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 Sermo Inc. raised $26.7
million in a third round of venture capital that took advantage of a
competitive process managed by media specialist Allen & Co. LLC of New York to leverage the online physician community's leadership in building a professional online networking site.Baltimore-based Legg Mason Capital Management led the round, in which Allen & Co. also participated as an equity investor, joining Series B leader SoftBank Capital of Boston and seed investor Longworth Venture Partners. The deal brings total investment in Cambridge, Mass.-based Sermo to $39.2 million and is expected to take the company to profitability in 2008. Sermo founder and CEO Daniel Palestrant said the two-year-old company has built a network of 30,000 physicians in all 50 states as members since launching the site in the summer of 2006, establishing a community where physicians in more than 35 specialties share information on medical opinions, discuss emerging trends and evaluate new medications, devices and treatments. Unlike leading consumer networking communities such as Facebook Inc. of Palo Alto, Calif., and New York-based News Corp.'s MySpace.com unit, the site carries no advertising but was built based on a revenue model of aggregating user content anonymously and selling it to third parties. Palestrant said the company brought physician members into the community based primarily on viral marketing, but invested heavily in infrastructure and engineering to establish credibility in building partnerships with organizations including the American Medical Association. The company raised $3 million in seed money from Longworth in November 2005 to launch the company and raised $9.5 million in its B round in February 2007. While the company took advantage of inexpensive tools to design the site initially, Palestran recognized the need to build a solid underlying Java architecture to scale the site and also invested heavily in experienced management, customer support, and legal and contractual services that he expected the medical community would demand. Paul Margolis, a general partner with Longworth, said the firm had done a variety of surveys on how to bring the success of social networking to professional communities and that Sermo presented a solid road map on how to build a credible site with physicians. "Obviously in the last few years online communities have been a very interesting opportunity for investment, but mostly with consumer sites," Margolis said. "We were examining whether there was an opportunity for professional communities to generate interest, and that could be sold in an interesting way, and Sermo had a very good initial understanding of what physicians were looking for and a commitment to listening." Palestrant would not disclose precise pricing strategy. He said Sermo offers subscriptions ranging from about $30,000 a year to $1 million or more, targeting vertical markets initially in healthcare organizations, financial services and government organizations. Subscribers have access to an entirely separate product, Alpha MD, which aggregates opinion from the Sermo site, and also offers opportunity to create custom queries for response from Sermo members. Palestrant said the company also offers the opportunity for nonsubscribers to conduct surveys with Sermo members beginning at about $2,000,. The company has developed other revenue opportunities it will begin to introduce later this year. Michael Mauboussin, chief investment strategist for Legg Mason Capital Management, said Sermo's business model allows for an aggregation of physician opinion that has not been available before. He added that the firm was attracted to the investment based on the opportunity of expanding those capabilities. The company undertook the fundraising after being approached independently by a number of venture firms, Palestrant said, while it already was in discussions with Allen & Co. partner John Koski. Allen & Co. managed a competitive process, which generated multiple term sheets at an undisclosed valuation "up several multiples," of the company's B round. Sermo did not use an outside financial adviser in putting the round together. It had legal work on the deal from Ed Pease of Brown Rudnick Berlack Israels LLP in Boston. Legg Mason and Allen & Co. used in-house counsel in closing the round.  Deal Video
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