Welcome to Scaled and Failed! My name’s Amil Naik and I’m an aspiring VC and founder at The University of Texas at Austin. I write about startups that scaled and startups that failed to draw insights about the patterns of startup failure and how to avoid them. Everything is clearer in hindsight, so it’s worth looking back.
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TLDR
Today’s Topic: Home Care
Scaled: Honor; Pivoted away from an independent contractor marketplace model and empowered existing independent home care agencies to focus on outcomes and growth by providing technology and operational resources as the primary business model.
Failed: HomeHero; Pivoted away from an independent contractor marketplace model and became much more like a traditional home care agency, then attempted to partner with hospitals but failed to secure long-term contracts.
Lessons Learned: If you can’t beat the incumbents, make money off of them by improving their operations. This is easier in a fragmented ecosystem with intense competition and poor scalability. Healthcare is a difficult space to tackle, so ensure fundamental assumptions about the business model are correct before investing time and resources into it.
Today’s Topic: Home Care
Not everyone wants to end up in a nursing home as they age, preferring to live out their old age at home. In those cases, many families opt to hire assistance in caring for their elderly members in the house as day-to-day functions become more difficult for them. While individuals and companies providing assisted living services are nothing new, there have been a number of startups trying to optimize home care service and its administration. It falls under the healthcare umbrella (even though many services rendered are non-medical), meaning that many bloated franchises and smaller companies in the space have numerous inefficiencies on the business and technology back-ends. As the population of the United States continues to age, the market for these types of services will only grow larger. The industry approached $100B in 2020 and shows no signs of stopping; it’s clear why so many companies want a piece of the pie. It isn’t all sunshine and rainbows though, especially for caregiving employees. The turnover rate in the industry was a whopping 64% in 2019, and this was celebrated as a huge improvement over previous years. It’s an intense, stressful, and thankless space with meager financial compensation for the actual caregivers while corporations rake in massive profits (it is a piece of healthcare after all).
Honor is a home care technology provider that has built a partner network of home care agencies that it handles the technology and operations needs for. In exchange, it gets a revenue-sharing agreement. Though it began as a marketplace for independent caregivers to match with seniors that needed assistance, it has pivoted to support tech-enablement at existing agencies rather than as a replacement. To date, it has raised $255M in funding. HomeHero operated as a similar matching marketplace for caregivers and families, but the changing regulatory environment around independent contractors forced it to pivot into corporate partnerships with hospitals and to an eventual shut down in 2017 as it lost its competitive advantage over traditional home care agencies.
Scale: Honor
Honor was founded in 2014 with serial entrepreneur Seth Sternberg as CEO and a rockstar team of co-founders. The initial idea to build an independent marketplace of 1099 contractors to be matched with families to provide non-medical home care raised a Series A not much later early in 2015. Product development sped up, with an expansion into on-demand service rather than solely scheduled services. Honor defied the industry norms of massive turnover in workers because of its better pay and treatment of caregivers. The company doubled down on this support for its workers and quickly transitioned away from the 1099 model, announcing early in 2016 that it would switch to W-2 employment for caregivers to provide further training, advancement opportunities, and increase incentives to stay with the company. Sternberg even stated that equity would be offered to top caregivers working with them, not just to engineers building the technology behind the startup:
We don’t want our software developers to be the only ones to get equity and big salaries like they’re part of some super team. That really isn’t right.
A Series B raise followed later in 2016 to push expansion to new markets outside of San Francisco and Los Angeles, with Dallas-Fort Worth planned as the first region outside of California. The company slowly pivoted away from the marketplace model, with more focus going towards partnerships with existing care agencies with the technology and resources it had developed. This culminated in the formal establishment of its partner network in 2017 to make its caregivers, technology, and operational systems available to care agencies that partnered with Honor. Although there was no up-front cost to joining the network, Honor held potential partners to very high standards. In 2018, Honor raised a Series C to further grow and develop this partner network across the country. The partner network became Honor’s primary business model based on revenue-sharing in exchange for its technology and operational expertise that took care of most of the office administration for agencies. The shift was met with some criticism as the company became a tech-enabler rather than a disruptor, but things seem to have worked out for Honor. By aggregating and analyzing data from its partner network, it has been able to leverage technology to reduce turnover for its partners. Late in 2020 amidst the pandemic causing significant issues for the home care industry, Honor raised a Series D to prepare for another large expansion across the US. With plenty of money in the bank to fuel growth, the horizons look bright for Honor.
