The Venture Capital perspective on wellness and the mind-body connection (Part 1)
The first rule of successful startups is to simply make something people want, yet to go beyond that and follow Larry Page’s toothbrush test by asking “Is this something you will use once or twice a day, and does it make your life better?” is a sure method to build real value. Twitter and Medium co-founder Ev Williams explains this business-building mindset further: “Here’s the formula if you want to build a billion-dollar internet company. Take a human desire, preferably one that has been around for a really long time….Identify that desire and use modern technology to take out steps.” I believe holistic wellbeing is one of those toothbrushing-like desires about to get hit by technology and innovation. All of us are feeling the urge to improve ourselves — to stay sharp, relaxed and clear-minded — in an increasingly hyper-competitive, energy-draining world.
The following series of posts is a shot at formulating a thesis on investing in this human desire. I believe there are certain mega-trends creating new markets with large upside, hence interesting for venture capital investors. In a TechCrunch article depicting the most important tech trends of 2018, Hayley Barna (now Partner at First Round Capital) expressed her interest in a modern take on wellness that goes beyond traditional medicine. She explains that her focus is “More holistic, more on mental health, more on alternative practitioners, [like] acupuncture, or mind/body connections.” With overall digital health investment picking-up, this seems like one of the untapped opportunities.
I’ve been interested in improving my own wellbeing for some time. I started taking herbal supplements a few months ago when I felt that my cognitive and physical health were not at their best levels. I also started doing yoga through Youtube channels to relax, and tried a few mental health apps such as Shine and Headspace to counter everyday stress. When I began to talk about these things with friends, I realized that many were also trying different techniques from nootropics to meditation, yoga, fasting — and that it is becoming less taboo for people to talk about their issues. Further online research has made me conscious that people are more motivated today than ever to take charge of their wellbeing, and that there is a long list of investors, startups and corporates betting on solving their needs. One Forbes article reads: “Consumers are placing more value on health and wellness than on material objects these days, and the definition of health and wellness has evolved. The phrase no longer refers simply to a lack of illness and disease, but to a more holistic state of being, where one’s mental, physical and emotional health are in sync. And in an era in which so many catalog their lives on social media, looking great, feeling good and sleeping well are the new luxuries that consumers want to enjoy and flaunt.”
For now, I will dig into the following three themes I found promising — but will be interested in getting additional suggestions for future research.
Theme 1: Super-ingredients and nutritional supplementation
Theme 2: Sleep-optimizing technology
Theme 3: Wellness software, gaming & VR
What this is not about
I won’t talk neither about disease management nor I will touch on anything related to the healthcare system in its current form. I also try to stay away from drugs and technologies that have to go through doctors, physicians, practitioners, coaches, hospitals etc… My focus will be in specific on startups targeting the daily aspiration to feel better than our normal selves, not on managing diseases, and I will solely discuss consumer products and self-help tools that anyone can make use of at home, at their own time and with minimum friction. We are realizing that our modern healthcare system is attuned to curing people from illnesses only after they happen, instead of being focused on preventive care and the earliest stages of disorders that worsen along long periods into full-blown illnesses. For example, simple sleep problems, nutritional deficiencies and constant fatigue are today a precursor of cancer and psychological diseases on the long-term. Stress can also lead to long-term health problems, and it is no secret that there is a resulting epidemic. With no current answer except low-impact neuropsychiatric medication — which more than 25% of people are on — drugs and hospitals are turning to not be the right route for healing our daily mind-body problems.
This is also not about the “altered-states economy”. It is hard to draw the line around altered states — but I will draw it around being fully engaged hyper well-being in real life versus and using tools of escapism that psychedelic drugs offer. While I believe it is a matter of time til these substances are legalized, I’ll skip going into other realms of consciousness and peak performance states for now and instead focus on countering our increasingly unmanageable daily lives with accessible wellness tools. I have to mention here that microdosing illegal substances does probably lead to a certain sense of well-being and enhanced productivity, so the value proposition very similar. However they are still illegal substances in the majority of countries and they do not represent major investment opportunities at the moment. The only interesting investment opportunity I’ve seen in that matter is a Peter Thiel-funded company based in London that is trialing the use of Psilocybin in late stage depression through controlled therapy sessions.
