Sermo: All Cashed Up and Ready to Grow

9/12/07

Turns out I was at least partly right back in July when I wrote that something was up at Sermo, the Kendall Square startup that launched its physicians-only online community a year ago this month.

Sermo CEO Daniel Palestrant had to duck out of our interview for a suspiciously impromptu call with his board and emerged looking pretty pleased. I was guessing at the time that he had been busy finalizing his first round of deals allowing pharmaceutical firms some sort of access to Sermo’s password-protected site, where doctors consult with and debate one another via a system of queries, comments, votes, and polls. (Currently Sermo has arrangements with several Wall Street firms, who pay to tap the online community’s wisdom to guide investment decisions, as well as a deal with the American Medical Association that, among other things, facilitates discussion of articles from AMA journals among Sermo users.) In reality, Palestrant told me yesterday, the day I visited was the very day the firm was making the decision to head down a path that led to, among other things, a just-completed $26.7 million Series C financing round. That deal, impressive for an online firm, is more than double the size of Sermo’s first two rounds combined, so it was no wonder Palestrant back-burnered our interview to take the call. “It has been a wild couple of months,” he says.

So what’s Sermo planning to do with all that cash? Palestrant says the majority of it will go to fulfilling a wish-list of new features and functions culled from physicians’ and clients’ feedback about the site. Among them:

—Continuing medical education, or CME, integrated into the site. The vast majority of state medical boards require that doctors get a certain number of CME credits each year to maintain their medical licenses, making CME a $2 billion-plus industry. Physicians can earn the credits by attending certain conferences and lectures, completing quizzes based on journal articles, and so forth, but I’d imagine many of them would be happy to be able to earn credits right on a site where they’re already hanging out. (Some 26,000 users are now hanging out on Sermo. The net full of candles—long story—broke right after the company passed the 20,000 mark a few weeks back.)

—Functionality that helps physicians use Sermo in real-time to improve patient care. Palestrant points out that most doctors now work in outpatient settings and don’t have the chance to easily consult colleagues during morning rounds or in the physicians’ lounge about, say, a difficult case or “the diagnostic dilemma that you haven’t been able to solve.” It has turned out that about half the activity on Sermo has been users seeking and giving just these sorts of informal consultations. “For me as a physician this is probably the most emotional part of the site,” says Palestrant, who left his surgical training at Boston’s Beth Israel-Deaconess Hospital to found Sermo in 2005. One feature will let users give gold stars to the person whose comment or suggestion was pivotal in helping crack the case—the company calls these “Sermo saves.”

—A “corpus” model for organizing clinical information integrated with the site’s current post-based setup. With thousands of users posting in real time, Palestrant says, Sermo is sitting on a body of information that’s more up-to-date than any medical textbook or encyclopedia. So the firm is looking to find ways to consolidate that information into a reference-style format—”a Wikipedia approach to clinical information,” he says. This would be a tool for the likes of physicians themselves, the AMA, and the FDA (with whom Sermo currently has a six-month trial agreement). The firm is “not worrying about monetizing it at this point,” he says.

To develop all these new features, Sermo is planning a dramatic expansion. Palestrant says in the next six to 12 months the staff will grow from its current 40-50 to 100-150. (He also asked that I mention that Sermo is very aggressively recruiting developers and UI people but really, if you couldn’t guess that by now I’m wondering if you’d make a great hire.)

So what about those pharma deals I keep thinking Sermo is about to announce? Palestrant says the company is close to coming up with a paradigm for drug-company participation, and that I could expect some announcement before the end of the year. Is Palestrant—who founded his first company in 1998 and sold it in 2001—starting to think about an exit? “No plans to sell the company,” he says. An IPO, on the other hand, is “always a possibility,” he adds when prodded. But Palestrant stresses that nothing’s going to happen on that front before 2009.

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