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Butterfly Labs: diagnostics infrastructure for home testing at scale

Butterfly Labs is building the diagnostics infrastructure to power at-home lab testing. With the ease of a single API, Butterfly Labs provides an end-to-end solution for home testing, including kitting, logistics, physician networks, lab networks, patient user experience and support, and regulatory compliance.

Healthy Ventures led a $3m seed round to secure 15% ownership and a board seat.

Since launching in September 2021, Butterfly Labs has already ramped to an impressive run-rate, finding quick product-market fit among direct-to-consumer (D2C) health and wellness companies. They're pacing to do some $1.5m in revenue this year. Butterfly provides virtual healthcare providers a way to seamlessly integrate customized panels into their offerings, taking care of everything from the lab and physician networks to interpreted results. The patient enjoys a cohesive experience: easy ordering, home-delivery, a white-labeled test kit, customer support, and physician-analyzed results – all with the comfort and convenience of testing from home. Contrast this with traditional lab testing, which has patient non-compliance rates as high as 24% due to various factors of inconvenience, like inability to find an available site or time, lack of transportation, or simply forgetting to visit the site (the most common reason).

While D2C healthcare is a huge market on its own and will continue to be one serviced by Butterfly Labs. However, we believe the much larger market opportunity lies in powering patient biomarker intake for decentralized clinical trials, which is an $8B opportunity.

Why move diagnostics to the home?

The single biggest healthcare trend for the past two years has been decentralization. When COVID-19 first upended the world with global sheltering in place, the healthcare industry stalled. While interest in moving healthcare ‘offsite’ had been brewing prior, COVID-19 catapulted decentralized solutions from merely an intriguing idea to a must-have. 

Lab testing is a perfect example of a service that can be moved ‘offsite’ or into the patient home. 70% of all medical decisions require a lab test, and 19 of the 20 most common lab tests can be done at home. Lab testing is a huge market, representing $73B in the US alone. And yet, the infrastructure for in-home diagnostics is still nascent. There is currently no other solution that focuses on the various needs such as white-labelling, customization for complex panels, and easy integration.

 

Example of a white-labeled kit with some common specifications.

Partnering with Butterfly Labs is a winning proposition for virtual care companies

As virtual visits capture more and more of healthcare visit volume, telehealth platforms are increasingly announcing the addition of in-home testing capabilities. The question each one will face over the coming years is whether to build, partner, or buy the capabilities. For most, partnering with Butterfly is the best choice.

Building an in-house solution isn’t feasible for many - setting up the entirety of an end-to-end solution including the lab network, physician network, integrations and front end - is slow, complex, and costly to implement, difficult to maintain the underlying infrastructure, and inflexible to iterate on as a company innovates. Some larger companies with the scale to afford it choose to build because it allows for better margins and the most customization, and hence differentiation. 

The problem is that companies must also continuously bring new applications or features to market to differentiate themselves from competitors - which again requires slow, costly and complex changes to the underlying infrastructure. Acquiring another company is typically more costly than either building or partnering, and comes with its own host of integration challenges. The best solution in most cases is to partner with a 3rd party dev tool that provides the building blocks, enabling customization while handling all of the backend coding. This unlocks innovation as it allows developers to freely experiment with products without having to maintain or update the arduous backend.

Replicating a proven playbook

We’ve seen this exact playbook in other API-first, PaaS, or developer tools-focused companies. There’s Stripe, the $95B VC-backed company offering APIs for payment processing. There’s Zendesk, the $12B publicly traded company providing developer tools to build a great customer service experience. There’s Twilio, a $47B publicly traded company that equips developers with the building blocks needed to spin up custom communications solutions. There’s Plaid, a VC-backed company for banking integrations most recently valued at $13.4B. There’s Auth0, an identity verification solution that was acquired for $6.5B this year. Butterfly Labs will replicate the same model in diagnostics. 

While all of these companies scaled successfully, the fundamental risk of an API-first company is that as customers grow, they’ll face the question of whether to move off-platform and build an internal solution instead. This is where there’s a lesson to be learned from the prior companies listed. Twilio, for example, took a massive hit to its market cap when its top customer, Uber, announced it was moving its cloud communications in-house. On the other hand, the largest company, Stripe, has been extremely successful in retaining its customers, despite taking huge margins. 

