1 Please walk us through the business model of Butterfly Learnings.

What is the current market gap that you seek to address and how has your journey been so far?

I'll probably start from the gap. In India, and this is true for other countries as well, one in eight kids have some sort of neurodevelopmental issue. This includes autism, Autism Spectrum Disorder, ADHD, learning disability, and intellectual disability. This is about one in eight. India has about 25 crore kids under 12. And if you take one in eight, that comes to about 3-3.5 crore kids. So broadly, three, 3 to 3.5 crore kids need some sort of help before the age of 12 years. This is on the demand side and this prevalence has been steadily going up in many countries. The US is the country that has published the most data. In India, the latest data was from NIMHANS- it says one in eight. But we believe that the prevalence is going up for multiple reasons.

When you look at the solution side, what is happening is that when these kids grow up, usually, there are issues that are picked up either by the parent or by the school or by the doctor. The doctor is typically a pediatrician. The pediatrician refers to a developmental pediatrician or a pediatric neurologist who assesses and if it is an issue, they do a diagnosis and they essentially refer the child to therapy. Therapy in India is largely speech therapy and occupational therapy. Now there are two problems in speech and occupational therapy. One is quantity; you have only 10,000 speech and occupational therapists in India. So on the demand side, you have three and a half crore kids. On the supply side, you have 10,000 therapists. These 10,000 therapists cannot cater to more than one to 1.5 lac kids. So that is essentially the supply-demand gap.

We looked at the ecosystem in India. We also looked at other countries. So, for example, in the US, there is something called ABA i.e. Applied Behavioral Analysis, which is extremely data-based, very scaled. A lot of private equity companies have at least one investment in ABA as of now. We saw that ABA was not there in India. So in 2021, we opened our first center in Thane, which is a suburb of Mumbai, and we started delivering therapy there. We just focused on the core of which is ABA, supplemented by speech and occupational therapy as required. After the first center, we set up a training academy where we can take in psychologists and can train and certify them in ABA, because the real gap that we are solving essentially is the supply demand gap. So that is level one.

Level two, and this is a problem with therapy, is that it is very unorganized, and nobody is measuring outcomes in India. So if you go to a therapist, you're really paying for the service, which is like 45 minutes of therapy but nobody is really measuring the impact that it is creating.

So we decided to change that. From day one, we started building a system where right from when the child is coming in, getting evaluated by a pediatric neurologist, and then therapy is being delivered, everything is being tracked on a web application, which is being used by the therapists. And our programs are also modular, in the sense they are not the same for every child. Think about it like a bunch of Legos, which you are putting together for every child. So if a child has an issue with eye contact, there's a program called Eye Contact. From day one, we have been very obsessive about collecting data from every session. If we delivered therapy to more than 3000 kids, we have data from multiple kids on which there is a data science team that is creating cohorts. The same data we show parents as well, so the parents get comfort as to whether their child is progressing or not in a very transparent way. That was the second piece.

So we're using technology to sort of make therapy delivery more transparent and maintain quality as we scale. Using this model, we've grown to about 50 centers. We are currently a team of about 450 people of which 384 are therapists and doctors. We are in Bombay, Nasik, Pune, Nagpur, and we have recently opened in Udaipur, Kota and very recently we have opened in Ahmedabad. We are three years old and this has essentially been our business model as we grow.

A typical child comes to us three times, for three sessions, three times a week, and one session is about one or 45 minutes. In the third year, i.e. the current year we also got into inclusive schooling. We found that a bunch of our kids are getting better; they're taking therapy; they're getting better; the next objective for the family is, how can my kids go to school? Many of our kids go to a neurotypical school, and they are adjusted there, but 50% of them aren't so then we curated a curriculum for them which is specific to their neurodiversity – which we call BLISS (Butterfly Learnings Inclusive Schooling System). So for example, if somebody has dyslexia, we teach language in a visual way. If somebody has dyscalculia, we teach math in a different way. Currently, we have Junior KG, Senior KG and Nursery but from next year, we are going to go to grade eight for specific kinds of neurodiversity.

So two of our centers are also inclusive schools - Thane and Dombivali study and we will expand to 10 schools in addition to the therapy centers that we are running. So as we go ahead, there are three parts of the business. One is the therapy center model. One is the inclusive schooling program for neurodiverse kids. And the third is the technology that they're using to track outcomes across all of these kids.

2 Since you're expanding to other regions, do you see this as a program which can be done in a virtual setup as well, so that you can reach the masses?

We've done multiple experiments. About 4% of our sessions are done online. But typically, when you're working with two to seven-year-olds, an online setup doesn't doesn't really work. It does not deliver outcomes. It can be a last resort option for somebody, but it's not something that we are consistently able to deliver, barring few use cases around speech therapy, so dis-articulation, etc, there are very narrow use cases where we have seen good outcomes online.

3 Our research tells us that commercializing some of the diversity or inclusivity-focused solutions in India is slightly challenging. What is your take on this?

I completely disagree. We are currently at about 1.2 crores monthly run rate. We are growing at 12% a month, and we have been doing that over the last three years. I don't think commercialization is a problem. 50% of our households; the families who come to us stay with us for a median of 15 months, and they pay about 14,000 rupees a month. 50% of them are families earning less than six lakh per annum.

