2010 Exit/Financing DOTY Nominee: Castlight

It's time for the IN VIVO Blog's Third Annual Deal of the Year! competition. This year we're presenting awards in three categories to highlight the most interesting and creative deal making solutions of the year. The categories are: M&A Deal of the Year, Alliance Deal of the Year, and Exit/Financing Deal of the Year. We'll supply the nominations (four or five in each category throughout December) and you, the voting public, will decide the winners (by voting early and often, commencing once we've announced all the nominees). Strap yourselves in, it's The Race for the Roger™.

Castlight's $60 million June Series C wasn't the biggest venture round of 2010. (That honor belongs to Archimedes, which pulled in a stunning $100 million from new and existing investors in March). In fact according to Elsevier's magic eight ball (also known as Strategic Transactions), Castlight's financing -- certainly a large sum -- wasn't even enough to merit a top five ranking, inched out by the raises of European companies Immatics and AiCuris, and on the U.S. side by Relypsa, Cerenis, and Pearl Therapeutics. Why, then, does it merit your vote for IN VIVO's DOTY in the Exit/Financing class?

Call it a vote for the new world order.

You probably know that earlier this year Congress passed a small piece of legislation called the Patient Protection and Affordable Care Act. We at IVB thought about nominating health care reform for DOTY, but after a couple of years of running this competition, we knew better. HCR is too big, too vast, too encompassing a topic to capture the voting public's imagination. You, dear reader, want something more tangible that you can point to and say yes, here's a deal that embodies a larger trend at work.

And if ever a financing represents the new business and market opportunities now in play because of health care reform, surely it's the Castlight deal. Castlight, founded in 2008 as Ventana Health Services, aims to solve one of the thornier wickets of health care delivery: the issue of pricing transparency for medical services.

Downloadable smart phone apps such as TheFind can tell you whether Amazon or WalMart or Best Buy has the best price on the fancy new GPS system you want to buy your girl friend with the poor sense of direction. But it can't tell you where to get the best price on a colonoscopy or a dental cleaning or an MRI. And with the advent of high deductible health care plans and an ever larger percentage of costs being passed on to the consumer (er, patient), that's valuable information to have.

Castlight aims to illuminate this murky arena, creating an algorithm that allows users to search a database of providers to determine out-of-pocket costs for various procedures. Its business model is simple: the company aims to sign contracts on a monthly per-employee fee with businesses that self-insure or are encouraging their own employees to make smarter--i.e. more cost-conscious--health care choices. But it's easy to imagine the model could evolve over time to an open access system where pricing is based on a per-use fee and anyone can sign up to use it. To date, Castlight already has one customer: the grocery store giant, Safeway, which employs about 200,000 workers.

Castlight has plenty of competition too. Small start-ups such as Change: Healthcare, along with insurers such as Aetna, or even information service providers like Thomsen-Reuters, are getting into this game. Though Castlight is small compared to some of those established players, it boasts an impressive roster of founders and backers, which include not just traditional venture backers such as Maverick Capital, Oak Investment Parnters, and Venrock, but also the Wellcome Trust and the Cleveland Clinic.

It certainly helps that one of Castlight's founders, CEO Giovanni Colella, is no neophyte in the health care services arena. He sold his previous firm, Relay Health, which enables doctors to communicate with patients via secure web-based technology, to McKesson in 2006. An added bonus is surely the involvement of investor Alan Garber, a professor of medicine at Stanford who also happens to run that university's Center for Health Policy.

Analysts have long said the only way to rein in skyrocketing health care costs is to make patients understand what they are paying for and why. But for most of us health care is heavily subsidized by our employer. With some one else footing most of the bill, there ain't a huge incentive to ask the neurologist treating your headaches if an expensive MRI is must-have data that will change his or her treatment plan for you. If it's not, knowing the costs of the MRI versus a 10-pill prescription for generic sumatriptan become valuable data points that help guide decision making--especially if you have to pay a portion of the tab.

It's perhaps surprising that with the passage of health care reform, VCs aren't talking up the opportunities in actually delivery of care with greater enthusiasm. Conventional wisdom is such technology plays are risky--unlike drugs or devices, these tools can be commoditized and don't have the same intellectual property protections that limit the playing field.

But the IP protection enjoyed by drugs and devices is a red herring. Health care reform means comparative effectiveness will be the rule not the exception and that means biopharma and medtech companies face increasing competition not less as payers, physicians, and patients evaluate the costs and benefits of various therapeutic options. Already companies have pivoted, talking about differentiation and unmet need as being important drivers of innovation.

By that definition, doesn't the information Castlight provides represent innovation with a capital "I"?

And that's why Castlight deserves your vote for the exit/financing deal of the year. It's a vote for innovation -- maybe a different kind of innovation than you are used to --but innovation nonetheless.

Heceta Head Lighthouse courtesy of flickrer dezz, courtesy of a creative commons license.