Underwriting a potential venture investment in Levels Health

May 2024

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Overview

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   Levels represents an interesting early-stage investment opportunity. The company is looking to raise $5-10M in a friends and family Series A extension round via an SPV. Previous funding for the company includes an Andreessen Horowitz-led $12M seed round in November 2020, a $38M Series A in April 2022 ($300M post-money valuation), and a $7M Series A extension round in January 2023.

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   Combining a continuous glucose monitor (CGM) with intelligent software, Levels allows users to track their blood glucose in real time. The company provides the first means of accessing your body’s metabolic data to see the effects of diet and lifestyle decisions as they happen in real time.

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   The five entrepreneurs are scrappy and sharp. They have built a very easy-to-use, fast-growing service that taps into several strong veins: personalized direct-to-consumer healthcare and wellness, availability of increasingly inexpensive and accurate CGM devices, and targeted preventive medicine.

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   The company has developed a dedicated following and well-functioning software application that aims to reverse the trend of metabolic dysfunction. Whereas CGM device manufacturers Abbott and Dexcom target patients with acute conditions (i.e., diagnosed Type-2 diabetics), Levels quantifies the impact of dietary choices in real time for healthy everyday people to tackle metabolic dysfunction and insulin resistance before it becomes a death sentence. If eight hours of sleep is ideal, and 10,000 steps is a benchmark for physical activity, Levels intends to show people that a flat glucose curve is similarly optimal for long-term overall health.

 

Competition

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There are several direct and potential competitors to Levels. These include:

• Direct competitors (Signos, Nutrisense, January)

• CGM device manufacturers (Abbott, Dexcom, Biolinq, Ultrahuman)

• Fitness trackers (Fitbit, Whoop, Oura, Garmin)

• Big tech (Apple, Google, Amazon)

• Health insurance companies (UHG, Aetna, Blue Cross)

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   Levels appears to have a clear lead over its three direct start-up competitors. The other categories of potential competitors target patients with an acute condition by providing CGM data that is interpreted within the context of a broader diabetes management program or are not necessarily focused on metabolic health specifically. Nevertheless, the company will need to stay very focused over the next 12-24 months to ensure that it builds a rich set of features increases its defensibility and improves long term membership retention.

 

Key Risks

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Competition/defensibility – As outlined above, Levels faces significant potential competition. The company needs to improve its user experience to ensure it reduces churn and continues on its early growth trajectory. Relying on 3rd party CGM device makers like Abbott and Dexcom is inherently a suboptimal situation for a few reasons. (a) It’s expensive (b) the user-experience is sub-optimal plus data is limited, and (c) they don’t control their own destiny. Each Freestyle Libre (Abbott) lasts 28 days and retails for $198, while a G7 (Dexcom) two-pack lasts 20 days and retails for $250. That means that in hardware alone, Levels costs ~$200-$250 per month (assuming the company receives no discount). Even if Levels were to charge nothing for postage, support, technology, and more, it would still be beyond most consumers from a cost perspective. On top of that, incumbents Abbott and Dexcom could integrate lifestyle insights within their existing software layer or box Levels out by targeting non-diabetics, although this seems unlikely. Similarly, a software-focused hardware manufacturer like Ultrahuman could achieve significant scale and pose a real threat with a more integrated solution. Also of note, Apple, Amazon, and Google (Fitbit) have expressed varying degrees of interest in blood glucose monitoring. And more upstarts, like NutriSense, Veri, Lifetzr, and Supersapiens, are targeting the space. There’s no denying the need and opportunity in glucose monitoring, but trillion-dollar tech companies or billion-dollar healthcare organizations could prove to be formidable competitors (or deep-pocketed acquirers).

 

Revenue model – The current Levels experience is positioned as an aspirational brand and targets a premium audience. The app requires an annual membership and a monthly CGM subscription which is $400 upfront for the annual Levels membership plus $200 a month for every following month for the CGM devices. Level’s revenue profile can be broken down into two different types of consumers, both with three different segments that we can model on an annual basis as follows:

• Average member (estimated 80% of users) – $400 / yr membership fee ⇒ 100% margin + $800 / yr standard quarterly diagnostic kit ⇒ <5% operating margin + $100 one-time purchase for ad hoc tests ⇒ <10% operating margin = $1,300 ARPU

