The case for the physical clinic

This post was co-written with Anarghya Vardhana (VC at Maveron) and Carine Carmy (co-founder and CEO, Origin)

Some VC investors believe that brick and mortar - referring to a physical presence of some kind - should be avoided at all costs. This cohort is allergic to the idea of a “four wall,” in favor of a software or digital-only approach. The perception is that clinic businesses are an expensive liability for an emerging company and require specialized expertise to build, while digital business models are lean and scalable. In a higher interest rate environment, they may also view clinic businesses as higher risk, given their higher capital needs in the immediate and longer-term. They fear that these companies will be mired in debt, if they’re not able to successfully raise equity. 

And yet, the track record of clinic and hybrid care businesses in health care indicates otherwise. Some of the biggest recent exits in healthcare services have involved companies with actual clinics: One Medical (sold for $3.9 billion to Amazon), Oak Street (bought by CVS for $10.6 billion), Lifestance (IPO at $7.5 billion market cap), and PE-backed Premise Health (acquired by OMERS Private Equity for $1.1 billion). It may seem like we’re cherry-picking examples, but there haven’t been many exits yet in health-tech. So the performance of this asset class is notable.

What we see in digital health is opportunities for every modality: Brick and mortar, hybrid and telemedicine only. We should be able to adapt to the needs of the patient, and what’s right for them. And that means: Founders shouldn’t write off clinics simply because they seem expensive to run. If a clinic is indicated as the optimal way to deliver care for that patient population, there are creative ways to build and operate them. We’ll talk through some of those in this piece.

“Even as technology and digital solutions are significantly enhancing health care, there remains an important place for in-person human interactions for advancing diagnosis and treatment,” said Amir Dan Rubin, the former CEO of One Medical and the founding medical partner of Healthier Capital. He said that seeing a patient in person can also “further build trust” and make it easier to coordinate their care.

So here are some of the biggest myths around clinic business and our attempts to bust them. As always, we hope to hear from you if you agree/disagree!

Myth 1: 4-wall businesses require millions of dollars to open

Some clinics do indeed require large upfront investments of in the millions. These can be clinics that have expensive equipment like outpatient surgical centers. They might also require prime real estate, or are competing on brand appeal to go above and beyond on the look and feel (e.g., One Medical, Forward, Tia, which focus on urban areas like San Francisco and New York and are known for their higher end, even “spa-like” experiences).

That said, the majority of 4-wall healthcare clinics can be built for a fraction of the cost. Assume less than $500,000 for an average build for a host of provider types, from physical therapy and medspas to mental health and primary care. Anarghya would ideally hope to see a “physical location to payback” in 18 months (18 months to 3 years, from what we can tell, is the goal for most companies, inclusive of marketing, recruiting, training and operating losses). Another recommendation she often shares to founders in this space is to “live and breathe the dollar” – understand how every dollar of revenue per square foot is used. Look at the Apple Store for an example of what’s best in class. 

There’s not great data publicly available about the current state and costs of 4-wall businesses. If you’re leading a clinic or hybrid model, we’d love to hear from you anonymously and share the data back with this community. Please fill out the survey.

So how can founders bring prices down?

1) It comes down to fewer expensive equipment needs and lower “per room” buildout costs. As opposed to say an outpatient surgical center, a PT clinic might only need sinks, beds, chairs, cabinets, tools and so on – so there’s not as much expensive equipment required. Embrace minimalism too. “Align on very few branded elements that you want to preserve and find the most cost effective ways to do it,” suggests Steve Eidelman, founder and CEO of Modern Animal, which builds clinics for veterinary care. There might also be ways to reduce costs by simplifying design choices, requirements around lighting, power, HVAC and so on.

2) Companies can use multiple types of real estate to lower costs, beyond medical offices. In the case of Carine’s company, Origin, which delivers pelvic floor and whole body physical therapy to women, the team has purposefully flexed into spaces with some colorful past lives, including a former furniture store, ballet studio, and a law office. That said, be careful with any real estate that comes with difficult landlords who offer little in the form of a tenant improvement allowance, demand fixed commencement dates or are challenging to work with.