While I am personally intrigued by the business of gene editing, I also won’t venture on that front — one because the business models behind that industry don’t yet work, and two because I have no intention to forecast the consequences of it on our society in the long-term. Even if we first apply it to eradicating diseases and extending life, the unknown unknowns of hacking biological evolution itself and creating different versions of human beings are many. I am generally an optimist and trust that scientists would use it to improve human capacities, but it worries me that if the effects are not carefully studied and the intentions of the players in this game are not totally benevolent then we would be facing grave danger as a species. A post-human society is definitely just around the corner — human enhancement technologies will range from wonder-drugs to the direct manipulation of the genome and using innovative neurotherapies. Yet to get there we need to experiment. In my opinion, there will be an evolution in consumer adoption of self-enhancement and it has to start with using hacks such as food, sleep and apps much before we reach widespread hedonic engineering.
Finally I will also neither discuss the organic foods and beverages craze, since that has been around for a while and is not targeting the desire I am talking about here (although a great thriving proxy market), nor the lab grown alt-protein food market which many VCs are rightfully excited about and heavily tracking.
Theme 1: Super-ingredients and nutritional supplementation
Driving factors
Biohacking is the movement towards tweaking our bodies for optimum results. One expert frames it as going beyond the modern psychological self-help ethos into the hard science of altering our bodies through chemicals and supplements. The energy/focus/relief stack of coffee, cigarettes and alcohol is bound to change, and it already has substitutes in the form of either prescription medication or illegal drugs.
A big part of biohacking revolves around improving cognitive performance. Young people everywhere have been taking substances such as Adderall and Modafinil, as well as microdosing LSD and MDMA to improve themselves and be more productive in busy, fast-pace environments such as college and corporations. As more of our jobs are reliant on intellect and brain power, we find ourselves having to rely on enhancement tools to reach optimimal performance. Steven Kotler and James Wheal have studied the phenomenon of “stepping beyond oneself” into peak performance in their new best-selling book “Stealing Fire”, and uncover the science and business of reaching altered flow states. I personally haven’t read that book yet, but using psychedelics and flow techniques can sometimes be seen as going to extremes. For now, the simple answer for many “normal people” is found in nootropics — supplements that improve focus and boost brain function. Nootropics act on the body without undesirable side effects found in coffee and drugs like slumps, acid burns and jitters. They are hence arguably not as dangerous as other products — meaning that people would be more comfortable trying them. By being herbal in essence, they also don’t require any approval from the FDA or other administrations, which makes them more accessible.
The nootronaut community is known today to be very experimental. They create combinations to produce synergistic effects and those become “stacks”. Some of the most common stacks are L-Theanine + Caffeine (one that I personally take everyday) and Choline + Acetyl L-Carnitine — with the possibility of adding racetams. A post from Observer describes this trend perfectly “This certainly isn’t the first American neuropharmacological craze. The 20th century had a strong go at psychonautic experimentation, from simple supplements to powerful hallucinogens. The movement toward nootropic experimentation could be called a second coming of America’s neuroscientific popular interest.”
In addition to biohacking’s focus on brain fitness, it also involves putting your body in more relaxed states. For that purpose, there are supplements that range from probiotics/prebiotics (which focus on wellness of the gut and have also proven beneficial for the treatment for stress-related behaviors in mice) to adaptogenic herbs such as Rhodiola Rosea, Ashwagandha, Bacopa Monnieri, Turmeric which were mostly used traditional Eastern medicine to fight fatigue. There are also some forms of mushrooms that have the same effect, such as Lion’s Mane and Cordyceps. These super-herbs can be great alternatives to balance stress chemicals and energy in the body. The use of these ingredients signal a return to ancient food practices and a borrowing from spiritual and natural powers. These techniques are comparable to the rising adoption of yoga and meditation practice — which are huge consumer markets in themselves.
Some startups that sell nootropic supplements are seeking growth through venture funding, for example:
Nootrobox, now branded HVMN, has raised in 2015 $2.5 million from investors including Andreessen Horowitz, Marissa Mayer, and Mark Pincus. The startup manufactures and sells cognitive supplements through both subscription and one-off order forms.
Onnit is a e-commerce business that sells supplements including their flagship product Alpha Brain, as well as foods and fitness equipment — growing to $28M in revenues in 5 years.
Bulletproof, founded by Dave Asprey who is one of the most influential nootropic gurus, is also VC-backed by Trinity Ventures and CAVU Venture Partners.
Dan Scholnick, GP at Trinity Ventures, is quoted in a CNBC article saying that “As an investor, I think the ideas and discoveries coming out of biohacking will change the world.”
