WellnessFX’s James Kean on M&A in health startups and the effects of the Affordable Care Act

By on February 25, 2014

wellnessfx-screenshotEditor’s note: James Kean is the founder and former CEO of WellnessFX. Prior to that he helped start the company behind WebMD. In 2013, Health Elements acquired WellnessFX; Jim spearheaded the deal. The following is an edited transcript of an interview with him, conducted 01/28/14.

What is WellnessFX, and what does it do?

WellnessFX is the first consumer-driven health services market, a digital storefront for health services. Consumers can use it to purchase blood panels, and then choose a physician or nutritionist to interpret the results—to diagnose and consult—by phone. Recommendations could include supplementation, dietary change, exercise, or further consultation with a doctor about genetic risks or early signs of disease.

WellnessFX democratizes the consumer health model, part-and-parcel with the ethos of the Affordable Care Act.

Your product offering changed over time. Can you talk about those changes, and what prompted them?

These kinds of panels and consultations are not nationally regulated, so we had to deal with fifty-one different countries [states], as it were. We started with high-end panels, a kind of Cadillac model, only in California. This allowed us to make some profit and learn. But we were under market cost, purposely setting the price low and operating with low margins to gain new customers.

By May 2013 we had expanded into 46 states, and we wanted to show we could be a mainstream product, rather than just concierge or high-end. So we tried something radical: We gave away our entry level product. We offered basic panels and consultations for free. This catalyzed our company. In one week we doubled our membership, and twenty-percent of those trials upgraded to a higher panel. We grew membership, got great press and, thanks to the conversion revenue, broke even on the experiment.

We’ve always focused on the “who.” As in: Who are our users? What are their goals? Through these kinds of experiments we culled a big enough data set that we were able to define three distinct groups:

  1. Train (athletes)
  2. Pain (people with existing health concerns—they’ve skipped physicals for 
five years, have a thyroid condition, etc. They want to solve a problem.)
  3. Gain (Quantified Selfers, not necessarily athletes but people trying to stay ahead of the curve with more, and more personal, data)

Initially we were focused on the Train and Gain crowd, but over time we realized 50% of our customers were in the Pain group—they were trying to address some issue. So this was all an adaptive, iterative process.

Who acquired WellnessFX?

We were acquired by Health Elements, whose majority shareholder is Thorne Research. Other investors include two European biopharma companies. Health Elements is focused on supplements, nutrition and bio-pharma. They saw more and more consumers looking for integrated practitioners; we saw the only set of supplement companies that have never had a warning from the FDA. There was mutual interest. We thought, by combining with them, that they’d drive channel sales through their existing base, and bring with them their existing pool of doctors.

Why did you choose to sell?

We were close to break even but needed money to grow. VC’s weren’t interested in further investment because they weren’t convinced of the market size and opportunity. So there was a gap-financing issue. We felt that an acquisition was the best way to supply capital and continue growing. So we contacted Health Elements.

How were you introduced?

I met the Thorne CEO, Paul Jacobsen, back in 2010. He and his team are ex-Wall Street, and they all had health & wellness or pharma backgrounds. We stayed in contact for three years. Then, last summer, I mentioned that we were interested in selling. They gave us a term sheet, and the deal closed in three months.

Three months is a remarkable turnaround. How did it happen so fast?

Well it was a monumental amount of work. But I used to be a CFO, and from the get-go my team had organized WellnessFX based on diligence lists I had from companies I founded in the 90’s. Everything was filed correctly, our data room was squeaky clean—everything was in apple-pie order.

Truthfully, if you’re a startup and you’re going to have subsequent funding rounds, counsel for investors will do the same diligence work a buyer would in an M&A situation. So really things should always be ordered this way. The cleaner and more organized you are the more rapidly you’ll process investment rounds or a sale.

Were there any curveballs in the deal?

Yes, with legal counsel. Our law firm quit on us halfway through the deal. They’re a major Silicon Valley firm, and they wanted a $200K deposit in an escrow account for them to use at their leisure during the sale. At the time we had that financing gap, and didn’t have $200K in liquidity. So I said no, and they refused to continue.

Our investors were freaked, of course. And I admit it was super risky. But I scrambled and found a great firm out of Portland, Oregon. They were one-third of the cost of the Valley firm, and they capped their rates so I could stay within budget. Our staff loved working with them. They transferred the files, got the deal back to where it had been, and finished ahead of schedule. I’d recommend them to anyone.

Was this a true acquisition, an acquihire, or other?

It’s a true acquisition—WellnessFX will continue to operate as a separate entity. In fact, the combined company–Health Elements and WellnessFX–will operate under the WellnessFX brand . There’s also discussion of introducing a new line of sports supplements under a hybrid brand, ThorneFX. They love our brand, our reach, and the fact that we’re highly regarded by our consumers. They’re all in, and actively growing our sales, so much so that WellnessFX will finish 2014 ahead of 2013.

Once we had a deal price we did a private share exchange. I chose this because I think this entire area is on fire, and the buyer is a growing business.

What’s something a startup should know about M&A?

You should plan for M&A the day you found your company, and you should identify potential acquirers just as early on. Growing into a behemoth is rare. The capital stack is off nowadays—Series’ B, C, and D are hard to come by. We raised $11M in our first two rounds, and probably would’ve broken even this year. Most startups won’t even do that, so it’d be hard to get past that first round.

So have corporate relationships, find synergies with like-minded companies, and work together whenever possible, even on small pilots. This is your insurance policy. As you’re growing, analyze the landscape to see who would benefit from your nimble little startup. I was in touch with Thorne for two years before we pursued the acquisition, and it was nice to have that relationship in my back pocket.

There’s also being smart about your asset. Working with large companies nowadays has become so complex. But have knowledge of those categories. Understanding how to activate a channel is twenty- to thirty-percent of your overall value.

What are your thoughts on the health and wellness startup space?

Healthcare VC’s don’t understand consumers, and they don’t believe the kind of consumer aggregation needed to make a successful business can be done. So they won’t invest, and there are severe gaps in the capital stack. At the same time they’ll tell you to pursue big companies to buy your product as an employee benefit, even though this is an outmoded way of thinking.

This schizophrenic conversation comes from confusion. The non-health investor is fundamentally terrified of investing because he or she doesn’t understand health tech; and healthcare VC’s are scared off because they are stuck in this mindset that healthcare is not consumer driven.

I’d also say that traditional channels are hard. Gaining consumers through social is going to be way easier than through benefits/HR at a company, or big retailers like Safeway. We’re talking about pure healthcare and a purely consumer-driven market, but this is still a new idea.

What’s one piece of advice you could give to an entrepreneur?

Identify your channel. You don’t have the time or the money to experiment—if you’re a product or technology in search of a channel then you’re in a really tough position. Go find experts. Find the guy who just left Walgreens as the VP of merchandising, or the head of benefits at Mercer, and talk. These experts can eliminate false starts and accelerate your time to market. If you have expertise like that in your corner then you’re going to be tailor-made for that industry.

Any thoughts on the Affordable Care Act?

Exchanges are turning people into active consumers, and we’re seeing an uptick in preventative services. Now add the fact that employers can get rid of in-house plans—which can cost up to $8K per year per person—and turn employees loose to make their own decisions. Companies incur a $2K per person penalty for doing this, but the economics still favor them doing so, and VC’s see this. These are markets that didn’t exist before.

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