The difference between the two lies in 1) how entrenched they are within the customer and 2) how many touchpoints they have with the end-user. Out of all the companies, Twilio has the simplest integration and only one touchpoint with the end consumer - a message. In contrast, Stripe becomes a deeply entrenched part of their clients payments workflow. Stripe has a ton of add-on features enabled through their APIs (fraud prevention, billing, custom reporting, etc.), but they all link back to the core payments product - meaning, you can’t incrementally move off the platform - you either stay with Stripe or rip out the entire stack.

Butterfly Labs is similar. The simplicity of the API enables easy integration and encourages customers to build additional customized features to best fit their workflow. For example, several Butterfly customers are embedding features directly into their digital front door systems for their clinical operations teams to use (expanding touchpoints). It’s also similarly hard-to-rip-out since it’s an end-to-end solution. Butterfly has heard directly from customer after customer making the same observation - ‘we tried doing this ourselves, but there’s too many discrete components - the complexity isn’t worth it when diagnostics are not our core business’. 

Butterfly Labs has a clear market expansion strategy

1. D2C testing and consumer-oriented wellness brands  

The D2C diagnostics market was valued at $2.4B in 2020. It was growing pre-pandemic, but Covid-19 and the resulting shifts in consumer behavior have accelerated adoption such that the market is expanding at a CAGR of 26% and is expected to top $30B within 10 years. 

D2C diagnostics fall into the larger trend of consumers seeking maximum convenience, which drove e-commerce and home delivery sales up 32% from 2019-2020 alone. Think Amazon (where 61% of online shoppers choose to shop from), or online grocery shopping (which 79% of US consumers have opted for since the Covid outbreak, up 39% from pre-pandemic). At-home diagnostics is an extension of this trend, and one that D2C health and wellness upstarts are eager to capitalize on.

These companies are young and looking to offer their customers a differentiated testing product with a seamless user experience, all in an easily integrated and scalable manner. Butterfly Labs self-service API kits provide exactly that, making it uber simple to launch a white-labeled testing kit with customized panels. 

This has been a great segment to prove out product-market fit as the recent boom of D2C health and wellness upstarts provided Butterfly with quick traction and rapid feedback cycles. Consumer testing is only a small portion of overall lab testing spend, so while it was invaluable for proving product-market fit and early traction proof points, it won’t remain the core target.

2. Large telehealth enterprises

Consumer testing is only a fraction of total lab spend, so Butterfly Labs will need to expand into the rest of the $73B lab testing market that’s driven by medical visits. They’ll do this by selling to large telehealth companies, though we think about it in two segments.

  1. Telehealth infrastructure companies which equip healthcare providers with everything they need to deliver virtual care. These companies provide a virtual care platform that delivers a seamless virtual visit experience, which includes facilitating at-home lab testing programs. Wheel and SteadyMD, for example, are both incorporating home lab testing into their offerings already.
  2. Fullstack telehealth companies (including the actual care delivery). A majority of medical decisions require a lab test, most which can be done at home, so it’s a natural fit for telehealth companies to add at-home capabilities to strengthen their visits. Teladoc, for example, recently announced that they’ll be launching in-home diagnostic testing.

We think there is huge potential for growth in this market. Consider this: 40-50% of telemedicine visits result in a diagnostic test requirement, yet only 3-5% patients are currently sent an in-home test kit. The rest are either sent to an on-site lab or have to find a provider and available appointments on their own.

3. Decentralized trial software providers

The demand for decentralized clinical trial (DCT) protocols started growing about five years prior to the pandemic, but when lockdowns started, at least 70% of all clinical trials (a $44B market) taking place at sites were put on hold. Even as trials began to resume some 3-4 months later, global pharmas were traumatized by how vulnerable they'd been rendered, as just a single day’s delay amounts to $1-$6 million dollars in lost revenue. They jump started a demand for DCT protocols to be reflected in future trials. Anecdotally, we’ve heard that DCT went from being in 5-10% of RFPs to 30-40% in the months post-lockdown. Now two years into the pandemic, that has continued to grow.