3) If you don’t need to be on the corner of “main and main” from a real estate standpoint, there are further discounts on the price per square foot. We’ve also seen companies, like HerMD, finding success in geographies that are not Tier 1 cities (the focus is on smaller towns and cities in states like Indiana and New Jersey) and therefore less expensive from a real estate perspective. Patients in these geographies need help and often have fewer options than larger cities. Anarghya is looking to invest in founders who have thoughtfulness and strategy around how they select locations and build. If there’s a reason they need to be in an expensive city on a busy thoroughfare, that’s doable. But there needs to be a clear explanation for that. Beyond that, there also needs to be an understanding of the mix of payers in that specific geography, and a strategy to adapt to the specific needs of that market on the ground. 

4) Another tip is to avoid huge national firms for design, general contractors, engineers and so on, notes Eidelman. Smaller, newer ones may have their own risks though, particularly around quality and accountability. So take the time to evaluate less expensive options but ask for references.

5) Build smaller and simpler. Modern Animal cut 30% of its square footage, which also cut its costs by 30% by redesigning the clinics in a more creative and intelligent way. Some of the rooms got a bit smaller, but the layout was better - and those choices didn’t have an impact on providers and patients. Eidelman also recommends trying not to squeeze in as much functionality as possible and build one or two prototypes repeatedly to produce consistency, efficiency and predictability.

“At the end of the day, brick and mortar is not software,” said Eidelman. “Brick and mortar is about keeping build costs down, ramping quickly to minimize operating losses, and driving payback quickly.” Eidelman said every company’s equation is different, but taking on really expensive real estate and complex buildouts will only make this equation more difficult. “Success comes from repeatable, predictable buildouts, ramps and paybacks,” he explained.

Indeed, the other big driver of cost in launching and scaling a 4-wall model is ramp time – i.e., how long it takes to get a clinic to full steady state utilization. If that ramp is longer, it can mean companies need to pay full rent and high wages in advance of a breakeven point. That can create anxiety amongst the company’s executive team and the board. 

What other innovative approaches are worth knowing about?

There are other strategies to de-risk or reduce both Cap-Ex and ramp costs. The first is a health system joint venture (“JV”), which can take on multiple flavors but in essence involves a health system or hospital funding the build-out or offering clinic space, coupled with a strategic partnership. That drives patient volume, typically in exchange for part-ownership of that location and future revenues. Tia Clinic is an early proponent of this model, given that so many health systems are struggling in women’s health and can stand to benefit with a strong relationship with a chain of Gyn clinics. These kinds of agreements, which are becoming more common in digital health, can also make it possible for startups to contract and credential at higher rates. 

Another strategy is M&A, which is more often deployed in traditional PE-backed healthcare services. Partnering with an existing practice may cost more upfront but can reduce the costs of future market expansion, particularly if there are existing payer contracts or brand awareness. These factors could result in lower marketing costs and faster ramps.

Another approach to de-risking or reducing costs is the “popup” clinic model. This can take the form of the clinic on wheels (Studio Dental, Henry the Dentist, KindBody early days), a “store in store” model (Parsley early days in WeWork spaces, Origin in the Providence Wellness Collective in Atlanta), or other room-rental models. Store in store refers to opening a pop-up or permanent space in another clinic, business, or collective. Room-rental models can include store-in-store, or other models like suite rentals that enable you to rent a room but not manage the whole space, akin to a hairstylist renting a chair in a shared salon space.

There are many benefits to a popup model, especially for companies unsure of what their next new market should be. The location within a market doesn’t need to be set in stone (there’s more opportunity for experimentation before making a firm choice); there are lower buildout costs, and there’s an opportunity to start out with fewer employees before the company is ready to ramp. There’s also the opportunity to generate demand and excitement in the months ahead of the official launch into the market by building a waitlist - and that can provide a useful window into how successful a region will be. 

What we also don’t talk about enough is the brand and reputational value of a pop-up clinic. Kindbody’s mobile van was essentially an advertisement on wheels for the business. The company was able to use it to build partnerships with employers by offering their workers a super convenient way to learn about egg freezing. Correct us if we’re wrong but we weren’t aware of Kindbody building more than one of these fertility vans? And yet, the press reach was enormous. There’s just something fun and differentiated about the idea of a mobile van that offers testing and other assessments, so that users don’t even need to walk a few steps to get care. 

Myth 2: Clinicians don’t make good managers.

There’s a common misconception that clinicians don’t make good managers given their lack of formal business training. Chrissy has written about this topic in depth, particularly when it comes to the bias against investing in physician CEOs.

