Honor of the Midwest: How a Chicago Startup is Taking on Home Care
Setting up a home care shop in Illinois is no easy feat, as one startup CEO found out. With no state budget in place for nearly two years, the business reality in Illinois left the startup, called Respect, in a pickle and facing a possible year-long delay to launch—despite the CEO’s personal connection to Gov. Bruce Rauner.
After eventually securing a license and getting the business off the ground in Chicago and Milwaukee, Respect is now looking to grow by leveraging its app technology. As a company that compares itself to another home care startup, well-funded California-based Honor, Respect is revving into action and is one company to watch.
Home Health Care News sat down with Bruce Masterson, CEO and co-founder of Respect, in their Chicago office last month, when the company had just brought its first six clients on board. With a roughly 40-year career in information technology services, including running major offices at some of the biggest names in finance, Masterson is taking a leap into health care.
Masterson spoke about how the business sprouted from Chicago startup incubator Startup Foundry, its tech-forward approach to caregiving, when the company will be seeking a $5 million investment round, and what some other well-funded home care startups might be doing with all that money.
What’s the current status of the business? You just launched in Chicago at the start of this year and have been in Milwaukee a little longer.
BM: Our census is not as high, never as high, as I want it to be. In Milwaukee, we have 18 clients. We’ve been in the Chicago office since May of 2015, and we opened in Chicago in February 2017.
We didn’t get our license for Illinois until the end of September because of the Illinois budget crisis. That was an entire circus. We were originally told the lead time was six to seven weeks, back in 2015. We put our license application in in January , thinking we were going to launch in March or April. Six weeks went by, we called up The Illinois Department of Public Health (IDPH) and asked where we were. We were nicely informed that with the budget crisis, they had lost staff, couldn’t replace them, and it was going to be 10-12 months before we got a license.
Wow. What was your reaction at that point?
BM: After picking my jaw up off the table, my immedicate reaction was to go to Milwaukee the next morning. We had already done our homework, we knew where to go. Then we contacted the general counsel at IDPH, got his attention. I contacted [Illinois Governor] Bruce Rauner. I worked with Bruce in 1978 after hiring him out of Dartmouth as a BA, so we’ve known each other for a long time.
One way or another, they found a way through the thicket to hire employees for 75 days at a time without violating the budget law. Ultimately, we benefited from that. But it still took an extra six months. We had already hired 20 CNAs and started training them. We had to basically wave goodbye to those people—and all that money and time. It was very frustrating.
The good thing is we were able to go to Wisconsin and get started up there. We were able to learn a lot of lessons and apply them when we came back to Chicago.
In Chicago, what’s your hope for your size by the end of the year?
BM: At the end of the year, I would hope we would be in the 80-120 client range. I think that’s reasonable. In Milwaukee, it’s smaller market, not as robust as Chicago, so 60-80 clients in Milwaukee.
We have written a lot about other startups, like Honor, Hometeam, 24Hr HomeCare and HomeHero, which recently closed it doors. Some have huge funding behind them, others don’t. Where do you see yourself among those guys?
BM: Oh, don’t mention HomeHero! We are closer to Honor than anything. HomeHero, they always had an issue. They were doing one thing that, after 40 years in business I’ve never been done, and that’s competing on price. They were very heavily competing on price, so much so that when they went from the gig economy to W-2, they were cratered because they didn’t understand how to manage it.
I looked at the gig economy, 1099 versus W-2. I did the math. At the end of the day, a good W-2 employee doesn’t cost you very much more than an uncontrolled, untrained gig economy employee. That’s one of the problems, that they were so hung up on competing on price. They were running in California in like a $19 per hour ballpark. As W-2 employees, you can’t really do it. By the time you add FICA, unemployment, workers compensation, it adds up.
The HomeHero folks, they also got enamored with hospitals. They got sucked into the whole hospital thing.
I look at someone like Honor, and their model is close to ours. They are playing a long-term game. We are also playing a long-term game. They are getting more invovled in their communities, doing the same thing we are doing, in terms of networking extensively. You have to do that. This is not a market that can be driven digitally. You have to get involved up to your elbows and talk to people and keep talking and keep talking. If you can develop relationships, it works really well.
Can you explain to me what you share with Startup Foundry and how the company grew from the incubator?
BM: They are the parent organization. As an incubator, their job is to identify concepts, build up companies, and, ultimately, spin them off. So, we’re in that stage of spin-off right now.
We are courting venture capital right now. Working with Startup Foundry, we will get to a good position financially by fall, but that’s a slow growth path. We need more money for marketing and business development folks. Right now, I am business development for Chicago. While I am very charming, there’s only one of me, and I am limited. So, we will add more folks, and I will work probably only 60 hours per week instead of 80 hours per week at some point.
What’s your funding goal?
BM: We’re looking to raise $5 million.
I’m thinking about Honor, which has $42 million alone in their last funding round. For them to raise that much money and not share any numbers with the media or publish anything about their revenue…
BM: I know, they don’t share numbers with anybody. They are sometimes invisible.
Right. The only anecdote I’ve gotten from them is that they are the biggest provider in a certain market. Can you explain to me why it takes that much money to grow in the home care market?
BM: It’s fragmented, it’s regulated. You kind of have to think about it like an insurance market, where you’ve got an insurance commission in every state. [In home care] you’ve got a public health department in every state. They’re all local regulations. In most jurisdictions, you have to get licensed. In a state like New York, it’s a four-year lead time to get a license, which is insane. It’s not like a typical business where you can roll it out nationally. You have to fight the battle in every state.
And because it’s not a highly digital market, it’s a high-touch market, you have to have people like me out there talking to people so that when a geriatric care manger needs a caregiver for their client, they will call us and rely on us. It’s house-by-house growth. But you get to a tipping point. We are getting to a tipping point in Milwaukee, getting there in Chicago. The advantage of being an old guy is that I’ve done this enough.
Do you think it takes millions of dollars to grow home by home, to get market share?
BM: Well for us, I’d like to be doing more advertising. Advertising is expensive, but it’s how you get your name out there. It accelerates the tipping point. I can’t imagine people in the San Francisco market don’t know who Honor is. There is a benefit to that.
I don’t know what they are spending all their money on, I can’t figure it out. Part of it is technology. I think they are keeping a lot of dry powder, my gut is that part of that may be for inorganic expansion as well as organic. Being a fragmented market, there are going to be some instances where you can find a quality provider and they are going to be looking to sell the business. It could be a faster entry route for those guys. I’m thinking they may have a strategy to buy to expand. It would make sense to me. With that much capital, I don’t know how else you deploy it.
I’ve looked at plays like that, it makes so much sense for a rollup at the end of the day. It does leapfrog some of the barriers. For instance, had we bought somebody in Chicago, we would have had a lot of those contacts I’ve spent months developing on day one. That would be valuable and would save us a lot of time. You would start with a pool of caregivers already.
So why not go that route? Why didn’t you?
BM: Ultimately, we may end up going that route. Right now, it’s not in the plan. We are doing it organically, and you learn a lot organically. You can make an awful lot of mistakes playing the sport of kings. M&A is the sport of kings.
Written by Amy Baxter