(13) Holding Companies as a Long Term Funding Model for Mental Health Tech.

This week's top story:

• The Holding Company to rule them all. I draft out my thesis for a type of key player in the mental health tech market that I think will emerge in the next 10 years to consolidate the market and enable further growth. It is modelled on a company that lost 80% of it's value since IPO, so I assume there will be potential for disagreement.

News & Research of the week:

• A tool to help you train your working memory.
• How researchers try to break AI-assisted peer review processes.
• Founder of Woebot breaks down why Woebot broke down.

A few weeks back I wrote about the issue of VC funding in mental health tech. I made a model calculation showing specifically for a DiGA why the timelines and expectations of venture capital simply don’t align the the product cycle reality. You can read it here.

Today I want to expand on the issue and draft out what I think would be a sensible alternative to this currently very popular and (for lack of a better alternative) necessary funding model. So how could a financial partner's incentives align better?

Long term focus. The investor should not aim to grow and sell a valuable but potentially not profitable company. Rather, the focus should be on growing and either turning a solution profitable or killing it. Making money off of treating sickness might be a disturbing thought at first, but profits are what guarantee continuity and give the operators at a company the space to make the right decisions regarding privacy, security and continued research.

That's why I think a specialized large scale holding company could work out well. I have one very specific model company in mind: Tiny, a $500M+ Canadian holding company built out of a design agency by Andrew Wilkinson. (You could also take Berkshire Hathaway or Constellation Software as blueprints but that would be more boring.)

So, what all makes this business model great?

The TLDR: Wilkinson built a self‑funded, tech‑light holding company with over 30 profitable digital firms. Tiny pulls in roughly US $200 million in sales per year.

Andrew Wilkinson is a Canadian entrepreneur who founded MetaLab in 2006. It is a design agency known for clients like Slack, Google, and Shopify. In 2007, he launched Tiny taking the agency profits and creating a holding company focussed on acquiring profitable internet businesses.

Tiny’s model is buy‑and‑hold. It acquires established online businesses (SaaS tools, niche marketplaces, communities, job boards, e-commerce, ...) with at least half‑a‑million dollars in annual profit. Acquired firms retain autonomy under strong leadership, with Tiny applying light‑touch shared services and strategic optimization. Profit of portfolio companies flows up to the holding.

Unlike private equity, it doesn’t flip companies. Unlike venture capital, it doesn’t chase growth at all costs. It holds businesses indefinitely and focuses on steady, compounding cash flow.

Tiny owns over 30 companies. You might know some of them: Dribbble, Designer News, We Work Remotely, AeroPress, Creative Market, MetaLab,…

A large chunk of the total company revenue still comes from MetaLab. (Keep this in mind for the disadvantages section.)

The money is made at the time of buying, not through pushing for an aggressive sale. The company also tries its hands at turnarounds. In most cases, they buy stable cash flow, though.

This sucks in many ways.

All that sounds beautiful, right? I want to make clear that the company is not a perfect model at all. In 2023 Tiny went public via reverse‑merger with WeCommerce. The stock lost roughly 80% of its value since the “IPO”. Ouch. Why that I hear you ask? Well, here are some reasons I could identify:

• The company is massively in debt. Tiny has been working on reducing its massive debt pile, but is still above a 2.5x leverage ratio. Combine this with slow and volatile single-digit revenue growth, and you have a ticking time bomb in the eyes of investors. The company is still valued quite high in light of the recent financial developments. The holding company doing turnarounds effectively is in a turnaround itself right now.
• Scalability is questionable. MetaLabs is still a key revenue driver of the company, even almost 20 years in. This could either be because it is a great business, or because the holding is bad at / unsuccessfully buying and integrating new companies. There is a strong concentration risk here. Whilst this might be an issue at the portfolio level in terms of risk exposure, it makes sense in light of the funding model. The holding was grown out of MetaLabs and still does continue to do so.
• Key person risk. Tiny allows founders to operate quite independently within the portfolio. Whilst they pride themselves in being good at picking talent to run their portfolio companies, they don't really have an edge over a good recruiting firm. They hire for the business as outsiders, in the sense that they don't run it day to day. Especially in SMEs, founders or long-standing executives leaving is a significant issue. It might necessitate rebuilding the whole workflows of the company.
• There is no real moat. Betting on Tiny means that you think that they are better at realizing financial value from acquiring companies than other investors. Berkshire Hathaway was successful at this. But will Tiny's tiny 3-person holding be so too?

So there are five core risks:

• Risky financing.
• Questionable scalability.
• Key person risk.
• Belief-based moat.

Let's look at how to fix them.

Putting the rose glasses back on.

This dissection makes one thing clear: this ain't no perfect blueprint for what I envision. So, after tearing it down, let's reconstruct and add some provisions to make this business case more bulletproof.