• Premium member (estimated 20% of users) – $400 / yr membership fee ⇒ 100% margin + $2,400 / yr ($200/mo) full diagnostic kit subscription ⇒ <5% operating margin + $1,200 in ad hoc physician consults ⇒ <10% operating margin + $1,000 in ad hoc tests ⇒ <10% operating margin = $5,000 ARPU

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This prices out many prospective members and limits the company’s growth potential. To combat this, Levels is trying to shamelessly clone Elon Musk’s famous “Secret Master Plan” that detailed Tesla’s approach to dominating the auto market. CEO Sam Corcos summarizes the strategy as: “1. Build premium software to quantify the effect of diet on metabolic health. 2. Use that money to expand awareness and scientific understanding of metabolic health; build a more affordable product. 3. Use that money to build an even more affordable product.” We don’t yet know what form would work best to achieve the second part of this plan. Specifically, how much of Levels’ value proposition is tied to CGM access and the biofeedback it provides, and can the company develop enough features at a low enough price point that is not cost prohibitive to the general population?

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   The team needs to remain laser focused on creating more long-term value to its current users. From personal experience, the marginal utility of the Levels platform declines dramatically after the first month or two in its current state. The initial insights into how different foods, exercises, and external stressors affected my metabolic health were off the charts helpful, but the rate of new insights declines precipitously. The real product opportunity is to find a way to establish continuous value so that users have a reason to keep using Levels for years to come. To combat this, Levels is building more and more features by the month to encourage long-term use. For example, users can now connect with a curated supply of nutritionists via the app, they began offering blood testing kits to give users even more information about their bodies, etc. The company may add other forms of tracking that don't require hardware changes in the future. For example, it might encourage users to enter their mood or pull in movement data. Both could be interesting when paired with blood glucose data.

 

Ultimately, Levels has yet to create a dominant membership product. For now at least, there is more work to be done.

 

Scalability – Levels will need to scale significantly from its current level for the company to achieve profitability. We need to ensure that the company can inexpensively scale orders of magnitude from its current levels. Higher volumes will unlock lower costs by amortizing fixed expenses and negotiating lower costs with device manufacturers, a richer market position, stronger network effects from the community, improving access, and over the longer term positively influencing insurers, health systems, food companies, and regulation to positively impact the metabolic health crisis.

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   From a business standpoint, the membership fee pays for Levels’ internal costs, including its employees, operations, marketing, and sales costs. While still in its early phase, costs will be higher than Levels’ membership revenue since the membership base is small, and costs are high and fixed. However, every incremental member will add more revenue than cost as the company scales. As the membership base grows, Levels will become profitable if it can continue to use its existing capital efficiently, minimize burn, and show real progress if an additional raise is necessary in the near term. The variable costs of additional products (i.e., CGMs) and services (i.e., blood testing) are paid for a la carte by the member, meaning Levels doesn’t make or lose significant additional money on those offerings. With higher volumes, Levels can work with its suppliers to get members access to CGMs, testing, and other products at prices that would be difficult to get on their own.

 

Exit

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   I cannot point to many high comparable exit valuations. A few comparable companies include Fitbit, which was acquired by Google for $2.1 billion in November 2019, and MyFitnessPal, which Under Armor acquired in 2015 for $475 million and later sold to private equity firm Francisco Partners for $345 million in 2020. Another comparable is Peloton, which IPO’d in September 2019 at a $8.1 billion valuation, and is now trading for less than $1.4 billion.

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   There are some other examples of businesses that have built successful membership programs for health and fitness tracking, including Oura and Whoop. While these companies deal with different types of fitness and biomarker tracking, there are some similarities with Levels. None of these companies have had an exit. Oura most recently closed its most recent Series C fundraising round in 2022 at a $2.6 billion valuation and in 2021 Whoop raised $200 million in a Series F funding round at a $3.6 billion valuation led by SoftBank.

 

Recommendation

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   Pass on the opportunity. Levels has a great head start and the founding team has hit on several promising themes – an increased consumer focus on health plus the quantified self and the “high-performance lifestyle” movement. It started with fitness (Fitbit and Whoop), then expanded to sleep (Oura, EightSleep), meditation (Calm, Headspace, Waking Up), and brain health (Sensate, Nurosym, Pulsetto, Fisher Wallace). Metabolic health is a natural next step, and Levels is well positioned to continue building its substantial lead but with ARR of only ~$4M, the proposed $300M post-money valuation is too rich considering growth has slowed pretty significantly in 2023 (topline grew 104% in 2022 vs. 57% in 2023).  

