How Levels Health will change the world (Investment Profile)

We’re in the middle of a national health crisis. The US has become riddled with diabetes, obesity, and overall metabolic dysfunction. Levels Health is a promising company with the ambitious goal of making radical behavioral changes easier to understand & implement. I broke down the startup in the format of a VC investment memo, and later added some of me geeking out on Levels’ potential :)

Executive Summary

Vision: Levels Health is an early stage bio-wearable system that uses a continuous glucose monitor (CGM) to give users real time feedback on how diet affects their health. The team’s grand vision is to create data-driven behavioral changes that address pressing health issues around diabetes/prediabetes, insulin resistance, and obesity through the lens of metabolic fitness.

Problem: In the United States more than 120 million people are diabetic or prediabetic, of which only 16% of prediabetics are aware of their condition. Additionally seven of the ten leading causes of death in the US are linked to metabolic dysfunction, a statistic that unveils the need for significant intervention.

Product: The wearable monitor brings light to a painfully opaque issue. Levels provides an objective approach with closed loop systems, personalized feedback, and awareness / accountability regarding the direct impacts of diet on one’s health. Building such awareness and providing tools for behavioral change make great steps in addressing the health problems prevalent globally (especially in the US).

Founders: The team is stacked with a wide range of experiences and previous successes, as well as backgrounds that address the ever-important “Why you” question. Sam Corcos previously founded CarDash, Y Combinator S’17 (acquired by RepairSmith); Josh Clemente was the Lead Life Support Systems Engineer at SpaceX, a Crossfit L2 Trainer, and Senior Engineer at Hyperloop One; Casey Means, MD is a Stanford MD biomedical researcher, surgeon, and metabolic health evangelist; David Flinner led product management at Google for consumer & international payment systems; and Andrew Conner led engineering for Google Voice for G Suite, previously VP Engineering at Kifi (acquired by Google).

Market(s): Levels has the potential to play in numerous markets, making the TAM assumption a bit tricky. To start off with incumbent tech, the Global CGM market is estimated to reach $12.2 billion by 2026, up healthily from $1.8 billion in 2019. Diabetic-related alternatives to CGMs, such as traditional finger-pricking tools, are potential additions on top of the existing market. For some more context 2019 global diabetes-related health expenditures were $760 billion, positioning CGMs as a promising emerging market adjacent to a massive one.

As it’s main “product” is the app and data-tracking capabilities, Levels could additionally be placed into the fitness app and fitness tracker markets. Apps are projected to grow to ~$15 billion by 2027, while the fitness tracker market is skyrocketing as demand for wearables drives expected growth to ~$92 billion by 2027.

Business: This section is one I can’t unfortunately populate at the moment as Levels is obviously a private company, but let’s get creative here. The product comes in at $399 for a 28-day kit which utilizes two 14-day sensors; which is not yet commercially available as they’re still in beta testing (2021 Q1 is expected launch). In September 2020 Josh mentioned on a podcast that the waiting list was at a very impressive 31,000…especially since the current price tag puts Levels in a premium category. What’s even more impressive is that as of December there are ~50,000 people on the waiting list. Very rough numbers here but lets estimate that given 50,000/31,000=1.6x growth over 3 months. Extrapolate this rate to a year, which in my opinion is conservative given recent funding and upcoming commercial launch, and you get (1.6*4)*31,000= ~200,000 monthly users by September 2021.

Now that we did those back of the napkin calculations it’s time to throw in another factor, recurring revenue. The Levels model requires no long-term commitment but, based on early signs and customer feedback via social media, it seems many would continue their subscription after the first month. ***Would be very interesting to run a cohort or growth accounting analysis on their beta test to better understand customer behavior.

Quickly comparing Levels to competition, Dexcom is the largest incumbent CGM provider with a 2020E revenue of $1.9 billion and an impressive 10-year CAGR of 44%. They’ve also estimated a CGM market penetration of only 27% in the most recent investor presentation, showing just how promising the opportunity for disrupters like Levels to come in, and for the TAM to see continued growth in the coming years.