In response, the “dyad model” has become the norm across multiple types of healthcare practices. The dyad model is a leadership model that pairs a physician leader with a non-physician administrative leader. The goal, in theory and sometimes in practice, is to balance the needs of healthcare delivery and business sustainability. From hospitals to multi-location practices like DaVita, we’ve seen the rapid rollout of this model across the country. 

That said, the dyad model is not required and it can add unnecessary overhead, not to mention operational friction between clinical and non-clinical teams. It also may impact career path opportunities for clinicians, who otherwise may have chosen to pursue business leadership. Carine and her team at Origin shifted to a fully clinician-led model, and the results have been stronger clinic performance, better cross-team dynamics, and more career growth and financial opportunities for clinicians. In practice, this means that each clinic is managed by a physical therapist who goes through management training and leadership development, and is supported on the backend  by business teams for various operational,  marketing, and HR needs. The clinician still treats patients part-time, which means they’re closer to the day-to-day work of their team and understand the unique needs of the clinic.

The bottom line is that the ideal model is probably business stage and size dependent. In a single location practice, the clinical leader is often the business owner and has a highly competent office manager who acts as their number two. When there are multiple locations, there’s the dyad route or there’s the opportunity to invest in management training and development of clinical leaders, augmented with operational support.

Myth 3: Telehealth is always more convenient and equally effective

Telehealth can be more convenient, certainly. But that’s not always the case. Many patients have encountered struggles with video-based telehealth at the office or at home, where it’s hard to find a safe space for an intimate health care discussion.

Likewise, many companies are now offering near-site medical practices, where it’s possible to access in-person care within a few steps of the office. This is also part of the strategy amongst the big retailers, like Walgreens and CVS, which increasingly offer medical care in the building. Anarghya recently got a Covid booster at a local Walgreens, just a few minutes walk from her office and achievable within a few minutes. Let’s not forget that brick and mortar can also be convenient, particularly when businesses make it super easy to find out their hours of operations, provide directions, and so on. That is particularly true for those who live in more dense, urban areas, where there’s typically some kind of brick and mortar health care facility on every corner.

Click and mortar for the 21st century

The majority of patients still want to see a doctor or health practictioner in person at least some of the time, despite the telemedicine trend. According to a 2023 study of 1226 participants, 71% preferred in-person while 29% preferred telemedicine. This is true for Gen Z too, who according to Springbank Collective and Able Partners “actually prefer convenient in-person healthcare within the four walls of brick and mortar.”

So there is still going to be growth when it comes to brick and mortar/hybrid businesses, even at a time when telemedicine investments have reached more than $15 billion in venture capital investment since 2020.

Where hybrid or brick and mortar health-tech companies ultimately need to shine is in the patient experience. It needs to be extremely simple to liaise with front desk staff, book an appointment, and communicate effectively with care teams. That’s what the traditional system still often lacks.

This may add some cost, even as we’ve been describing ways to reduce it, but investing in the experience is key both for acquiring customers and retaining them. What we hope we don’t see is companies in health-tech looking to reduce their spend by letting their patient experience slip. We would argue that patients can go without the spa music and fancy bubbly waters in the waiting room, but they do expect a quick response to an inquiry and appointment booking that’s as easy as reserving a spot at an exercise class. No one expects health care to be fun or relaxing; but we don’t want it to further burden us amidst other competing priorities or create more stress and pain. 

That said, it is still hard to raise in this market. So for those looking for backers, here’s a summary our hot tips:

• Be replicable: If you’re starting to think about raising for a Series A and you’ve only really excelled in one market, consider moving into a completely different geography. Investors will want to know that you can pull it off at scale. 

• Have a strategy: If you have good reason for investing more into an expensive clinic in an upscale part of town, justify that. There are ways to save on capital expenditures, which we ran through in this piece, but there are also reasons to spend more lavishly that might make sense. The key is that your model supports your assertions - and that the model is grounded in reality!

• Don’t waste time: As convincing as this piece may be (we hope), not all investors are bought into investing in brick and mortar. So before you spend precious time pitching your deck, shoot over an email and ask when the last time was that they invested in anything with a physical clinic. Some firms are “software only,” and nothing you say will get them to a yes. 

Again, we’re looking to hear from you if you’re leading a clinic or hybrid model. Please fill out our anonymous survey, and we’ll share the results back with the community in the next few months! Thanks everyone.