As tech companies slash their workforces and tighten their 2023 budgets, employers that once embraced shiny new perks to attract and retain talent are taking a second look at their benefit offerings.

Following suit, startups that made employer benefits their bread-and-butter business model are also shifting gears to depend on them less.

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“The Fortune 500s adopted a lot of different benefits over the last five to eight years, and they’re all looking to consolidate,” said Kevin Zhang, a partner at Upfront Ventures who is focused on health care. “It’s a lot of pain administratively to deal with 20 different benefit vendors.”

How did we get here?

During the pandemic, tech companies that once boasted free meals, meditation rooms and zen gardens quickly scrambled to find different ways to curry favor with an in-demand (and now remote) workforce. Company perks quickly shifted toward more telehealth and wellness benefits, moving away from the on-campus perks.

In the pandemic’s wake, a flood of venture funding flowed into startups providing virtual health services as an extra incentive to manage particular health obstacles. Funding to this space peaked in 2021 with over $1.6 billion, but 2022 (so far) garnered around $1 billion, the sector’s second-best year yet.

In 2020, employers were swimming in a sea of health-related startups such as One Medical for primary care, Maven Clinic for fertility care, and Folx Health for queer-competent health care. By offering platforms that are easier to use, telehealth companies could work directly with employers to offer virtual services to their workers. Known as direct-to-employer, this was a popular strategy for startups.

It’s a lot easier to sell to employers than to insurance companies since employers aren’t really looking at the cost of health savings. They look for programs that will help keep employees productive, and benefits that will help retain them.

“Unlike the insurer, [employers] have a whole different ROI, which is really around workforce retention rate and ability to work more. So if someone’s really sick or if someone has a tough pregnancy, in addition to the health care costs that also costs the employer,” said Jacob Effron, a health care-focused investor at Redpoint Ventures.

Now, telehealth startups have to prove they work

When Maven Clinic first launched in 2014, it quickly evolved into a direct-to-employer platform and has onboarded around 450 employers, including the likes of Microsoft, Snap and SoFi.

The company conducted surveys boasting high engagement rates with employees, pointing out on its website that 40% of those surveyed said menopause interfered with their work, and Maven promised its program would cut costs and “drive better business results.”

“It’s harder for companies to take away existing benefits that people like,” Healy Jones, an executive at startup consulting firm Kruze Consulting, said in an email. “So if startups are going to cut, they are going to typically cut benefits that employees are not aggressively using.”

Most employees stick with their employer longer than they stick with their particular health insurance plan, making certain health perks more desirable as a direct-to-employer model.

“There is this increased scrutiny on ‘how much do these things actually save money?’” Effron said.

Benefits-driven startups are moving toward insurance

These startups may not have to prove their worth to employers for very long. Partnering with insurance companies, like what Maven did in 2021, can tap into a far wider pool of potential patients. This, ultimately, is the future for all virtual care startups, especially as fewer employers adopt new benefits in an attempt to conserve cash.

“The employers are doing separate deals with these providers of benefits because the insurance companies were bad at their jobs, have poor network coverage, and were missing benefits,” Zhang said. “So employers tend to be the first to adopt something new and different, and then the health plans will follow through.”

Teletherapy is a good example of this phenomenon. Lyra Health, an employer-focused teletherapy platform, began offering mental health services for employers in 2016, long before insurance companies embraced the practice during the pandemic.

But more venture firms are looking for telehealth platforms to work closely with health plans and Medicare and Medicaid, which can tap into a wider user base of patients.

“I do think any successful benefit provider, over time, if they’re able to sell it to an employer, there’s no reason why they can’t sell it to a payer,” Zhang said. “[As an investor] you do want to see a team that wants to expand into that over time.”

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