Australia's $70M 'Theranos': The Founder Who Bought It

imagine raising millions for your startup and three months later

it's in administration

and that's exactly when Joe Zhou

our guest today swooped in and bought it here in Australia

it was almost like the Theranos

I can see there's definitely a lot of financial discrepancies

so I had to raise money to buy the

that then didn't have enough money to complete the purchase

that after purchase didn't have enough money to run a company

so everybody hated everyone

everyone's suing everyone uh

and everyone is basically tell all the other parties to f off

you know

they think that I'll just turn around and flip it in 18 months

from a personal level um

as a healthcare professional

the coolest things you can do in healthcare is one is cure cancer

second is tackling substance abuse and addiction

strong arm dies I I'm going down with the ship

hi I'm JoJo rebuilding Storm AI and this is found as emotion

quick thing before we get started

we have a lofty goal this year of hitting 1,000 subscribers

in order to help more people build really great companies

so if you enjoy the content

learn something new the best way to support us is by subscribing

okay let's get into it

okay so before we dive in

sure in very simple words

how would you describe strong AI uh

so strong AI is you know in the press

it's been described as many things like AI company adherence

medication management but um

that's actually not what they do at all uh

so they do a lot of stuff in substance abuse and addiction

and controlled drug compliance

it's a uh it's the Sass platform for organizations

that deals with controlled drug management

and opioid replacement therapy

so it could be pharmacies clinics

that was a very bad one line pitch

but that's as close as it gets

I still haven't perfected it yet

it's it's only been a few months you know

it's gonna take some time okay

so for people who missed the news or are not based in Australia

can you break down what actually happened with strongroom

before you stepped in yeah

so Strom room uh essentially went into administration um

very public um serious events after a um

you know large funding round and then discrepancies with the

with the financial records books

you know

misstated revenue and you know investor reported as fraudulent few

you know multiple court cases still still going on uh

for the previous company and the company got put into administration

and then I bought the assets of the company

so essentially that's the backstory um

very public event

I think here in Australia it was almost like the Theranos

of Australia Australia was missing that big scandal

uh huh so all everyone want to talk about it

all the journalist want to talk about it and um

yeah got time blew out of proportion

I think yeah yeah

what do you mean it got blew out of proportion

uh I think um

you know for what the news was

I think the journalist was covering it like daily

then it was like weekly news for like three months

I think that was a little bit over the top

oh really

yeah yeah

but it was certainly very exciting

I think yeah

definitely good story yeah

exciting but a little bit tragic

yes absolutely yeah

I think the strongroom news broke around the same time that I was

in the process of like

leaving to go to Australia alright

okay and I actually remember everyone was like

oh I

I was like doing some research

research on like startup Land

yes and the only news that came up like Strongroom AI wow

fraudulent activity wow

and I was like whoa

crazy

was it was I surely wasn't reported in America right

it was mainly Australian news

no yeah

Americans don't really care about anything else

there were a lot of headlines as you mentioned

yes and

but as someone that went through it

how much of the public story match were you found inside

after we took over the company access

you know your financial records

I can see there's definitely a lot of financial discrepancies

especially in relation to revenue that was recognized

I think there was a lot of contracts that hasn't come through

or probably transaction volume that's missed

represented as revenue

so I think I can see there's definitely a lot of mismatch there

you know with

with the case

I don't know the exact story of what's being sort of alleged

but from the financial side of it

there's definitely a discrepancies

yes

you already have a business that is operational running

then you suddenly decided you should totally turn your life around

and then buy Strongroom AI

and go be in the public limelight

so why did you buy strongroom

yeah um

that's a question I still ask myself these days

um I think going back to um

when I went into administration

I think I was like everybody just

you know reading the news and um

sitting on sidelines just

you know enjoying the

the big scandal and reading all the fiasco and you know

reading about it and then

you know then the administrator came ask everyone to put in offers

I didn't put in an offer

and then I pretty much all the offers were closed

and I still did not plan on buying it

it was absolutely crazy

I had zero plans of buying it until probably two days before

they're trying to make a decision

it was just talking to a couple of

you know previous investors I knew and you know

they knew Patterson Street Finance

which was um they owned the secured debt over the company

and they called the receivers over the company assets

so they were suggested you know

if I really wanted and to buy a stroller

cause I did mention to him a couple of times hey

this is right up my alley I love I've been you know health tech

I start up pharmaceutical software is right up my alley

I'd love to you know see what it is and give it a crack

so and I use my software myself

so I know that like they're real and I know they have a good product

yeah from that standpoint

we thought if I really wanted it

we could buy the debt

there's a secured debt plenty of interest heaps of bitters

so the real risk that would be running is a time risk

if we buy the debt to be a secured creditor

you could see everyone's bids

and we could use that to see if we wanted to make a higher bid

