The business case for wellness, with Wellhub CEO Cesar Carvalho

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1:25Working from client to client, many hours, not being able to prioritize well-being, physical activity at all. This is a real problem. As a recent college graduate working for the consulting firm McKinsey in Brazil, Cesar Cavallo's work days were long. Epically long. For the first time in his life, he wasn't making time for physical activity. His health started to suffer, and he realized he couldn't succeed in his career if he didn't make some big personal changes. The business case to me is quite clear. Resilience is probably the most important quality that every single employee needs to have.

2:08More active employees, they get sick less often. And there's no way to have great resilience if you're not sleeping well, if you're not active, if you're not at your best at well-being.

2:24Cesar realized he wasn't the only one with this problem. It's why he co-founded WellHub, the B2B service that gives companies a way to provide their employees with access to everything from gym memberships to meditation apps. It took a significant pivot and a very big name change for Cesar's company to survive its early days. Today, it's valued at$2.4 billion. You've got to have incredible talent at every position. It's like this huge push. There are fires burning when you're going home. Can you believe it? Such an idiot. And then you go back to, this is totally going to be amazing. There are so many easy ways.

3:08I have no idea what to do. Sorry, we made a mistake. But you have to time it right. Oops. Working out of a three-bedroom apartment. Stuff that just seems absolutely nut balls. Ten years later, we're like, well, that's just how you do it. We haven't made it just how you do it.

3:25This is Masters of Scale.

3:30I'm Jeff Berman, your host. Cesar Cavallo built WellHub from the ground up, and it now serves about 4 million people in 11 countries. We talk about how he worked through a barrage of challenges, including a once-in-a-century pandemic, and scaled WellHub into a global leader. Cesar, welcome to Masters of Scale. Thank you for having me, Jeff. I'm thrilled to have you. I've been very excited about this conversation. for a whole bunch of reasons. Like many of the founders we have on Masters of Scale, you're an immigrant, you're from Brazil. Your grandparents were, as I understand it, they delivered milk for a living.

4:14How is it that we're here today having this conversation? It's a story that shows the power of education. My grandparents were illiterate delivering milk door to door and my dad and mom were the first ones in our families to get an education and they moved to what they thought was a large city. this tiny town in the countryside of Brazil and where I was born and grew up. When I got to college age, I moved to Sao Paulo, the largest city of Brazil, went to the Sao Paulo University to study business, ended up working for McKinsey. And I think that was when a lot of things in my life changed. One, because I was working 15 hours a day.

4:52As one does at McKinsey early in a career. Exactly. And I was into all this work, the stress, And I couldn't even get my head off the water and kind of look around to understand what was happening around me. Not long after starting at McKinsey, his bosses encouraged Cesar to get his MBA. He went off to Harvard to do that. And that's where the idea for his wellness business first hit him. It was in the middle of an HBS class. It was a strategy class. And we were discussing a gym chain in the U.S. Can we name the gym chain? They don't exist anymore. It was belly fitness. But it was a story about how important new members was for bellies.

5:40Essentially, the cost structure of a gym is rent, the equipment. So it's mostly a fixed cost structure. And there's an incentive to bring as many members as possible. And I said, what if there could be a solution that would bring back to the industry people that at some point in time in the past had a membership, didn't use potentially, got frustrated with it. But now with this new method, using this technology that would bring them back and therefore generate incremental revenues for gyms and studios. And so that was the spark. In the middle of the class, I logged off, started writing the idea, the value proposition on a piece of paper.

6:23And six months later, I was dropping out. What was that initial vision? As you sat in that classroom and you're tuning out the class and you're feverishly scribbling out, what did you see exactly? So the vision there was for a platform that would sell day passes to consumers. So it was a direct-to-consumer business, not what we have today. We're full B2B today. The name was GymPass, not WellHub. And the last component of it was that there was always this focus of bringing back to the industry people that were frustrated by something with either gyms or studios or apps. whatever it was. And our idea was to find a more efficient way for people to pay less and still have access to gyms and studios.