Probable scenarios
Rohit Tawlar, one my favorite London-based futurists writes in his newsletter on January 12th, 2018: “The trend towards people enhancing their brains and bodies is only likely to accelerate. The year ahead will see a mix of excitement and outcry at the proliferation of examples of people receiving chemical, genetic, physical, and electronic augmentations of their “version 1.0” human brains and bodies. Over the next five years, it will be increasingly commonplace for people to use nootropic drugs and supplements to enhance their cognitive capacity.”
While that’s a great prediction, I believe that the mainstreaming of ingredients that work on the mind-body connection will continue through the Food & Beverages market — this will help the trend make the jump from passionate innovators to the mainstream majority. Previously just about capsules and powders, adding these supplements in our food not only makes them more accessible, but associates cognitive enhancement and stress reduction with good nutrition. As people are more and more realizing that “food shapes our bodies and brains”, it may become standard practice to consume mood and energy-altering foods. We can already spot the beginning of mood-enhancement food with the explosion of packaged & branded Marijuana edibles in places where it has become legal. My own prediction is that nootropics and adaptogens will follow the same route.
F&B brands are indeed fully riding the health-consciousness craze by increasing their investment in innovation around functional F&B. CBinsights state that the number of investors in F&B has tripled since 2013 and reached 450 investors in 2017 as health, food and tech continue to converge. Interesting acquisitions in this area include that of antioxidant drink maker Bai by Dr Pepper for $1.7Billion and that of Pukka Herbs, an organic herbal tea brand who has reached $40M in Revenues in 2016, by Unilever. Drinks seems to be the main form of delivery of functional super-ingredients, yet Nutrition Business Journal’s senior industry analyst Claire Morton highlights that snacks, in particular, have the strongest growth projections among functional F&B. “Functional food and beverage overall has had strong growth as consumers seek products with more bang for their buck. The snacks category is no exception. Consumers are eagerly seeking feel-good snack products with that added benefit”, she says.
Below are a few startups riding the wave:
REBBL a superherb-based drinks startup that has recently raised $20M from CAVU Venture Partners and Powerplant Ventures, is said to have reached $15 million in annual sales. REBBL drinks are made from mixing coconut milk with some adaptogenic herbs that described above, such as Ashwagandha and Turmeric.
Tranquini (Vienna-based) is a functional F&B business PE-funded by Co-investor. Their carbonated drinks’ product line contains the nootropic L-Theanine.
NOA (Stockholm-based) — backed by Aggregate VC — includes in their drinks a bunch of functional herbs inspired by “Nordic nature”, that work with your body to cope with stress and increase mental capability and focus.
Four Sigmatic focuses on mushroom powders that are drinkable with coffees, elixirs, and other blends and is funded by AccelFoods. The instant “coffees”, marketed as brain-boosters, are made with combinations of Chaga, Lion’s mane and Cordycep mushrooms .
Karuna is a brand shortlisted in the functional drink category at the 2017 World Beverage Innovation Awards, who according to their website are now aiming to raise outside capital. Their drinks are said to be inspired by Eastern medicine and Buddhist traditions, some containing Turmeric (again), prebiotics (again), Aronia Berries (an antioxidant proven to increase Norepinephrine, Dopamine, and 5-HydroxyTryptamine in mice), Goji Berries (which is proven to increases energy, focus, calmness).
Soylent, a popular drinkable supermeal startup valued at $430M after its latest Series B round of $50M, has in 2016 introduced its own coffee line that includes 75mg of L-theanine alongside caffeine and proteins.
Neurogum, which raised $200k from BAM ventures, mentions 3.5 million+ pieces of chewing gums that provide quick boost of energy with caffeine and L-theanine
JWT innovation group’s 2018 report “The Future 100: Trends and Change” points to the fact that even large airlines and restaurants businesses are also getting in on the trend — Monarch Airlines’s mood food box, which contains green tea and lavender to induce relaxation, and Pizza Hut’s mood enhancing pizza are aimed towards the feel-good factor.
David Pearce, a transhumanist philosopher argues that “There isn’t yet a true wonder-drug…And diet and exercise won’t take us above the low, genetically-determined ceiling of well-being/ill-being that Nature has given us. But many people never reach that ceiling.” For me, this signals an evolution from where we are now, to a full-fledged preoccupation with nutrition, all that being before we discover the perfect neuropharmacological drugs.