So here is how I envision the story for the mental health space:

• You start with a profitable company. Probably one of the many online therapy providers. They seem like the most stable business model in mental health tech to me. Careful though: don't squeeze margins like BetterHelp! Alternatively, mindfullness or meditation apps, mainly catering to sub-clinical needs might be an interesting cashflow source.
• Grow step by step. Tiny started out in 2007, and still has quite the limited amount of portfolio companies. Being very selective about acquistion targets, especially with the first few portfolio companies that might sink the whole company, this makes sense. The first companies would need to be profitable already, once established, turnaround candidates could also be considered.
• Keep the holding team small. This is not a VC fund that can coast along on the carry from the current fund with a 10 year runtime. As little cash as possible should leak to the holding initially.

Until here it is more or less copying the Tiny model. Now we start fixing it:

• Integrate semi-tightly with portfolio companies. Staying in one regulatory space and this one niche of mental health tech, there is only so many different subsets of core technologies startups are built on. Most of them might need a health insurance billing system, or a DiGA-certifiable app platform ready to scale. Fancy a secure AI backend? Here you go. Need integration with the 10 most common EHR systems? We built (and maintain) that for 10+ companies already.
  Problem solved: scalability.
• Avoid public markets. A mental health equvalent of this holding company would inherently be smaller than Tiny. Many companies don't grow into the milllions of revenue in this space. Acqusition targets could start as small as mid-5-figure revenue. Avoiding public markets would remove short term success pressure, the big advantage you might notice me pushing me for througout this article. Of course, we potentially introduce a new issue: funding sources. If we don't want to massively leverage with debt, nor take IPO money, this will definitely limit growth. But we are in the long game anyways, right?
  Problems solved: external accountability and short term pressure.
• Build and leverage the brand of continuity. Time to actually buy some other companies! In the healthcare space, acquistions are frowned upon. Health startups end up with the "evil" players of the space: pharma giants, established players with rogue business models, etc. Being able to offer an alterantive to founders and their users that is offering to take over and maintain the existing product, fighting the good cause, is a way easier sell. The long-term mission-driven narrative has a higher success probabilty with such a holding company than with a data hungry acquirer, PE-shark, or VC. Their return orientation is more short term. The holding is in no hurry.
  • This branding should also allow for more favorable deals. The holding might be able to offer less than those existing acquirers if founders and users trust the narrative. For potential portfolio companies, there should be high interest in selling to a third party that is neither soulless private equity, nor soulless pharma. The financial incentives would be aligned with those of mission driven startups: Make it sustainable to be around for a long time to help many people.
    Problem solved: belief based moat. (replaced for value based moat)
• Allow features to live. There are many companies building what might ultimately end up as a feature in another product. You are building a custom AI mental health companion? Great, but how will you outsell against a employer health platform that simply uses a slightly modified ChatGPT instance? Combining such companies in a holding, or enabling cross-company collaboration within the holding might unlock a path for individual companies to survive and thrive for longer without needing to consoldiate into larger players. This would allow for mission driven founders to keep steering the boat, retaining controll and continuing work on their vision.
  Problem mitigated: key person risk & scalability.

Closing thoughts.

Even tough Tiny is publically traded, it could allow its shareprice to tumble for a few years. The biggest shareholders are the operators of the holding, taking the grunt of the devaluation. Their large exposure shows the commitment to the business model and the ability to sail rough waters for a few years.

Potential synergies (eg knowing how to get a DiGA to market as fast as possible) might make indications with fewer patients viable economically too. Business cases that don't work when build in isolation might make sense when using off-the-shelf core technology and drawing on successful companies and their executives within the ecosystem for consults and advice.

Aggreagting more companies might improve leverage in payer negotations. After getting a foot in the door with a health insurer, the next risk is getting that foot chopped off. When relationships exist already and the holding can potentially bundle different products into one deal, returns might be improved.

This holding company I drafted out could step in once a pre-seed to series A funded company start hitting limits in scalability or market size. I have to admit though, that early stage is a solved problem in Europe, where later stages are far from. Competition in those early stages is tough, so establishing a holding would be the toughest part. Growing it with the portfolio companies and getting into later series companies might be the easier part.

I know that I am just babbeling and dreaming here. But I truly see this as a realistic long term outcome for the space in a currently fragemented market like Germany.

I. Relearn solving though problems.

Do you think you have good memory? Me neither. So maybe I can interest you in this online n-back task to help you get those gears turning again?

Take care of your meta mental health and get your working memory back up to speed in this AI generated, slop-dominated, world of mindless work and existance.

II. Think twice before you trust a peer-reviewed paper.

How much can you really trust peer-reviewed papers? A peer review massively elevates the authority of a paper. And like any game for recognition, the rules get bent here too. Researchers are no saints when it comes to outshining others. This article breaks down how researchers from major universities hid AI-readable instructions in their submitted papers prompting AI to give a good review.

III. Founder of Woebot breaks down why Woebot broke down.

In this interview, CEO Alison Darcy explains that Woebot shut down. Getting FDA approval turned out to be a nightmare. Interesting read for any founder building digital mental health therapeutics using AI.

Alright, that's it for the week!

Best

Friederich

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