When Kara Trott started Quantum Health in 1999 to help consumers navigate the complicated waters of health insurance, she didn’t take a salary for the first three years and utilized the tried-and-true method of friends and family funding to raise capital.

But after the company was written up in Business Week in 2006 as one of the most promising businesses in the country for health care, the phone started ringing.

After careful consideration, she and her team decided to bring in a financial partner that could provide strategic counsel in the market and partial liquidity.

“We decided that it was a good idea to explore some of these investor relationships. To do that, I was willing to sell some of my shares, but only if I could maintain board, equity and strategic control,” Trott says.

Trott shared her experiences with three different investors at the 2018 Smart Business Dealmakers conference (formerly ASPIRE).

Keeping control

While Quantum Health had grown a lot in those early years, Trott says it was proof-of-concept growth rather than commercialization growth. However, she wanted to be careful with the terms when taking on an investor.

“I have, since the very beginning of the company, been committed to having the company be profitable in order to be able to control its own destiny,” she says. “My view is that I never wanted to run the company to where it was forced to gain outside capital in order to grow or manage its operations.”

Trott believes that having to constantly raise funds — as many others in the health care space do — would distract her from staying focused on achieving the mission of the company.

“Because the company was financially sound from the very beginning, we were only going to do a transaction if we could control the key terms: minority interest, limitations on preferred rights and specific pre-money valuation,” she says.

After some back and forth with a New York City-based company, a deal was completed.

"We did our due diligence, but the new partner had very different goals for the business than what we initially thought. Within a month, it was evident that there was significant misalignment with this new deal, which — from my perspective — created significant risk to the business," Trott says. "Because our agreement contained certain provisions, we were able to shift the deal to an economic investment without board representation."

Before taking on investors, business owners need to think hard about what they personally want, she says. How long are you going to stay with the business? What kind of work do you want to put in? Who do you want to work with?

“Be very clear about your boundaries,” Trott says. “Valuation is just one element. If you’re not ready to give up control, make sure the business is so sound that you can bring in a minority partner.

“There are many, many ways that you can give up control without realizing it, so be very clear about what does control mean to you,” she says.

Consider board rights and control, economic rights, management, and your terms on exit, Trott says. You can get into different classes of shareholders and treating people differently, so you need to clearly convey what you’re willing to accept.

Working well together

Over the next several years, Quantum Health grew and hit the point where it was national in reach. The company also began to face tougher competition.

“Our partner wasn’t tremendously involved in the company, and that provided us with a lot of latitude in strategic and operating control,” Trott recalls. “But what was missing was a financial partner who was aligned with the future growth of the company, who could contribute to the strategy of scaling the business and helping to formulate and drive our go-to-market strategy.”

With its higher profile and strong business results, the company was now attracting more attention from industry leaders, and several of them had strong private equity partners.

“In January 2014, we completed a recapitalization where we brought in a new partner. As we started the large-scale market capitalization, I sold a small number of shares as part of the deal,” Trott says.

She says it proved to be a good partnership, which helped the company commercialize and navigate the landscape, and Quantum Health grew even more.

By June 2017, the company's value had grown substantially, and she was to do another recapitalization at a favorable multiple, in order to bring in a larger private equity partner to accelerate growth even more.

Moving up

In the search for Quantum Health's third investor, Trott used an investment banker because she wanted a partner that could help Quantum Health scale. The company also met with several carefully selected investment firms.

Word spread, and Trott got calls: “I heard your company’s for sale.” She had to clarify — it was taking on an investor; it was not for sale.

A lot of good firms were very interested. “This was the only time where I didn’t set a valuation,” she says. "I wanted to see what they came back with, but I knew we had a number in our mind.”

After meeting with multiple firms, Trott decided to focus on those that were most closely aligned with the company, which was four firms. She went with the firm that was most closely aligned with the company, not only strategically, but also in respect to the deal terms.

Trott told Quantum Health's investors that she would continue to hold significant shares after the transaction, which is a powerful statement to outside investors. Now, the company's goal is to grow at a significant pace under the new investor, and she believes Quantum Health is on a good path to do just that.