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   The company has not yet hit adequate scale with its planned transition from "Levels is CGM software" to "Levels is software that uses CGM, bloodwork, and other tools for behavior change,” but my checks indicated strong demand for a product that can successfully make sense of the conflicting messaging around nutrition and what food is actually “healthy” for you.

 

   The management team is incredibly talented, but I think they would benefit from augmenting its growth team with someone that has successfully built a leading consumer-focused health and wellness membership program.

 

Bottom line: They raised too much money at too rich a valuation at the peak of the market and they are now paying the price for it. Rooting for the team and the business as I am a very satisfied customer, but as of right now my best guess is that Levels saturated the premium market, over-hired after over-raising, and was too early in answering the "Why Now?" question. Once CGM devices for non-diabetics are either (a) reimbursable through insurance, or (b) cheaper than $100 a month via cash pay, I think there is a massive opportunity for software like Levels has created. But until then it is just too cost prohibitive to be anything more than a niche product for wealthy biohackers.

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Additional Resources

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Team Bios

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• Sam Corcos (CarDash, YC) CEO – Background is software engineering. Co-founder of Sightline Maps, CarDash (Y Combinator S17), guest lecturer at Stanford, author of Learn Phoenix, angel investor.

• Josh Clemente (SpaceX, Hyperloop), President – Lead team that developed the pressurized life support systems aboard SpaceX’s first astronaut-flown, including Oxygen breathing system, cabin pressure, and fire controls.

• Casey Means, MD (Stanford), Chief Medical Officer – Stanford MD, Associate Editor of the International Journal of Disease Reversal and Prevention, research positions at the NIH, Stanford School of Medicine, and NYU.

• Andrew Conner (Google), Engineering Lead – Led engineering for Google Voice for G Suite, helped build a startup, designed risk models, and played with mathematics. Graduated from Mercer University with a B.S. in mathematics.

• David Flinner (Google), Head of Product – Former PM at Google, B.S. in Psychology from Yale.

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Technology Overview

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   Levels provides access to CGMs through a doctor referral network, and anyone who is approved for a prescription – based on meeting specific health criteria – can access a device. A regulatory change has helped this — CGMs are no longer Class III and are more reasonably categorized as Class II. The device itself is not Levels' creation. As you might expect, making a medical sensor from scratch not only takes considerable time but has a lengthy approval process. Part of Levels' innovation is improving the consumer experience by 10 to 100x with software alone. To that end, Levels integrates with pre-existing device makers, bringing the data they collect into its app. Via the Levels interface, you can log your food, run "challenges" (e.g., Try eating brown and white rice to see how your body reacts differently), and receive recommendations. Levels' software helps identify which foods may spike your blood sugar and how you might alter your habits to improve your health. It also provides an "overall" daily score of your metabolic health.

 

   As someone that has used the product for the past month, it is a smooth, elegant experience that feels like the future. Even more than many other quantified health products, there's a satisfyingly visual "cause-and-effect" that encourages better decision-making. For example, I know my blood sugar rockets if I eat white rice. Since it's a food I don't care much about, it's become easy to avoid or replace.

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   It can be empowering to realize that your metabolic health is in your control. It can also be overwhelming. Since a number of factors affect your metabolism, Levels helps you set goals around manageable steps you can take each day to improve your health across three domains: food, sleep, and exercise. Then they help you reach those goals through simple accountability and insights, like using a Habit Loop to track your daily steps. Since physical activity greatly impacts your glucose stability, the Levels app factors this information into the insights you receive, offering positive encouragement for workouts. It also lets you set goals and track progress around things like steps or high-intensity training.

 

Market Overview

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The number of Americans who want to track and improve their health is at an all-time high. The fitness tracker market is expected to top $92B in 2021. 1 in 5 Americans use a smartwatch or fitness tracker.

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Personalized health & wellness – $8B

This market contains some of the fastest growing segments in Personalized Health, led by genetic testing platforms and personalized biotesting products from Everlywell and Labcorp. This has led to the proliferation of direct-to-consumer healthcare technology companies that empower people to take ownership over their long-term health. This is the most relevant market to target initially. Customers have shown willingness to pay a premium for personalized insights, and are interested in optimizing diet, energy levels, sleep, longevity, and subjective well-being. This segment finds significant value from using CGMs accompanied with data insights, and most closely associates Levels with other high-end wellness products. Many are interested in periodic re-evaluations to track longer term changes as they modify behaviors.

