Welltok Raises $25M More, Takes Aim at $2.7T Healthcare Industry

You’ve got a fitness tracker on your wrist and a phone loaded with health apps in your pocket. You know all about the latest technology that can help you stay—or get—in shape, and you’re pretty sure you know all the names of the biggest startups (and giant companies like Nike) trying to sell you new apps or gadgets.

Well, think again. There’s a Denver-based company named Welltok that quietly has raised more than $75 million with the goal of changing how all those apps and devices connect to each other. But Welltok’s larger ambition is to connect consumers, healthcare providers, health insurance companies, and employers to one another to improve health outcomes—and save everyone huge amounts of money along the way.

That vision, along with a management team that has built and led billion-dollar healthcare and IT companies, has big-time VC firms like Bessemer Venture Partners and New Enterprise Associates betting on Welltok. They think it is a company poised to capitalize on the revolution taking place in healthcare as new technology empowers consumers and new regulations resulting from Obamacare change the rules for insurers and providers.

Welltok announced today it has raised an additional $25 million in a growth equity round led by Bessemer. The new funds bring the total amount the five-year-old company has raised to more than $75 million. That number is expected to grow soon, as Welltok plans to raise an additional $12 million before the round closes later this year.

Welltok is one of many health and wellness companies trying to shape and profit from “the industry’s seismic shift to get consumers more involved in optimizing their health,” chairman and CEO Jeff Margolis said. The company starts by focusing on generally healthy people, as opposed to individuals experiencing an acute illness or medical crisis, although Welltok’s software can be used to help manage chronic conditions.

Welltok is developing a product called CafeWell, which it describes as a health optimization platform-as-a-service. Unlike most so-called software platforms, it probably deserves the name. CafeWell is based in the cloud and collects and organizes data from popular health apps like MapMyFitness and wearable activity trackers like FitBit. It has been designed so it will be able to connect with additional apps, devices, and systems as they are developed, Margolis said.

CafeWell takes all that data to help users create a “personal health itinerary” with specific goals and recommendations that can maintain or improve their health. But it does more than just make recommendations: the current version has additional features like social networks, games and challenges, educational content, and access to coaches to help users stay on track. The program also can give users rewards like gift cards for actually going through with their plans and hitting their targets.

Listing CafeWell’s features makes Welltok sound like any number of startups developing yet more consumer-facing wellness apps. But it’s different, Margolis said, and when he explains Welltok’s business model, you realize he’s right.

That’s because CafeWell’s end users are not really Welltok’s customers. The company’s business model is to sell software to health insurance plans, providers, and what are known in the healthcare industry as population managers, Margolis said. They will pay for Welltok and make CafeWell and related products available for their clients.

Collectively, Welltok’s potential customers are responsible for administrating health plans, setting rates, and now monitoring the quality of care clients receive. They have a big financial stake in keeping costs low by keeping people healthy, especially now that Obamacare has changed the system so that providers are reimbursed based on results and lose money for negative outcomes like hospital readmittances.

Health providers, insurers, and managers are also the ones in charge of paying the bills for the $2.7 trillion U.S. healthcare industry. So instead of paying a couple hundred bucks a year like consumers could, they have many thousands or even millions to spend.

Stephen Kraus, the Bessemer partner who will join Welltok’s board, said that getting just a sliver of that market could yield billions of dollars. The industry also is vast enough and changing so rapidly that startups can find new segments where they can grow into major companies. He pointed to the estimated $20 billion already being spent each year on wellness products or services as an example.

But even with the changes, Kraus thinks a business-to-business-to-consumer approach like Welltok’s will remain the best approach in the future.

“Enterprises, whether they be payers, providers, employers, are still the predominant sales channel you need to market and sell into,” Kraus said.

It’s not only private companies in the U.S. that might be Welltok customers. Margolis said government insurance programs like Medicare or nationalized single-player plans like those in Canada and throughout Europe could become customers.

In addition to that market strategy, Welltok appealed to Bessemer because its future doesn’t depend on consumers or businesses adopting a single product.

“They’re not resting their success on any one app or sensor or tracker. What they’re trying to do is work with the payers and those folks who own the risk,” Kraus said.

Margolis contends that Welltok doesn’t have a direct competitor. Companies like Jiff and Limeade are developing products that help individual companies develop and run wellness plans, but Margolis said Welltok is the only company to focus on selling to insurers.

Welltok doesn’t disclose details about its revenue or current valuation, but Margolis said it has paying customers using the first generation of the CafeWell product line.

The company also doesn’t disclose its number of customers, but Kraus mentioned its software is available to millions of consumers. Welltok already is working with large health insurance companies such as United Healthcare, Aetna, and Cigna, as well as providers such as Centura Health, which owns hospitals in Colorado and Kansas.

The early numbers and relationships have made Welltok revise its projections upwards.

“Welltok has a lot of momentum in the marketplace right now, and what we’re seeing is the size of the market opportunity is at least as big or even bigger than we had anticipated,” Margolis said.

Welltok is planning on rolling out major updates to CafeWell in 2015, and it will soon launch CafeWell Concierge. That product uses technology developed by IBM for the Watson supercomputer to make extremely specific on-demand recommendations. The product will use Watson to learn users’ activities, interests, and health status, and it will be powerful enough to identify nearby restaurants with healthy meals or places to exercise when a user is travelling.

With the new product launches, Welltok wanted to keep its focus on execution next year. “We had the opportunity here to raise capital and essentially go into 2015 with no distractions regarding capitalization, so we’ll be playing from a position of strength,” Margolis said.

While Margolis probably wouldn’t list them as distractions, Welltok has had a busy past year-and-a-half. Margolis became CEO in April 2013. Since then, Welltok raised two major investment rounds, bought startups Mindbloom and IncentOne to improve its mobile apps and incentive programs, and struck the partnership with IBM.

Along with Bessemer, Welltok’s investors include Emergence Capital Partners, InterWest Partners, New Enterprise Associates, Qualcomm Ventures, and IBM’s (NYSE: IBM) Watson Group.

Investors are betting big on Welltok in part because its executive team is filled with people who have experience building or managing major healthcare IT and insurance companies. Margolis has two multibillion-dollar healthcare IT companies under his belt, most notably the TriZetto Group, which he founded in 1997. Margolis led the company as it went public, before ultimately selling it to a private equity fund in 2008 for $1.4 billion.

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