Customer Feedback: As mentioned Levels is still in its pre-launch phase. That being said they’ve already built an online community that’s eerily similar to CrossFit or Peloton. In addition to the lengthy waitlist there are promising qualitative indicators of the company’s early traction. A few key signs of this are the engagement they get on social, mentions or interviews on major podcasts, and the use / documentation of Levels by fitness industry stars such as Dom D’agostino. In addition the team spends extensive time sharing articles on the Levels Blog, which consists of very helpful research syntheses on the topic of metabolic health. Their focus on providing value is gaining a loyal and informed customer base.

Deal/Previous Funding: On Nov. 17th of this year Levels announced their $12M seed round led by Andreessen Horowitz, including angels Marc Randolph (co-founder of Netflix), Dick Costolo (ex-CEO of Twitter), Michael Arrington (Founder of TechCrunch), Matt Dellavedova (NBA, Cavaliers) and more. ***Again this is theoretical so can’t populate current investment round.

Probability Weighted ROI: See the decision tree below. Key assumptions are $70M post-money valuation, 20% stake, 12.5x average EV/Revenue (from competitor cohort). I used revenue numbers and other financial inputs from competitors as rough proxies on the potential of Levels.

Unfortunately given the unavailability of real financials (from Levels) to perform a cohort analysis, scenario analysis, look at key metrics, etc, there isn’t much hard data to populate this section. But like other areas, I used my best judgment and landed on PWROI as the most helpful “opportunity evaluation” method.

Recommendation/Verdict: I recommend to invest. Founder-market-fit is very strong, team has extensive experience in previous successful startups, and is driven to solve a massive problem which has clear demand. Early traction is also very promising.

***Do I have the funding or connections to currently invest millions of dollars in Levels? Absolutely not! That being said I refuse to miss out on learning opportunities for such reasons. I personally employ a paper trading-like practice to private investments by performing a diligence on opportunities (through AngelList or similar sites) and logging hypothetical decisions in an excel sheet, with an overview of key factors and the valuation / investment size. My intention is to keep up to date with these startups down the road, see if they had success, if they failed for worries I outlined, potential return rates based on new rounds/liquidity events, and start collecting data on my decisions.

Personal

In my previous article Metabolic Flexibility & Fasting I discussed my own personal journey with nutrition. From a multiple sport athlete, fitness model, to management consultant I’ve had to adapt my eating habits to a variety of lifestyles. While I wont fully rewrite the previous article, I’m willing to say one thing with absolute certainty:

The US health situation we are in is dire, and a drastic behavioral change is needed.

A major indicator of metabolic fitness is your blood-glucose-levels in response to food intake. Tracking this is historically done only for diabetics but, given the current state of American health and rapidly growing sugar consumption, CGMs clearly have applications among the general population. The following excerpt comes from Casey & Sam’s (founding team) post on The Levels Theory of Behavioral Change :

“Glucose is not a panacea for metabolic health, but it’s the single most important thing to track for the 80%+ percent of the population who exhibit signs of metabolic dysfunction, and more than 50% with overt insulin resistance. It is also the only blood based biomarker that is able to be monitored at home continuously, in the “background,” without being initiated by the user/patient. This is what makes it a great place to start.”

It’s clear that food intake is a main driver of someone’s glucose response. What’s interesting in addition to this, and further proved by Levels’ early findings, is that stress, sleep, and exercise can play a large role in glucose responses & metabolic functions. Increased cortisol levels from being in a stressed state will worsen your blood-glucose response, getting 4 hours per night of sleep as opposed to 8 has shown a 40% lower rate of glucose clearance from the blood, and overexertion from intense exercise sessions decreases your ability to correctly allocate food (leading primarily to more stored visceral fat). Therefore it’s not enough to just track exercise, sleep, HRV, or other common fitness tracking methods. The body is too complex for a simple answer; we need to look at internal responses in addition to the rest of these data sources.

The Solution

If you think about the utility of bio-wearables the growing hype around this industry makes complete sense. The explosion of data and a “smart” world is unlike anything we’ve seen previously. From analog to digital, Blockbuster to Netflix, bookstores to Amazon, our momentum is pummeling towards a deeply connected world. Alongside many these technological advances we’ve shot our primal selves in the foot a bit. Food scarcity is no longer an issue as it used to be; you can get a few thousand calories for <$5 at most grocery stores. In addition to such irrational supply levels, the foods themselves have changed. Hydrogenated, processed, and unnatural foods are the new normal. Some of these things are so addicting that children raised on such foods don’t stand much of a chance.