and ultimately have the highest bid

and we could use a secured debt position to negotiate

you know with the other parties involved

to put us in a strong negotiation position

that was a plan sort of a not a very well organized plan to be honest

and we thought yeah let's um

let's just buy this buy the debt and um

and

and and see what's coming with someone just buys the debt back and

you know that was it yeah yeah

so and then so you mentioned that you are a user

so you know

the platform works and it works well

um so what was it about strong women's core that made you think like

this is worth saving I think from a personal level

um as a healthcare professional

I think the the two

two of the coolest things you can do in healthcare is

one is cure cancer second is tackling substance abuse and addiction

and you know

the use of illicit drugs opioids causes many

many deaths worldwide

it's a global economic problem as well as a public health problem

so for me doing something in addiction is hugely rewarding

and that's what exactly what strong rooms software does

to provide a OPI replacement program software

and as well as control drug

a register for compliance and analytics

so I feel like it'll be something that

you know if I have a

I've always thought said to myself

if there's a chance to you know

tackles cancer or addiction

and I'd love to be involved

and the strong opportunity came up was

from a personal level was too hard to turn down

wow it's too hard to turn down

were there any moments that you almost backed out

so we did this over like three short week

short weekends so it was like um

Easter that was like Anzac Day and then it was Labour Day

so it was like three short

four day weeks in a row very memorable

three weeks yeah

it seems yeah

very memorable and we basically working all over the um

Easter over those public holidays

legal bills went over the roof

but yeah so yeah

could not get off the phone meetings after meetings

you know with administrators

creditors investors yeah

everyone legal team trying to

you know find a way forward

and the purchase got really complicated

because there was multiple court hearings and

you know there was a license period and I couldn't purchase

everything got delayed and I would have to wait for creditors hearings

it's all over the news like credit hearing No. 1

nothing happened then credit hearing No. 2

and the whole thing went just dragged out for like months

and I mean halfway through it certainly thinking to myself

is this you know

worth it like

I'm just chucking money at lawyers and

buying something out of administration

which I've never done before

with the worst possible press you could ever ask for

like what am I doing here

you know so yes

I certainly thought long and hard about yeah

whether we should just pull out um

and then I got to a point where like couple things

like I'm usually like once I decide to do something

I normally see it through

like I'm I hate quitting halfway and like yeah

on top of that my new my

my the news was covering me all the way through as well

so it's like it got to a point where like too much peer pressure

yeah this is

I can't just pull out now

like I've committed

I already feel like I got scar tissues by that point

like it was just too much

I've spent like a three public holidays working on this

and then so much time so much money as well

like I'm just committed to see us through at the end

so other than kind of the process being dragged out

administrator creditors and all the different stakeholders involved

were there kind of any other things that were shocking or surprising

everybody hated everyone everyone is suing everyone uh

and everyone is basically tell all the other parties to f off

so it's like um

yeah and I just jump right in the middle of like multiple court cases

and like I feel like I'm just like

hey just settle down relax

we can sort this out um yeah

so wasn't wasn't easy to navigate as well

and it's all like the biggest players

you know you're very large vcs

you know no investors

global investors so yeah

wasn't easy to navigate yeah

I kind of imagine so you've signed the papers

the internet is a little bit skeptical still

yes half the team is gone

yes what's your very first move

I think the first few days after settlement is basically to deal with

uh everybody that is pissed off

so literally everyone's pissed off

like I've never been to a company where everyone's pissed off

so all the staff want a pay rises

every all the staff remaining is like no

I had enough of this

like I'm the last person that understands this product

like if you don't give me this pay rise

I just couldn't go ha ha ha uh

but that that actually like the team is absolutely fantastic

but like everyone's just had enough like yeah

and the previous administration didn't promise them pay rises

and you look after them which they never did then um

you know dealing with internal issues

then there was like customer complaints

like whole lost log of customer complaints

and then there's like political agendas within the industry

you know people

I have lost money invest in strong room and then all of a sudden like

you know withdrawing contracts

you know telling people to have a

use strong room and losing deals here and there

complaints people paid and haven't delivered all of that as

as worst as you can imagine yeah

just dealing with I call it how to inherit 1,000 problems overnight

that's it fun fun

exactly what do you feel walking in the room

but I can imagine it's just hostile

yeah well

to be honest like

I think there's one part of the story I haven't mentioned

is that strongroom has a like at the time

had a wholly owned subsidiary called Members Benefits Australia

which is also widely covered there

strongroom previously paid like

eight or nine million dollars or whatever it is to acquire it

and once I took over the company

you know we didn't have that company was in administration

so we didn't have the financial records

and when I took over that company was like highly insolvent

it was like ATO debts you know all these liabilities

it was basically like a shell and there was

