WellTech Valuation: Forecasting the HealthWave.Center’s Scalability
First published in TechInvest Sept 25, 2020.
Technology expansion in the wellness industry has only begun, and the industry itself is in its infant stage. Nevertheless, the global wellness market is booming and technology plays a tremendous role in the $4.5 trillion industry. Estimating the actual fair value of new WellTech innovative projects is a crucial task for investors today, and it is not simple. ‘Classical’ valuation methods based on the tangible assets’ assessment do not fit into an intangible structure and some special features of WellTech businesses. PROFIT™ is a useful addition to well-known valuation methods because it takes into account specifics of WellTech projects. A case study demonstrates the comparative valuations of the exemplary HealthWave.Center project by the Venture Capital and PROFIT™ methods.
Mapping WellTech Landscape
The wellness industry provides us with products and services that promote wellness rather than heal illness. Information technology impacts all aspects of our wellness through devices, apps, and algorithms that help to search for wellness related information, buy wellness products online, create new wellness routine and healthily, and form more healthy both physically and mentally lifestyle.
WellTech is a technology ecosystem to serve the wellness market. The latter has several specifics that reflect technology impact:
- Increased consumers use the internet as the main source of wellness knowledge.
- A growing interest in non-medical home-based wellness therapies, appropriate products, and services.
- Customers want more transparency and trust to use wellness products and services safely, effectively, and without special training.
To meet the market demand, new online platforms employ technology to take part in building the WellTech ecosystem via:
- Starting a race for innovative natural products for wellness that demonstrate additional value to customers (Physical Products).
- Creating knowledge bases and search algorithms to help customers to comprehend their wellness concerns and find solutions (Self-service Algorithms).
- Developing software and hardware to collect information about customers’ preferences and wellness routine (IoT solutions).
- Creating a natural language interface to guide customers through the whole pre-during-and after purchase processes (AI-enabled ChatBots and Virtual Assistants).
Start-ups that operate in the WellTech segment are unlike any traditional businesses. They use new business models, innovative algorithms, and appropriate software, create new value chains and build unknown before customer engagement. In this way, start-ups can transform themselves into scale-ups (2%) or die (98%). Inevitably, founders and investors have their points of view on the prospective WellTech business, but valuation is a method to intersect them.
Valuating WellTech Businesses Scalability
The capital structure also has essential specifics in WellTech businesses. It is predominantly intellectual capital consists of non-physical or intangible assets, including patents, trademarks, copyrights, goodwill, and know-how/commercial secrets that grant rights and privileges, creating value for its owners.
Due to intangible values, WellTech businesses have different focuses compared traditional types of enterprises:
- Using outsourcing or different forms of cooperation instead of using own staff and physical assets to implement some business operations.
- Paying stakeholders through stock options instead of salaries and dividends to cut operating costs.
- Having limited physical facilities and workers because most business operations are virtual. It results in the minimisation of tangible assets.
- Employing business models that use a temporary lack of regulation as a competitive advantage.
Start-ups can leverage the intangible capital applications to scale-up, generating more revenues without significantly increasing costs. WellTech projects promise growth in revenues without a proportional increase in variable costs. To do so, start-ups have to accumulate intellectual capital, internally developing its intangible assets. While these assets have a lower or even zero collateral value, its meaning within the new knowledge economy is very high.
Unfortunately, the existing tools make it difficult to estimate the actual fair value of WellTech start-ups. Classical methods and appropriate tools include the following groups:
- Asset-based methods (replacement and liquidation approaches).
- Income-based methods (using discounted cash flow and future earning).
- Mixed approach (as an attempt to employ advantages of both asset and -income-based methods).
- Venture Capital method (using multiplies to calculate the start-up’s value after the investment has been made).
The first group of valuation methods is useless for WellTech businesses valuation because of small number of physical assets, but it gives us a hint to measure intangible assets. Income-based methods are also difficult to apply because WellTech start-ups have no income yet. Nevertheless, its idea to use projective figures can be applicable. The mixed approach carries a fruitful idea to combine different approaches to obtain comparable results. The Venture Capital method is the most popular because of its transparency and relative simplicity. This method can produce some figures to think about. It would be good to supplement them with some specifics of the WellTech industry.
Leveraging WellTech Intangible Factors
The PROFIT™ (PROject FITness for the market) method is developed especially for WellTech projects. This method is based on an idea to estimate how key intangible factors, project success drivers, can leverage the initial founders’ contribution to providing business scalability. Each of the factors comprises ten essential components that were chosen for WellTech projects to target its successful implementation. The money and time contributed to the project initially can mobilize some of the components to show a potential result of each success driver. All seven drivers influence the project synergistically, providing the non-linear growth of a prospective business.