In the science community, there is increasingly evidence of the link between the microbiome — the 100 Trillion microorganisms living in our body — and mental health as a two-way street, which means that the imbalance in bacteria and fungi in our gut may affect mood, and actually be one of the causes of anxiety. It turns out that 90% of the neurotransmitter serotonin is actually produced by your gut microbiome.
The global probiotic market is expected to grow to $64bn by 2023 as consumers increasingly make the link between our wellbeing and our gut bacteria — yet there is more innovation spurring on that front in regards to F&B. Probiotic-powered F&B startups such as TheCoconutCult, GoLive, and Farmhouse culture (with $18M raised to date) are also getting funding — with CVCs such as ZX Ventures, the corporate venture arm of ABinBev’s, leading the way. Fermented Kombucha drinks, which are said to have effects similar effects on the gut, have also enjoyed quite the investment interest with acquisitions such as Pepsico of KeVita for $200Million, an investment in Revive Kombucha from Peet’s coffee, and more recently Kombrewcha raising money from ZX Ventures.
The microbiome itself is already a thriving area of investment as portrayed by a Sillicon Valley Bank report in 2017 on the topic. While that report shows that most of the money is going towards disease therapy (especially GI and infectious disease) further research shows that there is rising focus on wellness and the brain-gut axis. The reason why this is fascinating from our venture perspective is that it opens up new opportunities in dietary ingredients and supplements that balance and increase the function of our internal microbial communities. Some examples of Microbiome-focused startups are:
Kallyope are building a comprehensive map of gut-brain circuits with $110M in funding from the likes of Lux Capital and Two Sigma Ventures.
Whole Biome have raised their second $10M Series A at a $39.5M valuation from the likes of Sequoia Capital, True Ventures and Khosla Ventures, and with their proprietary diagnostic platform are developing medical foods that therapeutically target the microbiome.
Second Genome has also raised around $64M from CVCs Pfizer Venture Investments and Roche Venture Fund, as well as other VCs for drug discovery efforts related to improving health & wellness through the Microbiome.
DayTwo are another Series A startup that raised $12 million of venture funding from J&J Innovation, Seventure Partners and Mayo Clinic to offer personalized nutrition insights through a gut microbiome health management platform, basing their service on research that links energy dips and sleep disorders to blood sugar levels.
Evolve BioSystems, backed by VCs such as Horizons Ventures and Spruce Capital Partners who led the $20M Series B provides microbiome-based probiotic and prebiotic products to maintain a healthy gut microbiome in infants.
Viome — Backed by Khosla Ventures, Peter Diamandis and others — and uBiome — backed by Andreesen Horowitz, 8VC, Slow Ventures and others — are both early-stage competing businesses that send microbiome testing kits to customers to test/sequence microbiome samples and then provide them with nutrition and wellness recommendations.
Scientists are still hypothesizing and learning about how essential is the microbiome balance to well-being, and don’t yet have a complete understanding on how the microbiome affects the brain itself. It was actually not until mid-2017 that a UCLA study affirming a correlation between having higher clusters of certain bacteria in healthy humans and “more robust white matter connectivity between emotional, attentional, and sensory processing brain regions”. This area will be very interesting to watch over the next few years, as we start bioengineering brain-manipulating “psychobiotics” that we can get over the counter, and even mix with our food.
Investment considerations
F&B brands have long relied on retail for distribution. But it is only recently that we’ve seen new startups rely on online channels. Vertically-integrated e-commerce businesses — AKA “Direct-to-Consumer brands” — and in specific digitally native ones that boast their unique cool factor, have been the focus of many VCs for a couple of years now. Startups in the biohacking space are definitely more likely to succeed by becoming lifestyle brands, with values and behaviours that guide their relationship with customers. Investors would agree that it has become easier to grow an online brand, with the help of self-serve advertising, more targeted community-building, as well as investment in influencers and instagram celebrities. We’ve seen many examples of influencers such as Tim Ferris, Joe Rogan and Dave Asprey himself selling the culture of biohacking and fueling the rise communities and subcultures around this topic. On why F&B are more likely to succeed in online distribution, CBinsights additionally write: “the visual appeal of food and beverage products makes the sector a good fit for effective social media-based marketing.”