7:11We learned a lot. We pivoted the business several times, but that was the original concept. And day passes were not a new concept. What was your spin on the day pass concept as you were formulating the idea? Yeah. Because for gyms and studios, most of the revenue comes through subscriptions and their rights to push people to subscriptions and not to day passes. Recurring revenue is a beautiful thing. Exactly. So what they rightly did at that time was to charge extremely high fees for day passes. And it made sense, you know, because then you're not cannibalizing what is, what should be the main product.

7:46Our pitch to them at that time was, you know, like instead of selling it directly and risking cannibalizing your own subscription model, sell it through us. And it should be a fair price. You know, we wanted to price the day passes at that time in such a way that if you are going twice a week, you're indifferent between a subscription and buying day passes from what was GymPass then. And they accepted. They wanted a new channel. None of the gyms and studios at the time were big on internet, on online marketing, on digital marketing. And we provided all of that to them. Yeah. And you're also a marketing channel, right?

8:25Because someone might discover a new gym through you was part of the value proposition, I assume, for the gyms. It was most of the value proposition. They would be willing to give us day passes for free if we were promoting their gyms as they were. So you have this epiphany, the clouds part, the angels sing as you're sitting there in class and you are getting it out on paper. What happens over the intervening weeks and months that you get the confidence and the funding to drop out of business school and go launch GymPass properly? The first part was getting my co-founders on board. I'm a first-time entrepreneur.

8:58I've been doing this for almost 13 years now. Still feel like it's day one, but I think the confidence, the support, and the relationship I got with my co-founders was probably the most important thing. One of the co-founders dropped out of his MBA at MIT with me. The other one had a job offer to start working at Bainian Company, one of the main consulting companies out there. And he also gave up on the offer. And the fact that we were all making this commitment together meant a lot. One of my co-founders worked with me at McKinsey. He was the smartest. He is the smartest person in the room. There's no one that is brighter than him that has such a logic deduction process to making decisions, etc.

9:47He's the best one at that. And my other co-founder went to the same university I did and has the biggest heart I have ever seen. It's the person that is the happiest person I know. and it's someone I look after when I'm thinking about how can I become a better person as well. So really head and heart were the two co-founders. Yeah. Wonderful. So you're at one of the very best business schools in the world. You are on this path at McKinsey, but you have this vision. You find these co-founders. What was the must for dropping out of business school and pursuing this full-time? It was going to be a very difficult decision, but it turned out it wasn't and the reason was that i had such great connections with people from from hbs and they wanted to incentivize the the students to like go and start ventures and in the end hbs gave me up to five years to come back at any point in time if i wanted and so did McKinsey.

10:50It was one year on McKinsey's side, five years on HBS. And that really helped me because coming from the family I came and having the parents I had, I don't know if I would have made that decision if it wasn't for the support from both HBS and McKinsey. It's quite a safety net to have two safety nets. A free call option everyone should take if they have the opportunity and if they have an idea, if they have the right co-founders. Yeah. So you need money to start a company. Where does the seed funding come from? First round was when we're still at PowerPoint, not a product at all. And essentially it came from friends and people I worked or one of my co-founders worked with in the past.

11:34And that was very fortunate that we got that because we needed that money. We had to pivot the business a few times before finding product market fit. If we didn't have the money, probably the company wouldn't be here. How much did you raise in that first seed round? $200 ,000. One of the challenges of a two-sided marketplace like this is it's a little bit like opening a nightclub. You've got to have the DJ book to show up and provide the music and the entertainment. but you need the customers there also. And how did you balance trying to sign up gyms that would be your partners on the one side and customers?

12:13Because there's sort of a chicken egg problem there, isn't there? Yeah, there is. And when we made our first pivot to B2B, it got even worse because we needed to convince not only the subscribers, people and the partners, but also companies to invest on the wellbeing for their employees. But in the early days, it was brute force on both sides. Sign as many partners as you can. Be very smart about which partners you're signing first, in which locations, which neighborhoods, and trying to get every single data you can to prioritize the right ones. We were distributing pamphlets on the streets. We did online marketing.

12:53It was brute force. I just want to understand when you're going to, I don't know, Equinox or CorePower, Orange Theory, whatever fitness group you're going to talk to, I presume that the person you're talking to is saying, well, how many people do you have? What's the market size for your customers? You don't have customers yet. I had none. What was your pitch that got them to get on the platform? I shared the vision. And in the end, what we proposed was almost risk-free for them as well. You know, because if we didn't bring any members to them, it wouldn't cost them anything as well. And we spoke to something that really mattered to them, which was bringing new members.

