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

How Joe Zhou did it: The Founder Who Bought It

StrongRoom AI went into administration after a large funding round and very public, serious events. The financial records, by Joe's account, showed discrepancies — misstated revenue, investors reporting it as fraudulent, multiple court cases. Here in Australia, he says, it was almost like the Theranos: the journalists covered it daily, then weekly, for about three months. "Australia was missing that big scandal," and everyone wanted to talk about it.

Joe was a user of the product and had been in the pharmaceutical software industry for years, so the story was right up his alley. But he had zero plans of buying it — not until probably two days before the administrators were trying to make a decision. After talking to a couple of previous investors who knew Patterson Street Finance, the firm that owned the secured debt and called in the receivers, the loose plan became: buy the debt, become a secured creditor, see everyone's bids, and use that position to negotiate. He raised money to buy the debt, then to complete the purchase, then realised he didn't have enough to run the company — "this is not part of the plan." Before settlement he put his house on the line.

What he walked into was worse than the headlines. Everybody hated everyone, everyone was suing everyone, and everyone was telling the other parties to f off — large VCs and global investors fighting in the middle of multiple court cases. StrongRoom had a wholly owned subsidiary, Members Benefits Australia, that it had paid eight or nine million dollars to acquire; it came as a "gift with purchase," highly insolvent, with ATO debts and roughly half a million dollars in liabilities. The first six weeks went on saving that subsidiary. On day one, three people resigned in front of him to say congratulations on the purchase, here are our resignation papers.

The core problem wasn't only the financial mismanagement — it was the engineering management. StrongRoom had seven products, eight engineers left, each product a single point of failure with one person supporting it. Joe's read: they died because they tried to scale horizontally and vertically at the same time, building every product in every direction and pushing into the UK and US at once. So the rebuild has been about stabilising the core — the controlled-drug and opioid-replacement-therapy software where StrongRoom has very large market share in Australia, a near-monopoly in several analytics areas, and very sticky, hard-to-switch customers.

Joe is a private person who got catapulted into the limelight, and his answer to the noise is to ignore it. He didn't rebrand, because while the brand is tarnished from an investor perspective, customers in the pharmaceutical industry still love it. He says he hates raising money and talking to investors; customer validation matters more than anything. He didn't buy StrongRoom to flip it — a lot of people assumed he'd turn around and flip it in 18 months — he bought it because tackling substance abuse and addiction is, to him, one of the coolest things you can do in healthcare. The mission now is to make the world a safer place, and the next big move is to make no moves at all: pulling out of markets that aren't relevant and focusing on the core. As he puts it: StrongRoom dies, he's going down with the ship.

What you'll hear

• Buying a scandal out of administration — how Joe went from reading the news on the sidelines to owning "the Theranos of Australia," with zero plans to buy it until two days before the decision
• The secured-debt play — buying the debt to become a secured creditor, see every bid, and negotiate from a strong position — "a not a very well organized plan to be honest"
• What the books actually showed — financial discrepancies in recognised revenue, contracts that hadn't come through, transaction volume represented as revenue
• The gift with purchase — inheriting Members Benefits Australia, a highly insolvent shell with ATO debts and half a million dollars in liabilities
• 1,000 problems overnight — pissed-off staff demanding pay rises, customer complaints, political agendas, and three people resigning in front of him on day one
• Why too many products kills companies — seven products, eight engineers, one point of failure each, and the cost of scaling horizontally and vertically at once
• Keeping the tarnished brand — why he didn't rebrand: tarnished to investors, still loved by customers in the pharmaceutical industry

Key claims from this episode

Chapters

Quotes from this episode

Themes Joe returns to

• Focus on the right things — the lesson Joe keeps returning to: companies die trying to do too many things; get back to the core fundamentals and try to do one thing really, really well
• Going down with the ship — when Joe does something he's all in; he hates quitting halfway and once he decides to do something he normally sees it through
• Customer validation over investors — he hates raising money and talking to investors; it's about customers and making the best product for them
• Mission over money — he didn't buy it to flip it; he bought it to tackle substance abuse and addiction, which he calls one of the coolest things you can do in healthcare
• Knowing which markets not to enter — the next big move is to make no moves at all, pulling out of irrelevant markets and focusing on substance abuse and addiction