#3 "Howdy Partner" - a complete guide to Partnerships for mental health businesses
plus... a Sydney company developing psychedelic-inspired drugs, emotional AI and all this week's latest mental health news and job openings.
Hi friends,
I met two legends last week - Dan Segal and John Parker.
They’ve built massive businesses like Cochlear, Saluda Medical, ALTO Neuroscience and Brain Resource Group.
Serious operators.
They had amazing advice for mental health startups - the type of advice you don’t really question, you just follow and throughout the conversation - there was one topic that kept coming up…
Partnerships.
They both had strong opinions on partnerships - why they don’t usually work, when they are useful and what it takes to make a partnership successful.
I know this is something a lot of mental health business grapple with, so this week, I thought we should go deep on Partnerships.
But, before we dive into this week’s content…
I’d love to hear what you think of The Hemingway Report. So shoot me an email and let me know!
This week in The Hemingway Report:
- “Howdy Partner”: a complete guide to partnerships for mental health businesses
- Psylo: The Australian company developing novel psychedelic-inspired drugs to treat central nervous system disorders
- Emotional AI: the release of the “emotionally intelligent” GPT-4o and what it might mean for mental health care
- Jobs: cool roles at the top mental health businesses
“Howdy Partner”: a complete guide to partnerships for mental health businesses
In today’s post, we’re going to cover;
- Why partnerships are usually a bad idea for mental health businesses?
- What causes partnerships to fail?
- When do partnerships make sense?
- What can you do to make your partnership successful?
- As well as lots of real life examples and the lessons we can learn from them
So let’s get into it!
I won’t bury the lead for you… partnerships are usually a complete waste of time.
Here’s a story from my own experience that might resonate with you.
At Wayflyer, we were growing like crazy. In 2021, we grew 900% year on year! So in 2022, we had to find a way to keep up this growth.
We had an outbound sales strategy that worked super well, but we thought there was a portion of the market we weren’t reaching. So we decided to look at partnerships.
The idea was this;
“There are organisations who have existing relationships with our target market. Why don’t we partner with them and pay them commission to send us customers?”
Not only would the company get paid but they would also get to add another service to their offering. Plus, since we were a funding provider, their customers would get financing.
As Michael Scott would say; “Win-Win…. Win” .
All sounds great right? We thought so too.
But it was a flop.
This wasn’t a reflection on our team. They were amazing people and they executed well.
The problem was, there are structural elements to these kinds of partnerships that make it very hard for them to ever succeed and contribute to the long term value of your business. And these elements were not unique to our industry - they exist in the mental health space too.
Let me explain.
For the purpose of this explanation, I’ll use an example of a "distribution partnership (more on the different types of partnerships later).
When partnerships fail, it’s because of these four structural reasons.
1. An incentive problem:
If I ever get a tattoo, it will be of Charlie Munger saying “Show me the incentive and I’ll show you the behaviour”.
People do what they are incentivised to do.
In most partnerships, the incentive is just not strong enough for the partner to do the thing you want them to do.
Say you do a deal with a partner for distribution (like we did at Wayflyer). You’ll likely have some financial incentive for the partner to send you leads (e.g., a revenue share).
The problem is, it’s usually a negligible amount of income for the partner company. If they are large enough for you to want to partner with them, they are large enough to have other revenue streams that are way bigger than the commission you send them.
So it will just never be important enough for them to prioritise it.
Think about it, if another business offered you a couple hundred dollars for each customer you send them, would you actually do anything? Would you change your strategy or team objectives? Of course not.
If I got a second tattoo, it would be a quote from Milton Friedman. “Only people can have responsibilities. A corporation is an artificial person and in this sense may have artificial responsibilities, but “business” as a whole cannot be said to have responsibilities”.
Ok, it might be a bit long for a tattoo… But here’s the point… To get something to happen, you have to incentivise people to take the action you want. It’s not enough to incentivise the company.
Even if you are able to offer the partner a revenue share that is actually meaningful for them, how do you make sure the people at the company are incentivised to do what you want?
Organisations can’t send you leads, only the people who work at those organisations can.
I promise I’m not just being pedantic here.
