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Why investors are leaning into direct-to-consumer health
Cause there’s nowhere to hide behind a bad product
Direct-to-consumer health seemed to come out of nowhere. Once an overlooked category, looked down upon by many traditional health care funds, it’s now proven to be one of the most promising go-to-market strategies in digital health.
There are a few reasons for that. Founders have spent the past decade selling into the employer market, which is now overloaded. These days, benefits managers are utterly overwhelmed by point solutions. Meanwhile, companies like Ro, Curology, GoodRx and others have taken off like a rocket ship by building products that consumers pay for out of their own pocket.
But there are some big (but not insurmountable) challenges with D2C health in the long-run, which is a major reason why a portion of these companies end up selling into payers. Arguably, these products and services are less affordable as they cater to those who can afford to pay cash. Costs to acquire patients have gone up substantially, particularly in the past year, for a variety of reasons. Another problem is that investors will look at the value of a patient over time and aim to maximize that metric, but some users only really need one or two visits. There’s also the role of the clinician to consider as some D2C brands will try to improve their efficiency, which may be ideal for some patients but not others.
Still, we’ve seen a growing acceptance that there’s a place for D2C health in the system. And it’s forcing many enterprise solutions to adapt to become more aware of the end-user, and not just the entity they’re selling into.
So let’s take a deeper look at some of the trends driving D2C health and the hurdles companies may face along the way. For this issue of Second Opinion, I tapped the brains of two of the smartest D2C health investors I know: ACME’s Aike Ho and Canaan’s Byron Ling. Between them, they’ve backed brands including Curology, Tia, Papa, Kin, Uniform Teeth, Brightside and more.
Here's what they had to say:
‘No room to hide’
The beauty of D2C health is that companies can’t hide behind a bad product that doesn’t engage its users. For years, too many businesses in digital health got contracts with payers that allowed them to sell on the basis of the total number of eligible members versus those who used it or benefited from it. In other words, companies can succeed when utilization remains low. Today, despite an increasing interest from payers in innovative per-outcomes models, Per Employee Per Month (PEPM) models still reign supreme.
With D2C health, teams are forced to build products that provide so much utility to the customer that they’re willing to pay for it. And ideally - although some solutions may be intended to be used only once or a few times - they’ll come back for more.
“There’s no room to hide with D2C health,” said Ho. “You either have a good product or you don’t.”
On a personal note, Ho’s own journey into health care investing began when she was diagnosed with cancer. She’s fully recovered, but saw first-hand how vulnerable and powerless it can feel to be a patient in the health care system. “I think this led me to take a more product-centric view,” she told me.
Ho has a special appreciation for businesses that can earn their revenue because customers love their products and derive real value from them, versus those that got a massive enterprise contract right off the bat. But she also recognizes that not all types of health care businesses make sense for a D2C model. So here’s what she looks for when assessing whether to make an investment:
Does the consumer first model align with the care protocol? For instance, a super complex condition that requires a lot of specialist attention may not be a good match for a purely virtual company. In Ho’s view, GI could be an example where a D2C player may struggle because the condition involves monitoring so many different data-sets & our knowledge base is still rapidly evolving. Some things are complex enough that they warrant both virtual and in-person care delivery. An example of that is Tia, which is combining primary care and gynaecology under one roof.
Does it align with the patient journey? Where companies can struggle is in cases where the condition is very well managed by a patient’s PCP and there’s little incentive to move to a startup alternative. But in cases where there’s a lot of stigma and patients are nervous to talk to their family doctor, a new player in the market could be very successful. There are also companies doing well in the space that take on patient populations that PCPs are reluctant to treat.
Does the condition lend itself to a virtual treatment experience? For Ho, Curology’s model made a lot of sense because acne is a highly visual condition and a lot can be communicated with a care team via photos & videos.
How quickly could the company scale/grow? For some companies, it’s relatively simple to get to the first few hundred patients because these are the so-called “early adopters” who will be evangelists for the service. But getting to a few thousand and beyond can be extremely tricky.
How visceral are the benefits? In the case of Curology, those who use the service may see a very quick improvement to their acne symptoms. For things that are more amorphous, where the patient doesn’t feel all that different the first few times they use it, it can be tricky. Talk therapy is a good example of that. For some patients, it might take some time before the benefits are really felt & that may lead to a lot of struggles with retention.
Is it safe? There are lots of ways to answer this question. But the major questions to ask include: 1) Would a serious condition be missed if a patient is getting treated online? 2) Does the treatment come with risks? 3) What’s the risk-benefit analysis? 4) And how well are the risks being communicated?
If you’ve spent any time in the consumer Internet world, you’ve spent time thinking about LTV: CAC. That’s a shorthand way of referring to the Life Time Value to Customer Acquisition Cost ratio. For those that don’t know, it’s a common SaaS metric that tells you how much it costs to gain a customer and how much that customer is likely to provide in revenue. It provides good insight into whether a company will succeed in the long-run because it’s an indicator of how efficiently the business is using its resources.
