Pelago started off as a research project when Maroof Ahmed, Sarim Siddiqui and Yusuf Sherwani (left to right) were students at Imperial College London.
Courtesy of PelagoVirtual substance misuse clinic Pelago today announced a $58 million Series C funding round–despite a decline in venture funding into the telehealth industry.
With investors including Atomico and Octopus Ventures, this brings Pelago’s total funding to $151 million and, according to analysts, makes it the highest-funded startup in the substance use disorder treatment space.
Cofounded by Forbes 2018 Under 30 Social Entrepreneur listers Yusuf Sherwani, Maroof Ahmed and Sarim Siddiqui, Pelago aims to reimagine the traditional rehab experience: Instead of traveling to a physical location, patients can access treatment for opioid, alcohol and tobacco use from their homes via a mobile app.
“People often feel a lot of fear around going to rehab,” says Sherwani, the startup’s CEO. “There’s a real barrier from a stigma perspective. There's a cost component. And then the final issue is just access.”
He says the virtual clinic provides the same level of care as a traditional rehab center through facilitating at-home testing, prescribing medication, offering one-on-one therapy and in-app goal setting tools that help patients track their progress. But Sherwani admits that in severe cases, patients have to be redirected to in-person care.
Companies like AT&T and American Eagle pay Pelago a fee per employee treated to offer its services as a benefit to their workforce. Pelago also partners with some health insurance plans, but Sherwani says the majority of customers are employers who cover the full cost on behalf of the patients.
Pelago sells these clients on the idea of cost-saving: Where treatment for substance use disorders can cost an employer a minimum of $15,000 per employee enrolled in a company-sponsored insurance plan, Sherwani says Pelago costs them just “a few thousand dollars.” He declined to disclose specific payment or fee amounts.
Sherwani also declined to share the startup’s revenue or valuation, but says they are working with over 100 employers, up from 55 in 2022, and have seen some 750,000 patients. He says the company is not yet profitable, but is "pretty close."
Pelago isn’t the only startup reimagining rehab: Workit Health, a rival mobile app with the same services as Pelago (and added offerings like group therapy sessions), has secured some $140 million in funding. Unlike Pelago, Workit patients don't have to sign up through an employer. They can either pay out of pocket or through certain insurance plans.
Last year, yet another substance misuse app startup Pear Therapeutics went bankrupt when it struggled to get insurers to pay for its technology, despite receiving FDA clearance. (Pear’s apps, known as digital therapeutics, were meant to be used in conjunction with ongoing treatment by a doctor.)
Aaron DeGagne, a digital health analyst at PitchBook, says this sector within telehealth is still so fresh that competition amongst startups isn’t much of a concern. Instead, companies like Pelago have to prove their worth against the in-person providers that have been around for generations, he says.
“It remains unclear to me how these businesses will build sustainable profits,” DeGagne says. “There needs to be one platform, whether it's Pelago or another, that could pave the way for others.”
For telehealth startups that are trying to replicate clinic-level care, it’s yet to be proven that a virtual model can work in the long run, he says, and it’s a reason why venture capitalists are investing less into the market now as opposed to in 2021, when some $50 billion was poured into digital healthcare startups worldwide.
Sherwani got the idea for Pelago after the passing of a close relative, whom he says he didn’t realize had a substance misuse problem. Around the same time, Sherwani was interning at a psychiatric ward while at med school. He says he realized people would only seek help when their situation got too severe—the cause of which he boiled down to stigma and access.
In 2017, he joined with Imperial College London buddies Ahmed and Siddiqui to found Quit Genius, an app to curb tobacco cravings, and raised a $2 million seed round the following year. In March 2020, they raised $11 million in a Series A round to expand into treating opioid and alcohol use.
By 2021—the same year 94% of people with a substance use disorder were reported to go untreated—Quit Genius had nabbed a total of $78 million. Last summer, the cofounders changed their startup’s name to Pelago to avoid using the word “quit.”
Laura Connell, a partner at Atomico, says the firm invested in both Pelago’s Series B and C rounds because substance misuse disorders are on the rise, and the telehealth market supporting it is expanding “unbelievably quickly.”
“We have a medical system that's really buckling under the pressures of costs,” she says, “and employers who are also facing increasing welfare costs for their employees.”