While the business model Honor operates now is different from what was envisioned initially, the partner network enables much more rapid scaling of the service across the country by enhancing the existing infrastructure with great technology rather than replacing it outright. It’s much easier to work with independent agencies that already have a brand and reputation rather than fight with them for market share. This also shifts a lot of employment burden onto partners rather than Honor itself, which would face rapidly increasing costs with each new market if it remained a marketplace. Additionally, the broader healthcare environment has shifted to support home-based non-medical care; some Medicare plans began covering non-medical home care in 2019, giving more people access to these types of services. With this boost in potential customers combined with a steadily aging population, rapid deployment and efficiency become even more important. Considering the serious issues facing employees and customers in this industry, any startup improving the experience for these stakeholders is a welcome change from the norm.
Fail: HomeHero
HomeHero began in 2013 with the support of the Science incubator based in LA, aiming to become the fastest way to get quality home care services. One of the founders, Kyle Hill, wrote about HomeHero’s journey from the beginning to the end. The company originally built a marketplace for families to find caregivers with all the usual bells and whistles of modern marketplace startups: online profiles, reviews, ratings, and algorithmic matching. Additionally, it gave families tools like timesheets and audio recordings to keep tabs on the care that older members were receiving with the goal of increasing transparency. Growth was good for some time, and by mid-2015 the company had expanded to cover the entire Bay Area, Orange County, and San Diego. They were serving several hundred clients and had over 1,200 “Heroes”, the name given to the 1099 contractors on their platform, onboarded. Not long after in June of 2015, the company raised its Series A, bringing total funding to $23M.
Things began to go awry in October that same year when a federal ruling was decided that would require most home care workers to be W-2 employees rather than contractors. These changes in regulation coupled with rising minimum wages in California rocked the home care industry overall, having a number of effects that rippled beyond just the employment method. You will recall this was while Honor was still making a decision about moving towards a W-2 model for caregivers, which ended up happening a few months later early in 2016. HomeHero followed suit several months after Honor and revamped the company internally to avoid potential lawsuits. Costs would rise and margins would shrink with the W-2 model because of how expensive onboarding would become, and HomeHero would need to pivot just like Honor did to build a scalable business now that its marketplace model had become unfeasible. Hill describes the effects of this change on the business:
From any angle, the W-2 model is not very attractive. The switch to W-2 would increase our caregiver onboarding costs by 10X. The additional costs of payroll taxes, overtime, paid sick leave, minimum wage regulations, benefits and health insurance, unemployment tax, workers comp insurance, and potential for lawsuits in a highly litigious industry put us in heavy handcuffs. We would also be forced to implement a 4-hour minimum and raise our prices by 32% — much closer to industry average.
The company became a HIPAA-compliant licensed home care agency, fully transitioned to W-2 caregivers, hired several senior staff, and put together a strong advisory board to navigate the changes and focus on a new business model. Although having W-2 caregivers had closed the affordable private marketplace door, it opened the opportunity to partner with large hospitals that previously they couldn’t work with due to restrictions on working with 1099 contractors. Later in 2016, HomeHero joined the Cedars-Sinai Accelerator to learn from bright minds in healthcare and figure out a strategy to penetrate hospitals. With the help of the mentorship and education the company received from the accelerator, HomeHero landed a pilot worth nearly $1M at a health system in Michigan near the end of 2016. Although this seemed promising, Hill realized that this wouldn’t translate into a sustainable business model:
The seemingly logical thing to do after winning a pilot of this size is to ramp up spend, start hiring in the new city and design technology sprints to support the new contract. However, it became evident that this particular health system, like many others we were talking to, had a genuine desire to conduct pilots to prove the actuarial value of home care, but there was no long term financial incentive to pay for home care in the same capacity. It became evident that most of our pilots were being constructed solely for case studies and had slim chances of turning into sustainable contracts. We were still going to be reliant on private pay for the foreseeable future. This gentle realization was the straw that broke the camel’s back.
