to be a deal-making dynamo. He embarked on an acquisition and alliance-forming spree, closing more than 100 deals in 18 months. His aim was to give WebMD access to more patients, doctors and insurance companies.
``This is a very hard market,'' Arnold said last week. ``With an Internet company, you need to put hard assets behind it. We had to run as fast as we could to assemble those assets before the bubble busted.''
Early this year, however, analysts and investors began to wonder when the daisy chain of deals would end and the melding of the company's disparate parts would begin. ``They've got the right assets, they just need to integrate them and really start to prove to the Street that their strategy is viable,'' said Troy Dayton, an analyst with Dresdner RCM Global Investors in San Francisco.
About 2.5 million people were visiting the WebMD site each month, but few transactions were getting processed over the Internet. It also was unclear how many doctors were using the service. WebMD touted nearly 100,000 physician subscribers, but many of the subscriptions were underwritten by WebMD's business partners, not paid for by doctors themselves.
Arnold said he realized he needed to start delivering results, but there was one more deal left to close. Months before, he had called Martin Wygod, chairman of Medical Manager Corp., whose office-management software was used by 185,000 of the nation's doctors. ``I wanted that asset,'' Arnold recalled.
A veteran of the health care industry and Wall Street, Wygod had sold Medco Containment Services, a mail-order drug company, to Merck, the pharmaceutical giant, for $6.6 billion in 1993. Briefly considered as a possible successor to Merck's retiring chairman, Wygod had taken himself out of the running to immerse himself in the business of hooking up health care to the Internet.
`A great opportunity'
When Clark learned a deal with Wygod was in the works, he gave it his full support. He met with Wygod at Shutters on the Beach, a hotel in Santa Monica, where Clark asked him if he had the energy for managing WebMD.
``I was thinking, `God, it sounds like a great opportunity,' '' Clark remembered thinking of the potential merger. ``I wanted to go out and bid for a million shares'' of WebMD.
On Feb. 14, WebMD announced it was acquiring Medical Manager and its publicly traded online subsidiary in a stock swap valued at about $5 billion. Two weeks later, however, WebMD's stock started to slide.
For Clark, a chance to buy the stock at a lower price seemed a bargain. On April 7, he announced his intention to purchase up to $200 million in additional shares. Venture capitalist John Doerr, an early Healtheon investor, also said he'd join in.
As the value of WebMD shares continued to wilt, the merger was renegotiated and ultimately sealed at $3.1 billion.
Clark ended up buying 475,000 shares worth roughly $9 million. Noting that amount was far less than he had announced in April, the New York Times published an article questioning Clark's integrity. ``It essentially said I was trying to manipulate the stock,'' Clark said, still angry about the article.
In response to the article, the company issued a statement explaining that Clark, a director of WebMD, was an ``insider'' and had limits on his purchasing ability. Clark has repeatedly denied any impropriety, and the experience helped fuel his disenchantment with public companies.
``When you are on the board of a public company you learn things, and that makes you an insider,'' Clark said. ``I didn't want to be an insider.''
In fact, cracks between Clark and WebMD had already begun to show. In the spring, according to CNET, an optimistic Clark had told TV talk show host Charlie Rose that the company would reach profitability and the $1 billion revenue mark sooner than previously published targets. WebMD subsequently issued a statement saying it did ``not endorse'' the comments.
Meanwhile, WebMD's executive team had its hands full merging with Medical Manager. The new entity had 6,100 employees, offices in 221 locations, 13 data centers and four corporate headquarters. The company's mission had grown equally unwieldy, sprawling into desktop software, cable television and Internet content, not to mention the original goal of connecting local health care institutions and doctors to the Internet and facilitating electronic transactions.
Making cuts
In September, after shareholders approved the merger, the company announced it would cut 1,100 jobs, close 65 facilities, slash marketing expenses and re-evaluate -- and perhaps terminate -- many of the business relationships forged by Arnold.
On Oct. 3, WebMD's early technologists Nigam and Kolluri announced their resignations. Nine days later, Arnold and Clark joined them.
``I simply felt, `OK. We've finished the merger,'' Clark said. ``I have another life.''
The company wanted Clark to stay on, said Long, now the chairman. But Clark, confident of the new management team, wanted to spend more time with three other start-ups. ``These young companies need more of my help,'' Clark said. ``Babies grow up. At some point, you don't try to control your children forever.''
Before he left WebMD, Clark accepted a speaking engagement at the University of California-Berkeley's Haas School of Business. ``The lesson for you as students as you go out to the business world,'' he told the gathering, ``is it isn't always true that the biggest market that appears to have the most inefficiency is the right one to go after.''
Said Clark: ``It's been a long, hard slog.''
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