13:34Still ahead, how listening to a single customer inspired a pivot to a different business model and unlocked a whole new level of success for WellHub.

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14:54And here's the best part. Join AWS Activate today and you could score up to$100 ,000 in AWS credits tailored to your stage and network. Go to aws.amazon.com slash activate and start building. Expanding your business in the US can feel like a maze. Every state has its own payroll, benefits, and compliance rules, which can pull your focus away from growth. That's why founders use Deal. Deal is the professional employer organization, or PEO, that gives you a dedicated HR expert plus Fortune 500 level benefits for your team. The National Association of PEOs says businesses can grow twice as fast if they use one.

15:37So if you're scaling, make it simple with Deal. Go to deel.com slash MOS and get up to three months free. Welcome back to Masters of Scale. You can find this conversation and more on our YouTube channel.

15:59Cesar's startup wasn't growing fast enough as a service that connected gyms to individual customers. He needed to make a big change in the business model if the company was going to survive. Things were not going well as a B2C company.

16:44It wasn't working. I love what you guys do. I'm on different places all the time because I have to visit the different offices. And my employees are now asking me for some sort of gym wellness benefit. And I don't want to go and sign contracts with all these gyms and studios. I don't want to give them just a reimbursement because I know they need flexibility and they need options. And essentially he pitched the business model, the B2B business model to us. He said, look, I want to offer this to my employees, but I don't want them to be paying for every single time they use. Just give them a membership, unlimited access to different locations.

17:22We're going to deduct something off their payroll to make sure that they appreciate this and they sign up to this benefit and I'll pay the difference. And when we launched, in three days, we tripled the number of users we had on our platform. And for the first time, everyone was happy. And that was because of PwC alone as a first client? Because PwC alone as a first client. They had 10 ,000 employees in Brazil and PwC was happy. The employees were super happy having access to all these partners for a lower price. And our partners, the gyms and studios, suddenly they saw a thousand people coming to them that were not members.

18:03And at that time, we kind of stopped doing everything else we were doing direct to consumer and funneled all our resources into getting more companies to offer WellHub to their employees. So I'm guessing if you'd called one of your Harvard Business School professors and said, we're going to move to a B2B model, they would have warned you that selling in through the HR function is one of the most difficult things to do. And this is going to be an uphill battle. Did you have an instinct that that might be the case? For sure, no. I think every single B2B channel you open or client you want to serve, it is indeed an uphill battle.

18:42It takes months to sign every single deal. There are a number of people you need to sell into. It's not only HR, it's finance, it's the purchasing area, vendor management, InfoSec. and I guess it's when not knowing helps. We just had one case of success and it was so magical to see. We wanted to see more of those cases and it took some time, a few months, to get the next client to sign and to perfect our strategy. What we found was that it would be very hard to get a company that was very distant from PwC to sign, right? But if you hire people from PwC, if you are competing with them head to head, and if all the other employees of your company are seeing that that's a great benefit, that would naturally make the next best client for us to sign.

19:40And that became a little bit of our commercial strategy. We went from PwC to all the other players that compete on the same space and got them as clients as well. So UI came next, KPMG and Deloitte came next. This is a concentric circle theory of growth. 100%. And our second large client was Unilever in Brazil. Then we got Procter & Gamble, J &J, all the other ones to sign afterwards. And it has been a strategy we used not only scaling in Brazil, but also to expand internationally. Because the next step for PwC was to launch PwC in Mexico. Then we launched the Spanish Bank in Brazil, in Mexico.

20:21and in Spain as well. And eventually signed a global deal of another client that led us to launch the US. And did you just then start laying it out category by category? Here are the top players in the categories. If we can land one, then we'll go hit the others in that category. Was that how you approached it? 100%. And we normally would start with the company that was perceived to be the company that appreciated the employees the most. Because those are the, as a consequence, are the companies that are performing better, are the companies that have more higher margins and that are growing faster because they appreciate their employees, they offer this type of benefits to their employees.