Think about the Account Manager who owns the customer relationship, or the Marketing Manager responsible for running all their campaigns. They already have targets and commission structures based on their performance. It’s unlikely a company is going to add in another bonus structure on top of this to incentivise them to refer customers to you. Would you do it for your team?
You can try stuff like gift vouchers, prizes etc. (trust me, we tried them all), but they are never going to be meaningful enough to incentivise sustained action.
So that’s point one…
Partnerships rarely deliver the commercial results you think they will, primarily because of a lack of meaningful incentive for the employees of the partner company.
When Dan Segall was asked what he’d do differently if he had his time over, he said “for any new partnership, I would ask ‘exactly how are you going to incentivise your employees to support this partnership and how does that compare to their existing incentives and commission structures?’”
Third tattoo?
If I’m scaring you off Partnerships, good! I wish I had been more aware of the reality of partnership deals, i.e., that most don’t work.
It’s not all doom and gloom though, there are definitely areas where Partnerships can succeed if you are clever about them. But I’ll get to that later.
First, we need to understand the other three reasons partnerships fail.
2. The resource drain
Partnerships demand resources. More than you think. We always underestimate the amount of work it takes to get a partnership off the ground and, more importantly, to sustain it.
Signing the deal is the easiest part of the whole process. Then you need to build integrations, reporting systems, train the partner’s staff, deal with commission payments etc. etc.
If you’re doing a partnership for distribution reasons, your partner will often want referrals sent back to them from your customer base. Like any healthy relationship, it should be a two way street!
There’s an endless list of things required to keep a partnership moving, and if you neglect them, the partnership dies.
At Wayflyer, we spent months of engineering and design time creating a white labelled solution for partners. One of those “white labelled” partnerships took blood sweat and tears to create, but didn’t bring in a single deal…
I have nightmares of people whispering the words “white labelled offering” in my ears…
3. The power imbalance
When you decide to partner with someone, it’s usually because they have something you don’t. A distribution advantage, a product capability, a certain regulatory position, money.
If you’re a startup, the companies who have these assets will likely be bigger than you. They’re better funded and in a stronger market position.
So when you go to negotiate, there’s already a significant power imbalance.
Say you want to partner with a large medical device company to access their distribution. This deal could be a game-changer for you. You feel like you need them.
But do they need you?
They are having dozens of conversations every week with startups like you. What can you offer them that will move the needle for their business?
These companies are aware of this power imbalance and will use it.
You’ll notice that if you are chatting with the BD or Partnership team at one of these organisations, they will never give you an outright “no”.
They will often string you along, not with any malicious intentions, but it just makes sense for them. They want to be in touch with everything happening in the market and don’t want to close the door on you in case you turn out to be super successful and strategically important to them. And they know you need them, so they can get away with it.
Conversations with BD teams can often go like this;
BD guy at big company: “hey, if you build product X, we would then be super interested”.
You: “OK, we’ll build it”. (You build it)
You: “hey, we built Product X. Can we do the deal now?”
BD guy at big company: “That’s fantastic, great work”. If you are also able to build Product Y, that would make it even more attractive to us and we can chat then”….
Soon, your product roadmap is being written by Mr. BD guy at big company, without any actual promise that there will ever be a deal.
Even if you do end up doing a deal with a big fish, the power imbalance persists after the deal is signed. Coming back to our point on incentives, the bigger they are, the less your success matters to them…
Now, startups are all about making tradeoffs. I get that.
Sometimes you just gotta do the deal even when you know you’re getting screwed. Just make sure you know you’re being screwed and go in with your eyes wide open.
4. The asset problem
A partnership is rarely a defensible, durable asset for your business.
The long term value of your business is determined by the assets you own – the products you build, the distribution channels you forge, the expertise you hone, the evidence you collect, the team you recruit.
So even in the best case scenario, where your partnership actually succeeds, you need to consider how much long term value it is actually creating for your business.
Are you completely reliant on this partner for distribution? This will add to the power imbalance and when it comes time to renegotiate terms, they’ll use it to their advantage and squeeze you. What are you going to do? Turn off the channel that brings you all your business? This will ultimately lead to margin compression.
You don’t have control over partnerships.
Your partner could decide to move to a competitor, re-negotiate deal terms or they might even go out of business.
They might call you one day, say that things have changed and that they don’t have the same feelings for you anymore…
Yes, they can be stepping stones. But you must always prioritise the assets you are creating for your own business.