Although HomeHero had a significant amount of capital left, Hill made the tough call to wind down and tackle a problem completely different from home care. Looking back, he summarized the three critical mistakes that led to failure: underestimating the effects of changing regulation, overestimating the willingness for health systems to pay for non-medical home care, and underestimating the ability of traditional home care agencies to become tech-enabled.
Lessons Learned
Honor and HomeHero both faced the same bumpy road following a transition to W-2 employment of caregivers and searched for a different business model that would be venture scalable. If they weren’t based in California, that might’ve never been an issue; it’d be interesting to see if their initial models are viable outside the state. Their pivots had very different strategies, with Honor focusing on improving the current conditions of home care and HomeHero taking another angle at disruption. As I’ve mentioned in previous issues of Scaled and Failed, incremental innovation tends to be easier to execute than larger disruptions, though it tends to be less flashy. Home care is an industry primed against the typical qualities of venture-backed startups: it is a highly networked, relationship-based space that has seen a tightening regulatory grip. As a result, the space is extremely fragmented besides a few major players that snap up independent agencies and keep the local branding or act as franchises. The marketplace model both attempted could have done well, but anything tied to independent contractors and healthcare will always have a dicey regulatory environment. Honor leveraged the technology and resources that it had developed up to that point and made a B2B play with independent agencies, which was a space filled with far fewer headaches. As they were now a partner rather than competition to the status quo, Honor would have a much easier time scaling. Everyone knows the adage “If you can’t beat them, join them!” and it rings true in this case. It won’t always be possible to unseat other companies entrenched deeply in the environment with more years of experience in an industry where technology can’t solve every problem. In those cases, shifting gears and working with those partners to deliver the same outcomes to consumers that you wanted to provide can be a lot more lucrative opportunity. This is especially true in a fragmented ecosystem where each player only has a small market share and needs to compete intensely.
HomeHero’s plan to work with health systems wasn’t a bad idea overall, it just wasn’t possible in the current American healthcare environment. Although value-based healthcare is slowly gaining traction, things like prescriptions and more office visits still provide the most financial incentives. Although many instances of early intervention reduce healthcare costs over the long-term, it’s difficult to predict and quantify how much is saved, making it hard to get non-medical home care in a position for growth with healthcare partners since cost reduction wouldn’t be immediately evident. As a result of the heavy focus on quantifiable outcomes and current financial incentives, non-medical home just doesn’t suit the way American healthcare operates. Whether the way we do things right now in the US is the best way is a separate discussion that I’m underqualified to bring up (though the data indicates something is going wrong), but as it stands payors are primarily charged for services rendered, not outcomes. Healthcare is a very, very difficult space to tackle as a startup and you need to nail your fundamental assumptions about what you are doing if you want to survive. HomeHero’s fundamental assumption that hospitals would be receptive to paying for non-medical home care was flawed, and so the pivot never had a chance. Test these fundamental assumptions before your business is up and running so that you don’t waste time and capital having to pivot away from the original model to something amenable to the rigid system. Make sure that pilots and test orders have a reasonable path towards becoming long-term contracts prior to investing in them, or else you’ll have sunk even more resources into chasing a flawed fundamental assumption.
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Thanks for reading! I have a lot of family working for different parts of the medical ecosystem, so I’ve clearly developed strong opinions and would love to hear about startups attempting to take on the system. If you found this interesting, consider sharing it with friends and subscribing if you haven’t already!
Cheers,
Amil