you know half a million dollars in liabilities and I

I had to deal with it it was like hey

here here it is gift with purchase

that's how they packaged it

it's gift with purchase um yeah

so like the first six weeks was actually dealing with the subsidiary

um you know uh

trying to get that solvent operating and that was like

it was like a rewards business

which really made no sense that like in the scheme of things

which um yeah strong room did a lot of stuff that didn't make sense

yeah so that and everyone resigned from that company

everyone hated me for some reason

because I bought the company and they all hated me so uh yeah

so I bought it everyone literally came and resigned on the same day

so three people resigned in front of me to say

congratulations on your purchase

here's your resignation papers

we'll do everything we can to assist you

the transition in the two weeks

that's basically what happened but you know what it's like

it's one of those once in a lifetime experience

like who could say that they've went through all of this shit

you know yeah

except for you and maybe like 100 other people yeah

I think looking back it's definitely the craziest thing I've done

like I ended up taking a lot more risks

I I pretty much put everything on the line

like I

I actually didn't have money to initially to buy the debt cause I

I I

I don't come from a sort of a VC background

I'm not a private equity I didn't buy it to flip it

if you like and I didn't have plan buying it

so I had to raise money to buy the by the debt to buy

then didn't have enough money to run the company

to complete the purchase that after purchase

didn't have enough money to run the company

so I was like this is not part of the plan

but um

I think it was just great to got us through it all and um

you know before the settlement

I had to put my house on the line to say

I will settle and I'd get a guarantee to say

you know and then thankfully

you know some financing came through at the end to to get it done

so after all this fiasco the first six weeks

maybe like

let's say the first three months of just trying to fight fires

and you're kind of getting to the process where you're

trying to grow it again make it healthy

what was the hardest part

would it be hiring the right people

or would it be like rebuilding customer trust

the hardest part was the strong room had too many products

strong room had seven products and each product had like

we had like eight engineers left

so each product was like one point of failure

one person support

majority of those products has very little traction is a lot

a lot of it was about stabilizing the core

like what makes a business business so

you know focus on your fundamental assets to remove distractions

focus on the right things um

they essentially died

cause they try to scale horizontally and vertically at the same time

they try to build every product in every direction

try to go to UK US at the same time it was just madness um

beside the financial mismanagement

it was very lousy engineering management

so basically getting the engineering management down pat

a lot of time my time right now is spent on product

getting the engineers building the right thing

it hasn't been a right strategy strategy at all and the core business

the core business is very sound so the core business

you know very large market share in Australia um

it's almost has like a

there's only one competitor that own like strong still owns a

a certain market

pretty much has a monopoly in several analytics areas

sitting on so much pharmaceutical data

so yeah lots of um

lots of areas where they're super relevant in um

but things like rewards aged care

um you know

adherence where they have very little market share

and they've spent too many resources building things

that doesn't matter yeah

so a lot of it is just focusing on the right things

yeah yeah

very important I think especially at the beginning

you're on your strap for cash resources

yes and everything as well

when you took over strongroom

you didn't do like a gigantic rebrand of the name and stuff

like what was the thinking behind that

yeah that was probably one of the first major decision I have to make

um whether to rebrand or not

I think a lot of people say just rebrand

launch something new and then you can

you know

say you got all this traction like in one month and stuff like that um

but I think fundamentally strong rooms brand is

it is tarnished from our investor perspective

but from the customer perspective is very

very relevant brand so within the farm chemical industry

everybody knows strongroom in Australia

it's very relevant people talk about best products in the market

people talk about strongroom

so and I'm from the

I'm user I know the

I've been in the industry for like

you know

God knows how long now so I know the industry inside out

so from that perspective we talk to a lot of people and you know they

there's a there's a significant love for us

so we made the decision to stick with the brand

we mentioned this a bit earlier

but you're typically more of a private person

yes and this whole thing have kind of

catapulted you into being pretty public

yeah so how do you tune out the noise

and how are you adapting to this

to this new change yeah

I'm not good at talking about myself at all

uh so yeah

I think when this thing happened

obviously then there's lots of press coverage over it

um

I've been building you know

textile for eight years I know what matters

it's the customers that matter

it's it's just getting the business to work

so it's just about like strong room

it's just about getting back to the core like yeah

business 1:01 that's

that's what they need they don't need another idea

they don't need like all these investors

all these um press

they just need to get back to running a business properly

and that's that's what I think what I do pretty well

I love that and

what do you think is the most misunderstood thing about what you did

a lot of people think I'd buy it to flip it

hmm and that has not even once crossed my mind

until so many people start mentioning it

especially you know

some private equity people some investors