So when are partnerships a good idea?
I promised you I wouldn’t just focus on the downsides of partnerships. There are cases when partnerships can be a good strategic move.
Typically, it’s when you can answer “yes” to the following questions;
- Do you know exactly what you want from this partnership and how that fits with your own strategy?
- Is your partner deeply incentivised to give you what you want to make this work?
- Are you able to invest the resources you need to make this partnership successful?
- Is the partnership creating long term value for your business>
It’s worth diving a bit deeper on (1)...
You don’t want to have a reactive approach to partnerships, responding to inbound opportunities.
Instead, you want to have a clearly defined business strategy, identify areas where a partnership can support that strategy, then proactively approach organisations that can help you achieve it.
Understanding the different types of partnership opportunities that exist for your mental health startup is going to help you with this.
Cristina Cordova has done some excellent thinking here. Few people know more about Partnership strategy than Cristina - she was the first Partnerships hire at Stripe and also ran Partnerships at Notion.
She breaks down Partnerships into four categories which you can use to determine what types Partnerships might support your strategy.
1: Foundational partnerships
These are partnerships that your business needs to exist.
For Stripe, this was originally Wells Fargo, their banking partner. It’s kind of hard to have a payments business if you can’t move money around… OpenAI’s partnership with Microsoft is another example of a foundational partnership. You can’t build a massive AI company without huge amounts of compute.
Foundational partnerships are like a marriage. Choose them very carefully, you’ll be attached to them for a long time and divorces are messy!
2: Product partnerships
These are partnerships where you use another company to enhance your own product.
An example in the mental health space might be Psylo (a psychedelic-inspired biotech company) partnering with Japanese pharmaceutical company Daiichi Sankyo. Daiichi Sankyo is a massive pharmaceutical company that could give Psylo access to data, equipment and resources that Psylo just wouldn’t have available to them.
This is a classic form of partnership in mental health. Pear Therapeutics had a similar partnership with Novartis to support the development of their digital therapeutics. Unfortunately, the benefits of that partnership never came to fruition as I describe in this post.
N.B. it’s important to note the difference between product partnerships and just plain old suppliers. I like to think of partnerships as any deal where you’re not directly paying them for their service.
3: Platform partnerships
This is only relevant for you if you plan to have a suite of APIs that other companies will connect into.
As a side note, I am SUPER interested in companies making a platform play in mental health. I’ll write about this soon as I think there is a huge opportunity there.
If you have a platform, you want other companies to integrate with your APIs so that your products can work together, making the experience better for customers. These are typically not handcrafted deals, but rather facilitated by the fact that you have APIs and certain terms related to their usage.
4: Distribution partnerships
This is when you partner with a company to distribute your product on your behalf.
These are the most common for early stage startups, just behind product partnerships. You want customers, so you look at the other organisations in your ecosystem who have relationships with the people in your target market. Then you partner with them and hope they send their customers to you.
An example where I’ve seen this work super well is with Gorgias (a customer service software provider for eCommerce businesses). They developed a partnership strategy where eCommerce agencies act as a distribution channel for them.
And it works a treat.
This channel is a great source of new business for Gorgias.
I’ve been telling you throughout this article why most distribution partnerships fail, so why does it work so well for Gorgias?
First, they have partner-product fit. Gorgias fits naturally into the workflow of their agency partners. Here’s what a typical journey looks like;
- The eCommerce agency sets up a website for their client.
- As part of this setup, they have to choose a customer service software.
- They are partnered with Gorgias, they’re nicely incentivised, so they install Gorgias.
- And just like that, Gorgias has a new customer.
Secondly - and this might be the most important reason - Gorgias is just a fantastic product. It’s easy for the agencies to recommend Gorgias to their clients because they know it’s a great solution. Gorgias is trusted in the ecosystem - “no-one gets fired for installing Gorgias”.
Gorgias are also great operators and have built their partner channel to be highly scalable. They created infrastructure and systems to be able to manage hundreds of agency partners efficiently without having to hire a massive team. They have standardised terms and the relationships require minimal hands-on management. All this allows them to keep partnership channel customer acquisition cost (CAC) down as they scale.
