On a Sunday morning a few weeks ago, Outcome Health CEO Rishi Shah walked out of a multimillion-dollar home on Chicago’s North Side and was greeted by a process server with court papers about an investor lawsuit alleging fraud. Shah ran to a waiting black Cadillac Escalade, jumped in and shut the door.
The process server placed the documents on the Escalade’s roof, jumped in his own car and followed Shah’s vehicle. Both drivers stopped in traffic and lowered their windows. “I told the driver that the pleadings and subpoena were on his roof and that his passenger, Mr. Shah, was served,” according to an affidavit the process server filed with New York County Supreme Court.
A spokesman for Outcome Health, Davidson Goldin, disputed the process server's account, saying Shah got into the car before seeing or hearing anyone and did not have any communication with the process server.
Just a few months ago, Outcome Health was considered a bright star shining on Chicago’s tech scene. Having attracted a handful of high-profile investors early this year, the company’s valuation rose to about $5.5 billion, and it secured a coveted spot among the local tech unicorns valued at more than $1 billion.
The 31-year-old Shah landed on the Forbes 400 ranking of richest Americans in October, with a net worth of $3.6 billion. Shah and Outcome Health President Shradha Agarwal, who’ve acted as investors and mentors to other tech companies, stood next to Chicago Mayor Rahm Emanuel at a press conference in September announcing a hiring push and a new headquarters to help accommodate the growth.
Outcome remains in the spotlight, but now for very different reasons.
The investors that provided $487.5 million earlier this year — including units of Goldman Sachs and Google, and a fund co-founded by Illinois gubernatorial candidate J.B. Pritzker — on Nov. 7 sued Outcome Health, Shah and Agarwal, alleging fraud. Pharmaceutical advertisers have pulled tens of millions of dollars in ads from the fast-growing company, and hospitals have backed away. More than one-third of the 535 employees at the company took a voluntary buyout a few weeks ago.
Local investors say the health of Chicago’s tech ecosystem doesn’t hinge on Outcome Health’s success but the allegations and rapid turn of events don’t help Chicago’s standing as a place for entrepreneurs to build multibillion-dollar companies.
“We have one fewer of those stories,” said Ira Weiss, a partner at Hyde Park Venture Partners.
More than decade ago, Shah and a friend, Derek Moeller, hatched a plan for a health information and advertising startup called ContextMedia while students at Northwestern University, Moeller said. Moeller presented the business plan during Professor William White’s engineering and entrepreneurship class.
Both students had an interest in health because of family members with diabetes, and they started planning. “We both had the entrepreneurial bug and we wanted to make something of it,” Moeller said.
Moeller’s group got an A on the business plan, said White, who later became one of ContextMedia’s directors.
The concept: Partner with organizations that could create educational content, install screens in doctors’ offices and waiting rooms to play that content, and sell ad space to pharmaceutical companies or ad agencies.
It was spring 2006 and Moeller was set to graduate and work in the banking industry. ContextMedia changed his plans. “We were spending so much time on the business and trying to figure out how to launch it and what the model is going to be that we were really primarily focused on that,” he said.
Neither Moeller nor Shah received degrees from Northwestern. Agarwal graduated in 2008 with a bachelor’s of science in journalism, according to Northwestern. Outcome Health spokesman John Eddy said Agarwal was involved in the early discussions and helped with the company in the early days, joining it full-time after graduation.
Shah, Moeller and Agarwal’s skill sets were complementary, said White, who stepped down from the board in 2013. Moeller was more involved in finances and operations, Agarwal focused on marketing strategy and Shah pulled it all together and did the direct selling, White said.
It took at least a year for ContextMedia to land a major advertiser, Moeller said. In those early days, the company was shipping DVDs to doctors’ offices that had their screens installed, and it was focused on endocrinologists, who treat diabetes, among other conditions. “They really enjoyed the idea of having relevant content in their waiting rooms,” Moeller said. “At the time, the primary competitor was soap operas. ‘Judge Judy’ was a big one.”
Jeff Coney, director of economic development at Northwestern who served as a director for ContextMedia until 2013, said the success he saw when he was involved was no accident. “Of course, you need a little bit of luck, but it’s the hard work,” he said. “They really did work very hard and they work well together.”
Soon there were signs of growth, Moeller said. The company expanded to more physicians’ offices and upgraded technology. But the early growth wasn’t without hitches.
