By KIM KRUEGER & MATTHEW HOLT

Rock Health has been around since 2011 first as an accelerator and now as an early stage venture fund. Matthew Holt had a chance to sit down with Rock Health’s Managing Director Malay Gandhi ahead of his appearance at WinterTech to discuss how Rock Health looks at the consumer side of digital health, and what developments Rock Health thinks we’ll see in the near future.

Matthew Holt: It’s Matthew Holt with Malay Gandhi. He is the managing director of Rock Health, and has been officially for what, nearly a year or so now, Malay?  Is that right?

Malay Gandhi: Since June, June of this year.

MH: So about six months. Most of us know that Rock Health was founded by Halle Tecco and Nate Gross a few years back, 2011, and probably was the first and most influential of the incubators and accelerators that target health care specifically. Perhaps you can explain a little bit about how Rock Health works. Most people know that Rock Health is a nonprofit, and that you guys do a lot in terms of stimulating the ecosystem with small events, big events, and your reports on financing and so on. But you are mainly a fund and the amount of money that you invest in your companies has been increasing from I think $20,000 in the early days to $100,000 plus recently? Could you explain how that actually works compared to other accelerators or incubators?

MG: Yeah. Essentially, the way Rock Health works is there are three big things that we do, all under our mission to support and fund entrepreneurs. We have our venture arm, which does seed investments in the companies now. We’ll write checks up to $250,000 per company, really at the seed-stage. We conduct research which we release publicly. Let’s say about four reports or so a year, as you mentioned, tracking funding, but also doing deep diving in various topical areas.

Then our third area, we host a couple of events each year. Our signature events are the Health Innovation Summit, which is for everybody; the CEO Summit, which is an event for founders and CEOs of digital health companies; and then finally, the XX Retreat, which is a women’s professional leadership group for women who work in health care.

The way we’re structured from a model perspective is there are actually two entities. We have a hybrid model. There’s Rock Health Inc., or RHI sometimes as I call it, which is a nonprofit. That’s who I work for, that’s who all the employees of Rock Health work for. We are generously funded through our corporate partners and earning some kind of profit on events.

There’s a bunch of logos on our website. We have great partners like Abbott, United Healthcare, Blue Shield of California, Kaiser Permanente, GE, Genentech, Boehringer Ingelheim, Deloitte, Qualcomm, and so on that generously fund our mission to support entrepreneurs. So that’s the nonprofit Rock Health Inc.

Then to its side, we have an investment vehicle which supports the venture funding aspect of our model. In that fund, Bessemer Venture Partners and Kaiser Permanente Ventures are the lead investors, and then there’s a tail of other investors in the fund. So that’s an investment vehicle that writes the check for the company as you would expect in a traditional seed fund.

MH: So that vehicle collects the management fee and shares a chunk of the equity — similar to a typical VC?  Is that correct or no?

MG: We don’t really get into the economics of the fund. We’re compensated for managing it, yes. Rock Health Inc. is the manager of the fund. The goal of the fund is probably a little different than what most would expect from a venture fund. When we ran out and raised it this summer, this third fund that we raised, the investment piece that’s underneath it wasn’t, “Hey, this is the best return on Earth that you can get. This is the best time for the money to return money.” If you look at the profile of our limited partners in our fund, we are a seed investment vehicle for these firms.

We do something that no one really has the capacity to do, which is to look at thousands of seed-stage deals in the digital health space. It’s such a growing category and it’s very hard to keep track of. Then, when you marry that with our research arm, where we’ve developed pretty deep insights, along with our industry partnership, I think we have a very unique vehicle. If you think about a seed fund of our size relative to our nonprofit’s budget, we would need a fund that’s probably an order of magnitude larger on a traditional management fee piece to provide the types of resources that we are able to provide to our companies because we have this leveraged model through the nonprofit.

I think the investment piece is less about, “Hey!  Let’s get great returns for investors.” It’s not that we don’t need to return money, we absolutely do, and we treat the money as such. But I think our investors, what they are looking for is help identifying the next great companies that they can really lead follow on funding into.

MH: So let’s quickly change to your view of the market. We’re focusing a little bit (but not exclusively) in this upcoming conference, WinterTech, on the evolution of the consumer side of the market, particularly around the new platforms that are starting to come into health care. Just give me a sense about what you think is moving in exciting ways, and then we’ll talk a little bit about some of the companies in those areas.

MG: They’re probably under three domains within kind of the “consumer landscape.” So, pure consumer, which monetize directly from the consumer who actually pay for the service that they’re using. One of our portfolio companies with that model is Lantern, which provides mental health on demand, really accessible coaches and mobile-delivered CBT programs. Consumers pay per month for a service like that. So that’s one model.