21:00And when they looked at the value proposition, the solution that we're doing, they were the easiest ones to convert. Well, and I love that filter. It's not necessarily the perceived market leader or the market leader by revenue. It's the one that is known for treating its employees the best. They may well also be the market leader on the other factors, but I love that as the filter for what you were taking to market. It was unique to your business. 100%. You'd be surprised by how positive the correlation is of those two. So you pivot to this B2B model. Your brand is still Jim Pass. I remember learning about you as Jim Pass.

21:41It's a great brand. It does exactly what it says it does. And it's not easy to build a brand. You made a decision to abandon a brand that had pretty darn good name recognition. People knew what it was and renamed the company. Why'd you make that decision? Look, it started with COVID. Up until then, all we had as part of our offering was about access to gyms and studios in person. when gyms and studios closed our mission to give people access to physical activity became even more important at that time and what were our clients wanted was also the same you know like when companies send their employees home getting the employees engaged with well-being and a great state of mental health etc was even more important than before so in response to that we started signing the same way as we had partnerships with gyms and studios, we started signing different wellness apps and aggregating them to our offerings.

22:47What are some examples of those? Strava, if you like to run outside, Apple Fitness Plus, if you like to exercise at home. We also started signing apps on meditation and mindfulness. Headspace is an amazing example of a partner. On the nutrition side of the house, MyFitnessPal, Nutrium, Nutric, they all offer access for people to go and do appointments with nutritionists so that they eat better. Sleep, Sleep Cycle is an amazing partner. So the offering expanded to all these different verticals of wellness. And very quickly, our clients would have this moment in the conversations with us saying, wait, but you became way more than just a gym pass, right?

23:33You have all these other parts of your offerings so much more holistic than before. And we noticed that from clients, we noticed that from investors, from subscribers, everyone was saying, look, it's way more than this. When I made the decision, we needed to change the name because the brand was somewhat restricting the message we wanted to share with everyone. And it took two years to find a name that was equally descriptive as GymPass was when it was just about access to gyms. And then came WellHub. WellHub being the hub for everything related to wellness. We are a year into the transition. And in the majority of the markets, people search more for WellHub than for GymPass.

24:17All right. One of the stories that we saw a lot as we went through and then coming out of the pandemic from fitness and wellness companies was demand was pulled forward, right? This is Peloton probably most famously. There was enormous demand pulled forward. You're seeing this hockey stick growth. And then as COVID restrictions came down and we started going back to gyms and socializing more, the trend line went in the wrong direction. How have you all managed the coming out of COVID? Let me take a step back. I've been working on this space for 13 years, and there's something very interesting I realized being on this space for all this time.

24:57Every two years, there's a new trend in this space. When I started what was Gym Pass back then, Zumba was the thing. Everyone was talking about Zumba every single day. It was the activity everyone did. And there's still a diehard fan base of Zumba today. It's an amazing solution. We partnered with Zumba. I love them. They're still there. But then CrossFit started being the thing. Everyone was talking about CrossFit all the time. And it peaked. And now we're seeing the rise of the racket sports. Pickleball, paddle. And in different countries, there are different flavors. And the true recipe for longevity in this space is working with all of them, is being the platform that's going to be relevant no matter what.

25:42I don't know what's going to come next. You know, I don't know what the new trend will be. Do you have a prediction? No, I don't. No? Can you see in your data, can you start to see things rise from what people are using? We can. And I'm seeing, I wouldn't call this a prediction, but I'm seeing a few changes in user behavior. One is towards strength training. we're also seeing a trend of when people exercise is changing it used to be always in the mornings and on mondays and tuesdays we're seeing people replacing happy hours with wellness hours so the most used time for physical activity now is on weekdays but at 5 or 6 p.m after work and it's such a healthy habit and we're seeing companies more and more push for that, eliminating alcohol in company gatherings and pushing for those type of activities.

26:39Well, it's interesting and it may be correlation, it may not be, that may be causation, but we're seeing a lot more data come out, more scientific reports about the importance of muscle mass, right? Yes. And about the harms of alcohol. And so is your instinct that those are tied together? Yes, and they're here to stay. Wellness and well-being, they have been a secular trend, a topic that no one would talk about 20 years ago, but now it's more and more prevalent. And if you look at the youngest generation, it is their most important attribute. When we survey employees in general, not only clients, they're ranking wellness and well-being as being as important as salary to them.