For many new F&B brands, defensibility lacks because of low barriers to entry (unless you own proprietary product recipes — but the customer is unlikely to choose based on “proprietary”). So it must be all in the branding and the story to which customers relate, and that requires a mental shift for traditional investors. Cameron McLain of Hummingbird Ventures recently wrote that “Traditionally, VCs have not placed much value on “brand” because its value is intangible and difficult to quantify. The same goes for many public equities investors. But it’s clear from recent success stories, like Revolut and Robinhood, which achieved billion dollar valuations in record time that their nascent brands played an important role in their rapid growth…Moving forward, investors and entrepreneurs will need to develop new mental models to better understand the role of brands in technology companies and early-stage startups”. He’s right in that brand drives trust (and hence defensibility) in an attention-shattering economy, and this is well relevant in F&B brands with strong messages of wellbeing and spiritual values.
In the early stages of a DTC startup’s life, the new brand can be quickly scaled with the right targeting. The CAC/LTV unit economics will tend to work — especially if it’s in a nascent market and the value provided by the product is substantial. However, at some point most DTC companies will find that online advertising becomes expensive — this is mostly due to growing competition on clicks and the auction-based nature of advertising. Andrew Chen, famous growth-hacker and now partner at a16z calls this the “local paid marketing max”.
As regular online advertising costs increase towards unsustainable CAC/LTV ratios, the challenge lies in finding creative acquisition channels that lower acquisition costs. In this way, selling these F&B products at the back of content becomes essential. Case in point is the acquisition of My Mad Methods, a content company providing educational articles and workouts, by Onnit. My Mad Methods’ youtube channels has 2.4M views but they are now integrated with Onnit’s website as an “academy magazine”. Most article pages include links to shopping the products mentioned. This also complements well their podcasting strategy to which a large part of their growth is attributed, according to a Forbes article. A post from First Round Capital features Food52, a home-goods F&B startup featured on the 2016 annual list of the 50 fastest-growing companies in New York, and portrays the company as a strategic combination of a content publisher and product shop. Hence their own growth recipe centers around high-quality content with educative value for consumers, with their shop benefiting directly from that.
Josh Hix the co-founder of Plated a food home-delivery subscription startup that was the target of $200M LBO in October 2017, makes two great points in a medium article around subscription models and retail as solutions to the problem of decreasing returns on advertising. The first argument Josh makes is this — “You have to pay “rent” in the form of advertising, or CAC, to drive every purchase customers make from a DTC brand — then why not just offer a subscription so that once you acquire a customer you never have to advertise to them to encourage them to buy again? You bring them through the front door of your “store” once, and they keep buying indefinitely.” In fact, subscription models remove friction from repeat purchases. A study by Lux Research states that there is great value in the convenience provided to customers by manufacturers in F&B — it is what drives both faster growth and higher prices. Nevertheless, Josh then mentions that average yearly retention from subscribers will typically be around 25% — because very few customers wants to keep getting the same products indefinitely. We’ve seen that of Blue Apron a home delivery meal kit service that has gone public, was around 12%, a major factor putting downward pressure on their stock price. The second argument Josh makes is that distributing through retail in, addition to online, creates more constant returns on marketing and increases margins through retention. He says “An Omnichannel business model done well should allow you to both “go slow” in your online media, keeping CACs at a healthy and efficient level and to vastly improve your customer experience online and offline which leads to higher customer retention over time. And this leads to a healthier, more profitable business.” Graze is one example of a successful snacks manufacturer that operates an omnichannel strategy. The company was started in 2007, went through venture capital-funded high-growth, then through an MBO led by The Carlyle Group in 2013. It currently sells its products through both mailbox subscriptions and supermarkets/pharmacies.
On the LTV side, my judgement is that super-ingredient supplemented F&B can drive higher LTVs than regular packaged F&B — this is due first to higher retention rates driven by the wellness effect those products offer, and second to higher selling prices driven by health-conscious consumers’ willingness to pay.
In the future, personalization will become a key value driver as depicted by the offerings of the microbiome startups mentioned above. Different supplements have different effects on different people, and the reality is that there are hundreds of these super-ingredients which many of us will want to experiment with to find the perfect fit. There is increasing evidence from online communities that early adopters of nootropics are spending much time on finding the perfect blend, and that some are experimenting with adapting their supplement intake to genetic test results such as those of 23andme. Microbiome self-testing kits will also be a gateway to nutrition optimization. These startups may even also be able to complement their products and possibly integrate with apps and wearables that track health and can lock-in customers further (i.e. the wellness index in Viome’s app seems very interesting).
Look forward to my next part of the series on sleep-optimizing technology and then wellness software/gaming/VR
Jad El Jamous,
London
May 31st, 2018