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Weight loss – $200B

In this large market, the fastest growing innovators are providing personalized insights, centered around diet. Usage of activity trackers and social accountability is quickly growing. Existing products do not measure metabolic health to support their customers. Using data from CGMs, existing wearables, and diet tracking, Levels will be able to enter the market ahead of incumbent companies, and synthesize multivariate input to provide more actionable insights. Level’s blog post on weight loss has also seen 5x more traffic than any other post they’ve published. Importantly, this segment is social. Several existing companies, such as Weight Watchers and Noom, use social accountability to improve outcomes. This market contains customers sensitive to a wide variety of prices. Importantly, Levels’ early cohorts of weight loss customers have expressed interest in continual monitoring for accountability.

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Wearables: $58B

The wearables market has continued to grow rapidly, and extends far beyond “dataphile” early adopters. Now, nearly 1 in 6 Americans currently own a smartwatch. Based on ad testing, the appetite for novel wearables is increasing. These customers are interested in real-time metabolic insights to improve their lifestyle and well-being. This market often compares CGM usage to other wearables, so tends to be more price sensitive. Based on my research, lower priced hardware would expand this market significantly. Many of these people are interested in long-term usage, combining metabolic insights with other wearables they use (primarily sleep and activity tracking). Much of the future insights for wearables will come from distilling insights out of multiple data inputs. Early indications from some segments, like performance athletes and the premium wellness (e.g. Oura) point to compelling value in insights derived across standard wearable metrics (heart rate based) as well as emerging analytes (glucose, ketones, lactate, etc).

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Corporate wellness: $57B

By providing actionable insights ahead of disease downstream of metabolic dysfunction, Levels offers compelling cost-savings to healthcare payers. Beginning with sponsored activity trackers, Corporate Wellness Programs are starting to include products that show meaningful improvements to long-term health outcomes. For example, in 2019, Fitbit achieved $100m in corporate wellness revenue and the meditation app Headspace sold $40m in subscriptions to wellness programs based on clinical research showing increased employee effectiveness. Level’s medical advisory board has reviewed research with strong evidence for significant healthcare cost reduction potential driven by metabolic health improvements. The company is running pilots to establish bounds around long term efficacy of targeted metabolic insights, and have close connections to teams that have expanded in this market effectively.

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Sports performance: $12B

This market is uniquely interesting for Levels due to brand positioning, marketing, and the value that the platform provides. Levels has early customers ranging from amateur CrossFit enthusiasts to professional athletes who are interested in gaining a performance edge in their sport. Levels insights are currently supporting distance runners and Olympic hopefuls reach their athletic goals. Associating the Levels brand with performance athletes also establishes the company as a market leader (see blog post), and has spill-over effects to other demographics. Levels is running pilots with athletes who are interested in endorsing and promoting Levels publicly, which may serve as a cost-effective distribution channel. This segment recognizes a premium value in metabolic insights, and has demonstrated willingness to pay at a high price point.

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Comparable Companies

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There are a few companies that are worth considering, both in terms of their ability to scale and their market capture. These are companies that either created a new and similar market or they are companies that have sold into similar markets that we would be targeting.

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• 23andMe ($300 million annual sales). Before 23andMe and Ancestry DNA, there was no market for D2C genetic testing, either for health or for ancestry. They created the market by providing novel insights to customers, and educated them on the benefits of knowing genetic risks. They effectively scaled from top-of-market to broad adoption. Both Levels and at-home genetic testing are used as a self-pay health assessment and they are within an order of magnitude of cost. 23andMe ($300 million annual sales) originally released their product at $999, which they reduced over time to where it stands today at $99 as they transitioned to broad adoption. In contrast to Levels, these services are inherently one-time-use products.

• Noom ($250 million annual sales). Noom is a subscription weight loss program that focuses on behavior change. Their revenues have increased massively over the last couple years, built on recurring $50/month subscriptions. This demonstrated a market willingness to pay $50/mo for a weight loss program that is software-only. Levels would inherently be able to provide better feedback mechanisms based on real-time biological data, and so could meaningfully improve outcomes at a similar price.

• Fitbit ($1.2 billion annual sales). Health-centric wearable hardware, like Fitbit, have sustained over 15% CAGR in recent years. We’re seeing customer interest from people seeking the next wearable to improve wellness and performance. Levels compliments existing activity and sleep tracking hardware, and will work with existing platforms to provide multivariate personalized insights.

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