Then, a second model would be multi-sided: working with the industry on paid distribution. So the consumer is still the end user of the product, but ultimately the value being created is so significant to the healthcare industry, it makes more sense to partner with them. Omada Health being an example of a company like that, that ultimately monetizes use through health insurance companies, self-insured employers, and the like–people who bear risk for diabetics, working to prevent that ultimate outcome. So they are a heavily consumer-centric company when you think about their product. They care deeply about engagement and driving that because that’s what leads to the clinical outcomes. They have to build that product that they monetized through the health care industry.

Then the last category of company I would say is one that forgoes revenue for some period of time. They’re trying to grow a real large consumer-base — grow a company and then monetize through a third party potentially through an advertising model or something of that nature. They would look more like a traditional consumer internet or consumer mobile company. For example, Iodine is a recent investment we made. Right now, they’re very much focused on building the best consumer health information platform and growing that, and then eventually they will figure out the best way to create value for the consumers and also to monetize the engagement they have with their audience.

We tend to see those three buckets and I would say they’re all really, really interesting areas of opportunity. Then on a global basis, the biggest area of opportunity that I always tend to point out is it’s very hard for me to find a single person if I asked them to show me their smartphone, where they have a health app on the home screen. We still tend to think of that as the largest opportunity: that no one has really built an iconic consumer digital health brand yet. We’re still waiting for a company to emerge.

MH: That’s such an interesting area, so let’s talk about that. I wonder what that might be. Do you think an online direct connection with a health provider is likely to be that sort of space on the home screen? What would you think are the kind of companies that might be there?

MG:  Well, I think there’s probably a couple of different ones. One is, what do you need to do every day around your health that’s meaningful. Most people don’t actually visit the doctor every day or have a serious health concern that they would want to engage a doctor in. I think telemedicine, virtual visits that if you look at the 1.1 billion ambulatory visits that will happen this year, there’s certainly a very significant opportunity to shift many of them to virtual visits. You don’t really need to go into your doctor’s office or into an urgent care clinic or to a regional clinic or even — unfortunately, people show up at emergency rooms for some of these low acuity things. So there’s a significant channel shift that can happen there, but I don’t see that as an every day activity for every person out there.

There are probably a couple big areas. One is the exploration of consumer health information. When we look at searches online, where people are trying to better understand themselves and their own health, there is something that comes up almost everyday with most people related to their health that they want to bang into Google, and I think consumer health information, looking at the kind of name brand websites that are out there today, they’re not very good. The content is pretty bad and most of  the content space is being sold for ads instead of robust information. It’s not really personalized, so the content isn’t in the context of your life, it’s not using any personal data. Then the content is also quite stale. It’s not updated, based on any patient reporting, or any what we would call “real world experience.” So I think consumer health information–if we just look at the volume of people out there searching for it and how much is being captured today by what I would call “weak products” –that’s certainly one big opportunity.

Then the other two relate more to the delivery side, prevention and wellness. Wellness, literally, if you define it, is the activities of daily life that improve your health, and most people describe that as eating well, being physically active, and getting the right amount of sleep each day. Monitoring and tracking that, no one has really unlocked what I would call an “extraordinarily high daily active rate” yet on the apps, like something at the Facebook level, north of 50% daily active user percentages, but I think that’s a big opportunity.

Then condition management. I would say the company in our portfolio that’s really starting to crack the code on this is Mango Health, which has worked on medication adherence. Because Jason Oberfest, the founder, and his team came from a mobile gaming background, they saw this idea that with a social network, you could build a gaming layer on top of it, and because the habit was already built into the person of logging into Facebook everyday, when you put games on top of that, you are capturing the daily engagement of a primary activity and rolling that engagement into your products which happened to be games.

That observation is what Jason has taken into Mango Health. A lot of times, it’s labeled a medication adherence company. When he observed patients when they were doing their early, early ethnographic work as they were studying what they wanted to do with the company, the one thing that he universally observed was that medicine was such a big part of people’s lives, taking their prescription drugs, but also their OTC supplements. The idea was, if you could build a daily habit, something that every person opened up everyday to kind of say, “I took my medicine,” you could start capturing other information.

I don’t want to share specific data, but I will say the engagement is better than anything I have ever seen in the health care vertical, but beyond that, better than what I’ve seen in mobile gaming. I think he really captured something amazing around condition management. There’s only one thing people really do everyday or that they are meant to do everyday and that is to take their medicine. Then if you can take that engagement and lever it into other areas, to get them in to see the doctor or get a certain test taken or maybe take a few extra steps, there is something really, really powerful about that where you’re building around something that needs to happen daily anyway.

