Direct-to-consumer healthcare. We see it more and more, and it is an increasing trend that’s been written about extensively (see: health-tech business models, the B2C2B playbook, amongst others). Today we want to take a step back and discuss some philosophical implications and the ethical/ safety concerns we think about as investors. And of course, we try never to wax poetic – skip to the end for actionable take-aways that you can use as a founder. Some lessons here translate globally but healthcare is very different in different parts of the world and this post is really focused on the US.
Why is D2C / B2C2B increasingly common and what are the pros?
Before we dive into the more interesting stuff, let’s review (briefly):
(1) what has fueled the growth of D2C (direct-to-consumer) healthcare?
- Patients (consumers) are more-and-more “tech-forward”: Increasing willingness to embrace technology in all aspects of life; the pandemic-catalyzed shift towards virtual medicine has contributed.
- Patients are increasingly open to out of pocket healthcare spending: This is projected to grow from ~$500B (2021) to $800B by 2026 (see here).
- Vendor fatigue and increasingly difficult standards for validation present bottlenecks for B2B sales: the B2B market is saturated with point solutions, and employer benefits managers and payers alike are (A) overwhelmed by all of the startups vying for their attention, and (B) asking increasingly for clinical outcome data prior to signing contracts.
(2) what is B2C2B and why is it a trend?
- Enter B2C2B (business-to-consumer-to-business). The premise? Launch D2C, get early product-market-fit, bypass the vendor fatigue and capitalize on consumers’ tech-forwardness and willingness to pay OOP. Much easier to garner interest from large employers/health plans if you can say “we have 50,000 users who use our product multiple times per week”.
(3) why might this be good?
- For founders & investors: (A) Early validation of product usability; as some have written, with D2C you “can’t hide behind a bad product that doesn’t engage its users”. Going directly to the end-users forces founders to optimize early on key value proposition, usability, need, and engagement. This sharply contrasts the previous generation of products sold on the basis of large eligible member populations which ultimately had minimal use/engagement and negligible outcomes. (B) Much faster product cycles and sales cycle allow rapid iteration (vs. long, slow, corporate contracts).
- For payors/employers: those previously overwhelmed by a sea of point solutions can now (hopefully) choose amongst products that truly drive utility (demonstrable engagement, and perhaps, proven clinical benefit)
- For patients: (A) increased access (think: rural areas & healthcare deserts, and/or indications where wait times are long)
Cons of D2C and some food for thought:
- Focusing on the well & worried: we wrote about this previously. The sickest 5% drive >50% healthcare costs, and these patients are rarely the well-to-do, early-adopting power users who leap to try the next digital health app
- We select for engagement, retention, and user acquisition (growth): In the absence of early clinical data, this is necessary at early stages. However, often the focus shifts to these surrogate measures and we lose sight of the bigger picture – driving meaningful clinical improvement. Philosophically, are we needlessly contributing to an epidemic of smart-phone addiction?
- Inappropriate overprescription of controlled substances: most recently, the Cerebral investigation and the shutdown of Ahead have cast a spotlight on certain negligent players irresponsibly scattering controlled substances amongst vulnerable populations without appropriate oversight. If you’re thinking that this smells an awful lot like the Purdue Pharma fiasco / opioid epidemic, we agree. More scrutiny to come.
- Increasing acquisition cost (CAC): this has multiplied in recent years with the explosion of digital health companies vying for the attention of a fixed patient population; diagnostics plays and products that are only used 1-2 times/year suffer in particular (see our previous post).
At Tau, we understand that few things are ever black and white. In fact, we are proud to be investors in several consumer-focused companies including Hank, Renee, and Marigold. Many of the things these founders do right are present in the list below.
Actionable Take-Aways for Founders: Ask yourself…
- What does the early clinical outcomes data show? This is a tough one, sure. Remember not to lose sight of the forest (true patient improvement) in the trees (optimizing product stickiness).
- How sick are my users? Will this truly shift healthcare consumption? Related to #1. If your patients are relatively healthy power-users and/or the product won’t shift the needle on healthcare costs, your business may likely be a marketing/execution play. Which isn’t terrible – just recognize this upfront.
- Am I needlessly making a virtual community? Is a virtual platform necessary? Is it sufficient? More on this in an upcoming article.
- What’s the harm your product can cause? How can you build in safety checks to prevent abuse, overprescription, and negligence?
Primary author of this article is Kush Gupta, co-authoring with Amit Garg. Originally published on “Data Driven Investor”. Kush is an Associate with Tau Ventures. Amit is Managing Partner and Cofounder of Tau with 20 years in Silicon Valley across corporates, own startup, and VC funds. These are purposely short articles focused on practical insights (I call it gl;dr — good length; did read). See here for other such articles. If this article had useful insights for you, comment away and/or give a like on the article and on the Tau Ventures’ LinkedIn page, with due thanks for supporting our work. All opinions expressed here are from the author(s).