The WellTech project success key drivers include:
- Project Risks Mitigated:
- Current legislation.
- Possible claims of regulators regarding project products or services.
- Reliability of local outsourcing services.
- Reliability of local partners.
- Reliability of material suppliers.
- General economic situation.
- Currency exchange rates.
- Customers’ preferences.
- Possible copying of project products, services, or business models.
- Operational performance.
- Project Innovativeness:
- The novelty in the product.
- The novelty in processes.
- The novelty in digital services.
- The novelty in methods.
- The value created via low cost
- The value created via convenience for customers
- Implementation potential / Complexity.
- Implementation potential / Relative advantage.
- Implementation potential / Compatibility.
- Implementation potential / Observability.
- Implementation potential / Trial ability.
- Project Competitiveness and Disruptive Potential:
- Unique products.
- Unique services.
- Unique market position.
- Unique business model.
- Stage of the project/Maturity.
- Disruptive business solutions.
- Incumbents’ substitute in the industry.
- Important R&D findings are engaged in business processes.
- Digitalisation of products and services.
- Customisation / Personalisation.
- Project Team Abilities:
- Industry experience.
- Marketing experience.
- Prior start-up experience.
- R&D experience.
- Staff completeness.
- Period of the team existence.
- Successful collaboration and outsourcing experience.
- Superiority in qualification.
- Interchangeability within the team.
- Similar projects
- Project Readiness for the Market:
- Marketing objectives and goals are set up.
- The main competitors are determined.
- Market segmentation is performed.
- Targeting segments that provide the greatest profits and create the best customer value are determined.
- The positioning of project products/service from competitors is made.
- The competitive advantages of the project are clearly defined.
- Digital distribution channels with the best online value proposition are defined.
- E-tools (SEO, analytics, and online advertisements) are selected.
- The marketing mix (product, price, place, and promotion) is formed properly.
- The project has a presence on social media channels.
- Business Vision:
- The clear business idea with benefits for prospective target customers.
- The value proposition is distinctive and ready for customisation.
- Clear competitive advantages that differentiate the project from competitors’.
- Clear core values of the project.
- The clear understanding of economic environment changes.
- Clear brand positioning.
- The clear vision of project implementation.
- Clear understanding of built-in technology.
- Clear vision of customers’ preferences.
- Clear vision of the projected future.
- Market Situation Was Taken into Account:
- Market size.
- Market growth rate.
- Market trends.
- Market variety in customer segments.
- Competition intensity within the industry.
- Environmental diversity and complexity.
- Environmental dynamics.
- Trends of customisation.
- Trends of collaboration within the growing sharing economy.
- Customers’ demand for knowledge and transparency.
The components of factors on which action is taken within an estimated project receive a score of 1, while the factors that cannot be influenced receive a score of 0. The total leveraged estimation of the project is calculated as the following:
Template matrix to calculate the PROFIT™ output:
Case Study: HealthWave.Center as an Exemplary WellTech Project
INNOVATION WAVE PTY LTD was established in 2015 as a proprietary limited Australian company with its offices in Adelaide. It is a new generation WellTech company that develops technology-enabled products and services for wellness. The company is a vehicle to develop the HealthWave.Center project. Victor and Roxana Paul are company founders and project initiators, as well as owners of intellectual property. For more detail see BLOOMBERG. Starting with a highly qualified and skilled team of two, the founders of Innovation Wave employed an idea of outsourcing, a common contemporary phenomenon for technology businesses. See an interview with Dr. Victor Paul by Fintech Singapore.
- The knowledge base and Navigator algorithm with smart filtering functions.
- The AI-enabled bot is integrated with Google’s NLP, Machine Learning, and AI through DialogFlow V2.
- The QR Smart Labels, an IoT unique identifying method (in which QR codes works like RFID tags) for ordering and checking the authenticity of consumables and customer feedbacking.
Calculation by the Venture Capital method Multiple derived from other comparable companies from the CBD industry where the average figure is about 12x and goes down. The forecasted average multiple for 2021 is 10x. For these reasons, the ratio of EV to forecasted revenue for 2023 is suggested as 7X.
Calculation by The PROFIT™ method that uses the above formulas and template matrix to show close results (see table below):
- HealthWave Center’s creative wellness solutions are protected under the umbrella of HealthWave™, a registered Australian trademark No 1715178.
- HealthWave Center’s business model is protected under the umbrella of PROFIT™, a registered Australian trademark No 1949116.
- Rub n’ Roll is protected with the Australian innovation patent No 2019101191.
- The HealthWave.Center project is a participant of the 12th Healthcare Innovation World Cup® (Welltech Challenge).