As demand for DCT protocols grows, so does demand for software and digital tools to support the host of logistical needs. Butterfly Labs is already seeing a growing appetite among their current customers, including a CRO who cited that 60-70% of the trials they serve are using in-home diagnostics. Butterfly Labs is poised to be the go-to diagnostic infrastructure provider for each DCT.

Who are the competitors?

Butterfly Labs' competitors into two main categories: 1) diagnostic incumbents like LabCorp and Quest and 2) other in-home diagnostic infrastructure upstarts.

Labcorp and Quest are both publicly traded giants, valued at $26B and $17B, respectively. If you’ve ever had lab work done while visiting a doctor, there’s a good chance the lab provider was one of these two. They are the status quo that many traditional on-site providers still send their patients to, but they are not designed for virtual care. They offer absolutely no in-home testing solutions, along with a disjointed and often frustrating patient experience. Patients simply forget to go into the lab, the single most common reason for failing to complete a lab test (highlighting a glaring lack of basic patient engagement and follow up), or have other competing issues like transportation that cause them to be noncompliant at rates as high as 24%, depending on the order.

The second group, which is more directly competitive with Butterfly Labs, are other in-home-focused diagnostic upstarts. These include companies that are known for their D2C tests (but have a B2B side), the largest example being EveryWell, a VC-backed startup whose recent $200m round valued them at $2.7B. EveryWell is best known for their direct to consumer health testing kits, offering everything from food sensitivity and metabolism checks to vitamin screens to STD tests to thyroid health. Similar solutions include LetsGetChecked, who reached a $1B valuation on their recent $150m Series D, as well as newer entrant Getlabs, who recently raised a $17m Series A at a $57m post-money valuation. On the pure-B2B side, the largest player is Truepill, a VC-backed company whose recently $142M Series D valued them at $1.6B. At-home diagnostics are a recent addition to Truepill’s core pharmacy and telehealth infrastructure offerings, and they fail to meet several of Butterfly Labs' customers' pain points, such as quick, easy onboarding and no minimum orders. ORDRS is another early entrant that Healthy Ventures evaluated, though they don’t have the commercialization vision for clinical trials that Butterfly Labs does, and have yet to raise any institutional funding.

The feedback from customers is that Butterfly Labs is more versatile, easier to use, and cheaper than alternative offerings. In the words of one customer, ‘everything is just easier’ -  easier onboarding, easier and more accessible testing menu. The same customer, who had previously used both LetsGetChecked and EveryWell, also divulged that both alternatives ended up being over 2x the cost of Butterfly Labs. Their cost is even higher when factoring in configurability, as they charge for additional modules (whereas Butterfly Labs is easily configurable from the start). 

 

Are there viable exit paths? YES, multiple:

  • Virtual trial software providers are becoming active acquirers of tools that make DCTs more seamless for sponsors, sites and patients, such as Virtrial acquiring telehealth infrastructure platform SnapMD.
  • Diagnostic incumbents like LabCorp and Quest, who are currently losing market share to upstarts that provide better integrations and patient experience, may acquire to modernize their integrations and UX.
  • Telehealth enterprises such as Teladoc, DoctoronDemand, Wheel and SteadyMD will all be looking to add home diagnostic testing capabilities to keep up with competitors.
  • Larger healthcare API-first companies such as Truepill and ixlayer will look to consolidate market share. 

CEO and co-founder Hiroki Butterfield brings a singular mental agility to the team, wowing us with his dogged, rapid iterating chops on product, distribution, and vision. His co-founder and CTO, Dhruv Manchala, marries product-first design with best-in-class software development savvy. The pair have long worked together, first as meeting as classmates in college then colleagues at Microsoft.

Butterfly Labs previously raised a $620k Pre-Seed round in July 2021. Wonder Ventures led with the largest check, joined by The Fund, Bloom VP, and Techstars. 

We led the $3m Seed round, investing $1.975m to own 15% of the business and secure a voting director seat. Joining us are the existing investors who are exercising their full pro-rata, the largest being Wonder Ventures. As well, we invited our very own portco CEO, Ivor Clarke of SubjectWell, to join as a strategic investor; he will be an invaluable advisor as the team strategizes their move into decentralized clinical trials. 

 

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