So while insurance and other payment mechanisms will take time to emerge, and they will definitely emerge, but even till then, because of the supply-demand gap and because of the fact that if you're delivering outcomes, people spend on their children.

The key is delivering outcomes and communicating those outcomes in a very transparent way to the payer - in this case, the parent. I don't think demand is a problem. It's rather supply. Scaling supply, and maintaining quality as you're scaling, is really the challenge.

4 If we can just go one level deeper in this, is the paying capacity different for solutions focused on physical disability (such as products for amputees) or developmental or behavioral disability?

I think the willingness to pay is maximum for the mild to moderate developmental disabilities. The earlier intervention comes in, you have better outcomes, so people don't think twice about investing to get the child to a particular level.

If you are talking about an amputee for example, that is a completely separate market. We focus on kids and within them, you could have DMD (Duchenne Muscular Dystrophy), you could have cerebral palsy, which is a small percentage, but we need to understand - I look at the business from the lens of my consumer. (Physical) Disability is a completely different market in that sense.

5 You've stressed a lot on the importance of outcomes, about measuring them and conveying them to the consumer. Typically, what are the impact outcomes, in this context, that are extremely important to track? Do you see an eagerness from investors to look at investments which are linked to the outcomes?

I'll talk about the investors first. So in that sense, we've been very lucky. Insitor Fund, Sagana, CIIE (IIMA Ventures) were also the investor in my first company - Biosense. So in that sense, we now have a multi-decade relationship with them. Maybe that gave us an advantage in attracting capital. Having said that, the system of measurement that we have created, i.e. the technology piece, is something that is extremely granular. So for example, if there is a child with negative behavior, if there's a child who's not sitting in one place, who's running around disrupting class, we have a program called Sitting Tolerance in which we measure how long is the child sitting in one particular place. And this is granular to the objective level.

Sitting Tolerance is one, Eye Contact is another. And we use a scale called VB MAPP, which is - Verbal Behavior Milestone Assessment Placement program, to map the child's progress across multiple dimensions. And this scale is something we created; it's a globally validated scale. We've just taken it, we've put it into practice, and we have just been very diligent in measuring every single session.

The other side was that demand is not a problem. I can easily see a scaled 200-250 crore kind of a company which is profitable, delivering 20-25% EBITDA, if we just keep the fundamentals right, which is clinical outcomes for us. It might take a year or two more than you planned, but in the large scheme of things, it doesn't matter. We have been very lucky to find investors who've agreed to it because that mission alignment is critical and without mission-aligned investors, growth would have been slower.

6 Coming to the point related to demand, do you see this demand coming in largely from Tier 1 cities itself or is awareness and demand coming up in Tier 2 and Tier 3 locations as well? What are some of the challenges you face in this regard?

So awareness has actually gone up significantly over the last four or five years, especially as people are consuming more content; it's easier to reach people out. People are having fewer kids; even those in Tier 2 and Tier 3 cities. And hence they are picking up signs of developmental delays earlier than usual. Tier 2 and Tier 3 does have an ability-to-pay problem. So when we go towards Tier 2 and 3, our sessions go from 1 hour 45 minutes to 1 hour. And then the focus becomes - how can we best utilize that one hour and then make the parents part of the session and give them tools so that they can do home plans as well.

The ticket size of 14 to 15,000 rupees per month suddenly becomes six to 9000 rupees per month. So more than awareness, the ability to pay becomes an issue, and that's where we have some centers in smaller towns like Satara, Solapur, Khopoli, where we are essentially experimenting with smaller sessions, plus parent training and home plan kind of a model. But, you know, I would say for the next five to six years, just Tier 1 demand itself should be able to see the company with 200 crore+ revenue.

7 When it comes to achieving scale, what kind of model is more efficient? Since you have two different business models (one is where you link with the schools, and the others, where you have your own centers), from your experience, what kind of partnerships really help when it comes to scaling a solution like this?

It's a mix of things. About 40% of our kids come in from pediatricians, 50% come in by parents finding us online and 10% are word of mouth and schools. We work with a lot of preschools. We have our own centers as well. So we have both COCO centers and FOCO centers. In both of the models we manage the operations ourselves. So even if we work with the school, all we are taking from the school is their infrastructure. The therapist is ours. The technology is ours. The delivery is ours and the promise made to the parent for clinical outcomes is also ours. We feel that it is an operationally heavy model, but this is what the country needs.

We feel that the country as of now, easily needs at least 1000 therapy centers, and at least 500 to 600 micro-inclusive schools which are focused on neurodiversity, which are curating curriculum and taking it ahead without diluting quality. So as of now, we are taking the hard way out. We are saying that we will keep all of the operations under our control. We will be measuring every single touch point, and we'll be transparently giving it to the parents.

Is it operationally clunky? Yes, but you know, it goes back to the growth versus clinical outcomes, such that if there is a school whom we can partner with, we will be happy to give our technology and our protocols, but then we have to be very sure that the delivery isn't being compromised.