The recession hit around the same time ContextMedia moved into its first real office space in the Loop. That made fundraising harder. The company was not yet profitable and was still working to solidify itself among advertising clients. There were times when one customer accounted for a majority of the company’s revenue, Moeller said. “That’s the kind of stuff that keeps you up at night,” he said.
Shah and Agarwal were not made available to comment for this story.
Near the end of 2009, Moeller left to buy a Washington-based manufacturing company called McConkey. ContextMedia bought his shares and it was an amicable parting, Moeller said. He was proud of where ContextMedia was, and McConkey “needed a turnaround,” he said. He added that at that point, Shah wanted to be the primary driver of ContextMedia. “He wanted this to be more his thing,” Moeller said.
Soon after Moeller’s departure, the company expanded, starting with the launch of its Rheumatoid Health Network. Between 2010 and 2016, ContextMedia increased its network from a few hundred hospitals and clinics to more than 10,000, according to a 2016 court filing. Its clients were big companies like Bristol-Myers Squibb, and divisions of ad agencies Omnicom Group and Interpublic Group.
The company acquired competitor Accent Health late last year and soon after it changed its name to Outcome Health. The two companies’ combined revenues added up to about $170 million in 2016, Eddy said.
By early this year, Outcome Health’s growth appeared unstoppable. Its first outside funding round was one of the largest ever raised in the Chicago tech scene. When the funding was announced, a company spokesman told the Tribune that Outcome Health was considering an initial public offering in the coming years.
Employee count also was growing. Outcome Health told the Tribune in May that it had about 600 employees in Chicago and New York, including those who joined through an acquisition of competitor Accent Health. That compared with 200 employees in January 2015.
The company entered into an almost $6.1 million state tax credit agreement in late 2016, with a requirement to add at least 175 new full-time jobs in 2017 and 2018. Then, in late September, executives announced plans to hire 2,000 workers in the next five years at the news conference with Emanuel. The company also said it plans to move to a new office space nearly six times larger than its current location to accommodate growth.
But just days after announcing the aggressive hiring plans, the company laid off dozens of employees, though it said it hired more that quarter. In October, The Wall Street Journal ran a story that said employees had misled advertising clients regarding the ads’ performance. The investor lawsuit followed.
“Yet again, here’s Chicago holding up a success story which is not a success, really,” said Jason Fried, CEO of Chicago-based software company Basecamp. “To me, it’s celebrating the wrong things.”
Fried draws a parallel between Outcome and Groupon, once a rising star that brought national attention to Chicago’s tech scene when it went public in 2011. Once the company that was fastest to reach a billion-dollar valuation, Groupon debuted on the Nasdaq at $28 a share — but it has never again matched that high point.
There’s more to success than rapid growth, Fried said.
Fried doesn’t think the allegations surrounding Outcome Health will have any real impact on Chicago’s tech ecosystem, despite Shah and Agarwal’s places in it.
The two founded investment fund JumpStart Ventures and made a name for themselves as mentors to budding entrepreneurs. Smaller startups have subleased space in the company’s office. Shah serves on the boards of health-tech incubator Matter and tech hub 1871, the 5-year-old home to more than more than 400 early stage digital startups and satellite offices for area companies and universities. The high-profile founders were frequent speakers on panels and at events, talking about the company.
The tech scene is different from other industries in that entrepreneurs who find success tend to reinvest in the industry, said Steve Blank, a lecturer at the University of California at Berkeley’s Haas School of Business. That reinvestment can come in the form of mentorship or funding. “But if you’re struggling for survival, the odds are you’re going to be inward-focused for a while,” Blank said.
Everyone, from investors down to early stage entrepreneurs, is paying attention to the allegations against Outcome Health, said Nimit Maru, co-founder of New York-based coding school Fullstack Academy, which expanded to Chicago through an acquisition last year. “It’s definitely a warning call for the whole ecosystem not to promote shortcuts,” he said.
Maru acknowledged that while the allegations against Outcome Health, Shah and Agarwal are still just allegations, less-experienced entrepreneurs could learn from the situation. There’s a lot of pressure in the startup world to prove investments are justified, he said.
A provided statement from Outcome Health said it remains committed to improving health care and creating technology jobs in Chicago.
“We’re grateful for the support from so many entrepreneurs, investors and partners in our hometown that have helped us thrive,” the statement read. “We’re proud that Outcome Health’s headquarters is in the city that works.”
This story has been updated to reflect Outcome Health's version of events when Shah was served with court papers.