I would say those are probably the three buckets I think about as home screen app potential for a lot of Americans or consumers– health information and either wellness or condition management.

MH: They’re all areas which have, as you said, had a lot of activity. Especially the last one you said, it’s been very, very hard to crack. Jason and the group at Mango Health have an interesting approach to that.

Last question, and not directly connected to what you’re working on per se, but — and again, I don’t know if you’ve looked at this from an investment perspective — there’s a big move changing the natural core of health care delivery, again, starting from the edges, but with companies who are delivering care either in the worksite setting or most notably in the retail setting. Do you have a sense of how far that’s going and/or how much it’s involving the kind of companies that you’re working with?

MG: The way that we tend to think about it is, where is all of the money spent in the health care system, where do we absorb a lot of cost? And then we want to invest in companies that have the technologies that attack those costs. One of the biggest buckets as you know is spending inside of the hospital, and then everything from the hospital down to the phone in your pocket, we describe as the “location stack.” Where is care delivered, the hospital being the most expensive, and me walking around with my phone being able to do some kind of self-care wherever I am being the cheapest. So retail clinics, worksite clinics are definitely closer to my pocket, my home than to a hospital.

So the way that we see that is yes, absolutely, those are growing because more and more care will be and needs to be delivered there. On the worksite side, there is a very strong value proposition that goes beyond just medical cost and health spending to productivity, employee satisfaction, and everything else. I think we see tremendous growth in employer worksite clinics. Then retail clinics have been interesting. It was actually an area I spent quite a bit of time on while I was at Deloitte and I offered some studies, about six or seven years ago. You can go back and look at my terrible forecasting that I did as a consultant about how many clinics there would be by now. Those forecasts have not been met.

We’ve heard from companies who are very ambitious saying, “we’re going to have 2,000 to 3,000 clinics around the country”, and we haven’t yet seen them. I look at that as a scope of service question: how much can we really do in a retail clinic? What we saw three, four, or five years ago was none of them really had enough service breadth. If you look at the traffic, they weren’t really able to generate enough volume of visits to justify a break even for these retail clinics.

With Ben [Wanamaker] and his team from Walmart, and I know Ben is speaking at the conference about their new strategy for retail clinics, I think we’ll see why it’s different this time, because they are moving from doing low acuity to thinking, “This is a primary care center and we are going to build the largest primary care practice in the United States,” which is a pretty remarkable shift from when we first saw this model starting to emerge. It goes back into the mid 2000s when CVS and Walgreens started to scale up Minute Clinic and Take Care. It’s very different today than what it was; almost like we’re getting close to 10 years ago when that model first started emerging.

I think the role of their ambition, how wide the scope of services they want to offer is, and then when you look at what enabling technologies you can put in today, everything ranging from simply just workflow, clinical decision support, digital diagnosis, all the way to point-of-care diagnostic tools that you can get, you can gain much more rapid testing and triage and learn about the patients inside these smaller clinics. And if you need to, you can have technicians connect to specialists. I think that breadth of service offering starts to expand dramatically both due to the ambition of the players, but also because the enabling technologies are there.

We certainly see it as a big area in terms of where, again, the 1.1 billion ambulatory visits, they should be absorbing quite a bit of them.  All the research tells that the quality of care in those settings is just as high, if not better, and clearly it would save the health care system quite a bit of money. From a quality/cost argument, it’s there. I think now, the technologies are really going to be there as well to support a real business model for this retail and worksite clinics.

MH: I’ve been doing this for 25 years now and it still hasn’t really changed, right? You still see these hospitals with the expensive inpatient component buying their primary care supply chain. But it’s neither necessary or productive. It’s interesting to see if this retail/worksite approach is going to change it. But what you said about the location stack versus the technology is actually very interesting. It’ll probably be much more interesting the next 10 years than we have seen in the previous 20.

MG: Yeah. Kaiser and Target together, right? I mean, that’s a change in the way Kaiser thinks because they’re partnering with Target. It’s just different today.

MH: Well, Malay, I look forward to more conversation at WinterTech. We’re talking with Malay Gandhi. He is the managing director of Rock Health. Malay, thanks for your time.

Kim Krueger is a Research Analyst at Health 2.0 where Matthew Holt is Co-Founder and Co-Chairman. WinterTech is on January 15th, in San Francisco at the Julia Morgan Ballroom.