Levels has taken the great approach of minimizing cognitive overhead through the app’s incredible UI & UX. Rather than getting a bunch of raw data, users are presented with digestible “scores” of 1–10 for each meal and then receive a daily score as a % out of 100% (similar to a test). These scores illuminate cause & effect relationships and allow for simple trend analyses across days/weeks/months. To top it all off, users get personalized reports and feedback on a weekly basis along with an in-depth review at the end of the month. Gamifying the process in such a way will, in my opinion, drive radical user adoption. Just search Levels on Instagram, people love sharing their meal responses and daily victories/shortcomings with friends. See below some example outputs from the app.

Daily score on the left, and individual meal score on the right.

While I could go on forever about this topic I’ll spare you my rambling and quickly share opinions I’ve developed as I researched this topic for the last few weeks.

Pressing thoughts I have on the trajectory of Levels:

• We’re seeing self-quantification methods like Whoop, Fitbit, and Apple Watch gain tremendous traction. Tracking sleep and movement are prevalent now, but gathering data on dietary choices has been omitted thus far. Nutrition advice is already so misguided, and often with a demonizing or one-size-fits-all approach, which makes Levels even more necessary.
• Telehealth (accelerated by COVID) is a promising convergent trend for the Levels’ applications. As we shift away from in-person doctor visits, your PCP having constant access to health data via a CGM will prove to be invaluable in their ability to treat patients. Even before the shift to digital, having one data point per year (traditional check up) was a primitive method compared to the ability to collect data every couple minutes and then aggregate these trends to gain better insights.
• The company has said they’re in the “Tesla Roadster phase” of the business now — meaning that the first iteration of Levels is a luxury model which they’ll use to learn from and fund further research, eventually getting a lower unit cost. Very promising, and telling that Josh learned a lot from his time with Elon!
• The TAM mentioned for CGM devices could very well be way off a few years from now. A previous example from Uber came into my mind when researching Levels as the behavioral change could be so great that it’s application far transcends the current CGM market. Read Bill Gurley’s How to Miss by a Mile to read more about Uber’s TAM.
• The team has laid out their Secret master plan on the Levels Blog. If you read it you may feel, like me, that this is much bigger than a CGM company. The future implications of such a tracking software being combined with different hardware is interesting.
• “Band-aid” products or services, that address a pressing issue in the world, typically gain traction easier than “supplements.” Give that Levels is in-line with large macro trends towards a connected world and health, the positioning is exciting.
• Initial challenges observed include the ability of patients to get other CGMs at a discounted price via insurance providers, strong relationships that incumbents have developed with medical providers over 50+ years in business, price competition of new players & incumbents that may shrink gross margins, and potential alternative such as smart insulin pens/automatic dosing mechanisms that would take a significant piece of the diabetes related market.
• I see outside of the US (OUS) as a promising market for new players, given the incumbents like Dexcom or Abbott are either not established at all or in the very early stages of market penetration. We’re seeing similar demand based on common health issues in Latin America, EMEA, and APAC (which expects the highest CAGR of 26.9 % during 2019–2026)
• Levels Blog posts you need to read: Behavior Change , Understanding Weight Loss , Ultimate Guide to Metabolic Fitness , Josh’s story.
• An important quote “Too many smart people focus on small problems. Levels has picked something big and important to solve — and I love it.” Marc Randolph (Netflix) on investing in Levels.

Conclusion

After reaching out to Josh I was able to get myself in on the beta testing of Levels. My kit just arrived and it’s hard for me to contain my excitement! I had previously tried to get a CGM prescription from my physician when these things started popping up in the fitness community a few years ago. I was very quickly told not to worry about that, as a healthy college athlete in his 20s. Did this crush my ability to find an ideal diet? No, but it did make the process far more difficult and time consuming.

A closed loop system that allows for cause/effect transparency would have saved me years of trial and error, elimination diets (which are lengthy), and in general a lot of frustration. I first read nutritional studies like a mad-man and, once I was comfortable with my understanding of a concept, began implementing it in my life. What I wasn’t aware of is that two people can eat the same exact foods, and have equal and opposite glucose reactions. As you may imagine this led to times of extreme confusion. Spending hours in heavy scientific text only to find out that the study’s results aren’t relevant to you is not ideal.

My 28-day kit recently arrived in the mail. Very excited to join the Levels family, and will be documenting my experience with the beta program!