In an ideal world, customers are cheap to acquire and will stick with the product in the long-run. But there’s a lot of complexity to this equation and every business is different. For instance, if the lifetime value (LTV) is incredibly large because customers pay a lot for the service and tend to stick around, according to Ho, it’s well worth spending more to acquire them. In her view, it’s all balanced in the margins.
“There are companies we have invested in that have a major services component but have been interesting to us because on an absolute dollar level they have yielded so much revenue you don’t need that many customers to get to a $100 million run rate,” she said.
Over the past six months, both investors have seen a massive jump - according to Ling from Canaan, it has been double or even triple - the cost to acquire customers. For many companies, the iOS 14 update, which emphasized privacy and allowed users to opt out of in-app data collection, had a big impact on their customer acquisition cost or CAC.
So what are smart investors and founders doing about that?
“After talking to growth investors in my network, I’m getting the sense that companies involving higher consideration purchases have definitely been hit the hardest,” said Ling. “I think the solve is that we try to push companies to explore ways to build organic awareness whether it’s referrals, community-building or even offline channels.”
In Ho’s view, newer social media companies like TikTok are going to become an increasingly important way to engage customers, particularly Gen Z and millennials. “There are so many communities there that are engaging people in conversations about medicine and their bodies,” said Ho. “I’ve fallen into so many medical education rabbit holes on TikTok and learned a lot from them. It could prove to be a very effective strategy in acquiring customers as you can gain a follow from both paid acquisition and free viral content.”
“This is an interesting test for teams that can be creative and adapt their marketing strategies,” she added. “But for a while we may see companies with upside down unit economics.”
Shifting to payers
Imagine you’re an early stage digital health startup. You could approach a payer with a pitch about how incredible your business is and the cost savings it will generate. And if you get lucky, the payer gets religion relatively quickly and might agree to a pilot. It’ll be an uphill battle with lots of customization requests, and there’s no guarantee that the pilot moves to a paid contract.
Or you could build an incredible consumer business with traction in a few distinct geographies. At that point, you approach a payer that’s heavily focused on those geos with a very different pitch: “Just so you know, tens of thousands of your customers are already using us on their own dime and these are the outcomes we’re seeing.”
The latter strategy seems to be working for some - and it’s compelling for a lot of reasons. One example is Ho’s portfolio company Brightside, which was originally a cash pay service for patients to access talk therapy and prescriptions, but is now in-network with health plans like Cigna and Aetna.
“I think a lot depends on the end market, but it can be really effective for startups to approach the market this way,” said Ling. “We see it working well with companies that have built up case studies around clinical outcomes, and not just purely focusing on growth.”
The ideal team
Here’s Ling’s hotlist for what he looks for in an early team:
Consumer product DNA: The CEO doesn’t necessarily need to come from a consumer background, but someone on the early team should check that box. A head of growth or chief marketing officer would do the trick.
A payer background: If there’s an intention to move the company to the world of B2B, someone has to be there from the beginning to think through that strategy and compile the data/refine the pitch. “Sometimes we have met teams that are very good at growth but they don’t anticipate that the D2C health market they’re going after is actually pretty small,” said Ling.
Clinical expertise: A high quality chief medical officer is vital for any company that touches patients. Companies that hire this person too late will struggle. For those looking to hire a clinical team, here’s my nifty guide for how to do it.
A startup they’d love to fund
One of my favourite questions to ask investors is what company they’d love to back if they saw it.
For Ling, it’s something in the obesity management and support space. While there are lots of players offering weight loss services, including Noom, Calibrate and WW, he hasn’t seen many scaled businesses yet. “I think there’s still a lot of interesting opportunities here,” he said.
For her part, Ho is looking into two areas: The aging space and endocrinology. On the latter front, Synthroid - a synthetic drug for hormone-related problems - is among the most prescribed drugs in America. In 2016, it was the most prescribed drug in the country, according to GoodRx. So in theory, there’s a great business to be built there by a team that’s really thoughtful about how to reach patients & ensure it’s the most appropriate course of treatment. The population is huge. One of the major reasons for that is the prevalence of hypothyroidism, particularly in women in their 40s, 50s & beyond. So there’s definitely an increasing need - and yet only a handful of startups looking at this space.
Aging, in Ho’s view, is also one of the most exciting areas for a consumer investor to crack. “It’s so complicated but so worthwhile,” she said. “No one has really cracked it because it’s a complicated sell. Decision making is not straightforward and differs from family to family. You have so many voices within each family to consider, including the aging patient.”
So that’s a wrap on D2C health. Hit us up if you have any questions. Byron is reachable at @byronling1 on Twitter & you can find Aike at @AikeHo. As always, you can find me @Chrissyfarr.