They share the love. Jeremy Horowitz used to run partnerships at Gorgias and just posted this on LinkedIn. Gorgias “give what they want to get” i.e., leads.
They aren’t selfish lovers.
It’s taken years of smart people, working very hard to get to this point. But now, partnerships are a critical part of Gorgias’ growth strategy.
OK so we’re getting to the end of this post and I hope I’ve been able to shed some light on how to think about partnerships, when they can be a good fit and what to do to make them a success.
If I had to summarise my thoughts on partnerships for Mental Health businesses, it would be this
- Be wary. Most don’t work, so don’t get lured in by the promise of a partnership solving all your problems. Like a good friend once told me “if it ain’t a ‘hell yes’, it’s a no.”
- Don’t lose focus on developing defendable, durable, assets. The long term value of your business is determined by what the assets you own, not the partnerships you’ve signed.
- Partnerships work when they clearly support your business strategy. The four different types of partnerships (foundational, product, platform and distribution) can help guide your thinking.
- Be obsessed with incentives. Incentives are the biggest determinant of partnership outcomes. Get them right and your partnership as a chance.
If you ever want to chat partnerships and how they fit with your strategy, drop me a line. As you might have guessed, I kinda enjoy talking out on this stuff…
Mental Health News
Here’s your roundup of the top news in mental health this week;
- OpenAI launches GPT-4o which can detect and “display” emotions among other features. I’m fascinated to see how this impacts the wide range of therapy chat bots out there right now. (Youtube)
- Melbourne-based Kite Therapy secures $750,000 in pre-seed funding round to help more children to receive support for autism and developmental delays. (Smart Company)
- California-based autism therapy provider Spectrum Behavioral Therapies has been acquired by PE firm Optimal Investment Group for an undisclosed amount. (BHBusiness)
- New study by University of Sydney finds up to 40% of mental health conditions are linked to childhood maltreatment, including abuse of physical, sexual and emotional kinds, and emotional or physical neglect before the age of 18. (University of Sydney)
- Everbility, an AI-co-pilot for allied health professionals including psychologists, featured in Startmate’s Demo Day at their Sunrise event (Startup Daily)
- Australian Federal Budget allocates an additional $888m over eight years to mental health. This includes $589m to fund a nationwide, low intensity mental health service, which no-one seems to know much about yet… (National Australian Bank)
Company Spotlight: Psylo
- What they do: develop novel psychedelic-inspired drugs to treat central nervous system disorders using AI
- Headquarters: Sydney, Australia
- Founders: Joshua Ismin and Dr. Sam Banister
- Founded: 2021
Psylo is using AI to develop take-home psychedelic drugs to treat mental health conditions in the broader population.
For those interested in the scientific context, the psychedelic compound psilocybin has shown promising results in treating mood disorders, addiction, and neurological conditions. It works by targeting the 5-HT2A serotonin receptors, which are widely distributed throughout the central nervous system. Emerging research supports its role in treating mental health conditions.
Psylo aims to make this accessible, safe and scalable through optimising the chemical makeup of the drugs, using AI to assist with the drug discovery process.
They currently have 4 publicly-disclosed therapeutics in their pipeline, each in varying stages of development. They have been partnering with global institutions including CSIRO for testing and validation and Japanese pharmaceutical company Daiichi Sankyo for drug development.
If you’re interested in working with Psylo, they have two job openings right now (see below).
Jobs
- Career Development Research Fellow in Cognitive Psychology/Cognitive Neuroscience @ Oxford University for OPM-MEG, a neuroimaging technology (Role description) (More information)
- Healthtech Sales Specialist @ Updoc (LinkedIn)
- Director Commercialisation (Social and Behavioural Sciences) @ UniQuest (Startmate)
- Associate Lecturer, Psychology @ University of New South Wales (LinkedIn)
- Various @ Headway (Accel)
- Fractional CFO @ Psylo (Swag)
- Vice President/Consultant of Drug Development: Clinical Readiness @ Psylo (LinkedIn)
Make it this far? Fair play! Reply to this email and let me know what you thought.
That’s all for this week.
Keep fighting the good fight!
Steve Duke
Founder of The Hemingway Group
P.S. if you found my unashamed Pear pun in this week’s post, please let me know ;)
P.P.S. feel free to connect with me on LinkedIn
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