Schafer: Venture capitalists behind RedBrick Health in Minneapolis showing patience

  • Article by: LEE SCHAFER , Star Tribune
  • Updated: May 28, 2013 - 10:57 PM

Venture capitalists want the companies they fund to succeed famously — or at least fail very fast.

Putting more cash than planned into an investment just drives down returns. So does the passage of time, which is why start-ups rarely are given a slow, cash-consuming ramp.

RedBrick Health in Minneapolis appears to be an exception.

When its last venture round of $14 million closed this spring, it brought the total to about $75 million in venture money invested into RedBrick, with the first round dating to 2006. RedBrick provides a service that helps people improve their health, selling now mostly to large employers.

Seven years is a long time in the venture business, and RedBrick’s investors include the top players Versant Ventures, Highland Capital Partners and Kleiner Perkins Caufield & Byers, firms that have closed down plenty of portfolio companies.

Maybe just one of RedBrick CEO Dan Ryan’s slides in his corporate presentation is enough to explain why they are hanging in there. The slide on market potential has a circle that represents services to self-insured large employers — $2 billion. That’s a major opportunity, but it’s dwarfed by three larger circles. The biggest of the labels is the market for consumers. It’s $50-plus billion.

That number will keep the attention of venture capitalists.

Ryan, who became CEO in 2011, said there’s no pressure from his investors to engineer a transaction that would allow them to turn their investments into cash, a so-called exit.

“They were the ones that put in the last round,” he said. “That’s a better buying sign than anything.”

Ryan is clearly planning for the recent investment to be the last, and he said that every one of RedBrick’s 150 employees knows what the acronym CFBE means — cash flow break even. His plan is for that to occur at the end of this year, when the company should be at an annual revenue run rate of more than $50 million.

“It’s not like every [venture] dollar was spent perfectly well, as most start-ups don’t,” Ryan said. “But it’s also not like I’m going to do an Instagram and have three software guys working on it for a week. There are a lot of elements here, and it’s a little bit more expensive business to get going.”

RedBrick sells a service to large employers that promises to reduce employee health care costs. RedBrick’s original vision was a bit grander, but now it acts mostly like a software-as-a-service company. Ryan previously served as a senior executive with software firms including Stellent and Secure Computing.

RedBrick competes with a host of others, from health insurers like UnitedHealth Group and operators of health club chains to start-ups with a similar technology focus.

Ryan said RedBrick’s competitive advantage starts at the front end, with a health assessment for new participants that RedBrick has taken pains to make easy to fill out. The outcome Ryan wants he calls “engagement,” meaning active participation in a program to improve health. RedBrick pitches its engagement rates as two to five times greater than what came out of an industry survey of 180 employers using other services.

As participants are enrolled, assessed and advised on their health, they move on to a personalized program of recommendations for how to improve it, amassing points along the way that can lead to financial rewards. As modifying behavior is quite the challenge, the idea is to make it easy to choose to take some small, positive steps: Even if you don’t decide to train for a triathlon, how about going for a walk?

The RedBrick system changes recommendations as it gets to know the participant. Ryan said it’s much like how Netflix recommends new titles for its customers based upon the movies its customers have just watched or rated as enjoyable.

RedBrick’s pitch has worked with a number of big, self-insured employers that seek lower health care costs if employees manage to make themselves healthier.

Because the business argument for using the likes of RedBrick is about money and not really health, RedBrick has published a white paper that concluded it saved an average of $287 in increased productivity and $325 on health care expenditures in 2012 — a total average savings of $612 per participant per year.

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