you know

they think that I'll just turn around and flip it in 18 months

um but yeah

I think my sort of always been a founder investing sort of

it's not my thing um

flipping it for profit I mean

it it doesn't really drive

drive me I think

mm hmm for

for me I

I bought a strong room

because I want to tackle substance abuse and addiction

I think you know

the mission of strongroom now is to make the world a safer place

so I think what we're doing

what we're building towards will be saving lots of lives every day

so that's what drives me I love that

and what do you think has been a big win

throughout this rebuilding process

that made you been like ha

I'm very glad that I did it

I think there's a there's a few things that

you know you sort of happy about

I really love the team like the team is wonderful

I think I met some great people that still

they've been through so much

like throughout this administration period

I think they're absolute superstars

absolutely love them to death um

even though a few of them been drilling me for pay rises

but like they you know

I I get it

but yeah they're

they're they're great

great engineers great team

they build some cool stuff

they just you know

had the company unfortunately mismanaged

and another thing is that like during all of this that has happened

there's very little churn customer charm very little

the product so sticky um

and very happy to see even with all the political agendas

with all the stuff that happened

like the base revenue is still there

base customer base so I knew that sort of from day one

cause I use the product like if you don't have to switch from strong

you would not you will not switch unless they close

it's just one of the most painful things to switch

so cost of switching is really high

so you know that the retention

so the first three months is all about focusing on retention

so that's been really good

and also like you know

in the recent round capital raise

like a lot of people you know

within hospital within the industry

um ministerial cannabis

um within aged care

within farm pharmaceutical

they you know they

they they all see the value

so yeah it's um

not just me but like there's a lot of people that love the product

yeah I

and I really love that um

I think customer validation is way more important than any thing else

yes around it yeah

I hate talking to investors

I hate raising money I don't I

if I don't have to I'll never do it

it's just um

it's just customers making the best product for

for the customers that's yeah

that's why I I don't think anyone really enjoys talking to investors

yes yeah

yeah not me

definitely not me

and I never asked so what is your background Joe

I've got a um pharmaceutical as well as computer science background

so I did a pharmaceutical degree from university of Sydney and then um

been running tech startups since 2,018

so first company founded

comes to you and then started my current Kiso group 2,021 good

really well had the resources to do this wasn't part of the plan

but here I am here you are yeah

um okay

so you're still very early on this journey with strongroom um

but looking back now what's the biggest lesson that you've Learned

rebuilding something that already crashed

I think just focusing on on the right things

I think if you look at the reason the company dies

it's usually like strong room if they just didn't hire 50 people right

if they just stuck to what they were doing well

that that would have grown fine

sometimes it's just trying to do too many things do too many things

go on fire from the core mission

and then you end up running out of money

you end up doing creative accounting

you get desperate you do all of them

we've all been guilty of it myself included

so I think yeah just um

get back to the core fundamentals and try to do one thing really

really well yeah

and what is the next big move that you guys are up to

that we should all keep our eyes on

you know the funny thing is the next big move is to uh

is to make no moves at all

I think sometimes

it's more important to know which market you're not going to enter

rather than which market you're going to enter

I think strong room

is at a place where it needs to know which market not to enter

so you'll see the big moves is us pulling out of a bunch of markets

that's not relevant and focusing on substance abuse and addiction

yeah I mean

that's the core right

mm hmm

cool so okay

I have some really fun light hearted rapid fires

yes to wrap up our conversation

sure buy a broken company or start from scratch

start from scratch go viral for bad press or never get noticed

never get notice

heaps of great businesses are never get noticed unless you yeah

so going bad viral is not good

coldplay will tell you that

would you ever buy a distressed company again

I don't know I really don't know

I think it's so painful that I

I don't wanna go through that process ever again

to be honest I think I'm

it's always good to start something by yourself

I think Strong Room is very unique case for me

like I think if I was a private equity yes

I'll you know

you buy this restaurant turn around and flip it

that's the business model

but for me like when I do something

I'm just all in like storm dies I

I'm going down with the ship right now

like I'm

I'm not backing out um

so I think for me um

it was only because I think what they do is very good for the world

that I you know

I like to be part of it and I want to

you know

like to revive the company

that was the only reason but I would yeah

it's just too too painful

it's probably the

it is up there with the most painful thing I've done in my life

strong by and strong this yeah

what's No. 1 most painful

No.1 most painful uh

probably when I ran my first startup

there was some painful times there OK

so either way it's just startup life that's painful

you know yeah OK

thank you Joe so much for joining us

no it's been fun

thank you yeah

thank you that's really good

that's a wrap if you like this episode

please hit the subscribe button

it helps us bring on more awesome guest

level up production and drop new series you wanna watch

see you in 2 weeks