So this is more of a real business. We are cash flow positive from the therapy business. It's a great business from a cash flow perspective because you get paid ahead of time and you have to pay something later. Gross margins are good. Growth is great, but all of it comes with the caveat that you have to put the child first.

8 Could you help us understand some of the challenges that you are currently facing?

For us it's the supply. The biggest challenge is getting in psychologists, putting them in the training program, having a certification and gating step, because you can't dilute quality. So if you're getting 100 psychologists in, only 50 get placed, and just getting the engine of psychologists out is really the bottleneck. Capital is also not a bottleneck. It's not like, if we put more money in, we can scale fast. The only thing to scale faster is to create more supply and for that you have to go back one step and tie up with colleges. You have to create more educational programs, which is what we're doing but it takes time.

The second issue is with respect to Tier 2 and Tier 3 locations around payers. 97% of our parents are out of pocket while 3% are reimbursed by CGHS where we were able to get reimbursements. We were also able to get our therapy included in some of the major employers in and around the Mumbai region. We talked about 3.5-4 crore kids who have neurodisability - 10% of them probably can pay something. 90% of them are still completely untapped, and for them to get services, either this has to be part of some sort of government schooling over the period of time where we use our technology, our pedagogy, and we teach teachers how to deliver it. We have not done it till now, but that is one sort of logical way to do it. The second is that it has to be included in Ayushman Bharat and some of the more widespread insurance programs. Right now, it's only in CGHS which is a good start, but not much of the population is under CGHS.

I would say payers and quality supply are the two biggest challenges. But even if you take the payers out, I think the immediate challenge is supply, because you still have a lot of people who are willing to pay for their children if you're delivering results.

We would also like to add that 90% of our team identifies as women. We have about 384 therapists of whom 90% are women. So there's also a great career path that is getting created for a bunch of people, many of them identify as women.

9 How are investors viewing this space of diversity and inclusion? Any specific expectations that they have?

If you're creating a 200 crore company revenue company with a 25% EBITDA i.e. about 50 crore of EBITDA; if you look at the hospital segment, or the single specialty segment a 40x multiple on EBITDA is not unfathomable- you have multiple healthcare chains that are operating at that sort of the median.

If I say, four years down the line we will be there and what is the entry valuation that would make sense for a fund to come in now and can I deliver a 10x or a 15x on this multiple, and would it make sense for a seed fund or a series A fund to come in? In most cases, the answer is yes, because it's a high probability 10x.

The only thing is, as founders, we can't be greedy on the entry valuation. If we push on an entry valuation which is too high, it might not make sense for investors. So as long as entry valuations are not out of whack, and they are somewhat tied to revenue and growth and keeping clinical outcomes first followed by profitability, it is easy for a fund to say that this is going to be a 10X for me.

The inclusion space is very diverse. I don't think people are looking at us as a disability and inclusion company. They're looking at us more like a healthcare company, which also has an interest in education. So somewhat of a mix of healthcare and education is where people are putting us in.

10 How are you viewing your peer group? Are there other players in the industry, such as specialty hospitals, who are trying to offer similar services?

Some hospitals may also offer therapy but that is less than 1% of their revenues. The unorganized segment has a bunch of peers. There is also the organized segment that is coming up, for example, Mom’s Belief is a company that came in way before us - they have aggregated a lot of speech and occupational therapists. There's a company called Lissun that has recently got a seed round of funding, and they have also started pediatric centers. So interest is growing. The biggest issue here is that investors who invest in this space, have to understand that in this segment, online doesn't work. And for children in the 2-8 age bracket, online definitely doesn't work. It can be used as a layer to monitor quality as you scale. But pure play online doesn't work. It hasn't worked anywhere, globally, as well. And, you know, the operational heavy nature of the business. These are the two negatives, for the business to scale demand; supply is the rate-limiting step .

11 Lastly, any suggestions that you would like to share with other entrepreneurs doing similar business?

I think there are different kinds of businesses. You have some businesses that should become a unicorn, that need to become a unicorn for it to survive. And these are typically winner-take-all kinds of businesses. You can't have more than two Swiggy and Zomatos, there will be consolidation. But in healthcare and education, I don't think it's a winner-takes-all kind of market. Here there are multiple companies that can coexist, that need to coexist to supply and to service the demand; businesses like ours.

So these businesses need to be rational with their entry valuations and need to be rational with the amount of money that is being raised.

The mindset of the founder, the mindset of the fund- all of these have to align to support these kinds of businesses. You can't take what has worked in an e-commerce business and put it here. Both are different frameworks and both are required. I think there is a lot of nuance that needs to come out from funds and founders at every level. The core is outcomes because if we have outcomes we will be able to raise funds, make profits, and scale and everyone will be able to make money. The entry valuations and the size of the funding that is coming in needs to be very tightly calibrated. These kinds of businesses cannot be over capitalized. In fact, you might be killing the business if you're over-capitalizing such businesses. So it's a fine line. And that's why capital is not the biggest problem. It also means that the founder who's taking money has to think about where the exit/return is going to come from. And what is the entry valuation? So everybody in the system has to be mindful.