Private equity has long dominated in-person behavioral health investment.
But some venture capital investors, who entered the behavioral health market by backing digital providers, have now moved into hybrid business models that include both telehealth and in-person elements.
For example, GV, formerly Google Ventures, recently invested in hybrid outpatient provider Guidelight.
Despite the higher working capital needs compared to digital-only businesses, some venture capitalists see potential brick-and-mortar investments.
“For a lot of industries, [in-person] leans more towards PE, but I think there are exceptions where these attractive, dynamics at play and telehealth only … doesn’t get to the root of the problem,” Claire Biernacki, principal at BBG Ventures, told Behavioral Health Business. “So when you’re solving the root of the problem with [certain] dynamics we do think brick-and-mortar can work.”
BBG Ventures has invested in Millie, a maternity, gynecology and wellness provider with a clinic-based model as well as digital elements, including app-based tools, virtual visits with a care team and remote health monitoring.
New York City-based BBG Ventures invests in early-stage companies with a focus on women and diverse founders. Its other behavioral health investments include eating disorder provider Arise and youth mental health provider BeMe.
A hybrid future
For venture capital investors, hybrid models must maintain high margins and can scale quickly to offset the risks associated with brick-and-mortar businesses, Biernacki said.
Certain business segments are more suited to hybrid or brick-and-mortar models than others.
The maternity market in which Millie operates has attractive return dynamics, Biernacki said, but may not scale to the same extent as other investments. Still, BBG Ventures did not underwrite the investment to a different return threshold.
Other investors, including Marissa Moore, principal at OMERS Ventures, and Michael Yang, senior managing partner at OMERS Ventures, say venture capital is not moving into brick-and-mortar investments because of the intensive up-front capital investment.
“VCs would not be the right investor asset class to fund real capital expenditures, which [includes] leases, office build-out, real estate, equipment and that kind of stuff,” Yang said. “That’s what we would consider capital intensive.”
Toronto, Ontario-based OMERS is an early-stage venture capital firm that invests in Series A to C companies. The firm has net assets of $127 billion and a portfolio that includes behavioral health providers Caraway and HelloSelf.
A hybrid opportunity may make sense for a venture capital investor in some circumstances, Moore said. For example, a business interested in value-based reimbursement structures may need to have some brick-and-mortar elements to meet payers’ expectations.
“It’s just a matter of your investment thesis and what you’re willing to underwrite to,” Moore said. “We don’t only invest in health care, so if we’re comparing a hybrid brick-and-mortar virtual behavioral health practice against the gold standard SaaS company, our capital is going to be better put to work in a SaaS business. But that’s not to say there won’t be others out there who would be willing to fund that hybrid model.”
But having a hybrid model may result in better care for patients, according to Margaret Malone, principal at Flare Capital Partners.
“As we think about investing in new companies, we don’t want to create more fragmentation,” Malone said. “I think virtual first is amazing and increases access tremendously. … . Ultimately, I think it is a hybrid model for everyone. Whether that is having boots on the ground in the local community, or helping you navigate to the right in-person resource, it is super critical. If it’s not part of your strategy today, you should think about how you might incorporate that.”
For Malone, hybrid models represent the future of venture capital’s involvement in behavioral health.
Boston, Massachusetts-based Flare Capital provides capital for early-stage health care technology companies. Flare Capital’s behavioral health portfolio includes Author Health, Marigold Health and BeMe.
Boston-based Author Health is a hybrid mental health startup. The provider raised $115 million in 2023 led by General Atlantic with participation from Flare Capital Partners.
Malone would be potentially interested in a brick-and-mortar business model, provided the company has the ability to scale its model and has thoughtfully reduced its capital need to build out its physical footprint.
Ultimately, investors must ask, “is it the right model,” Malone said.
Certain business segments, like autism treatment, have historically been the domain of private equity, but some hybrid or brick-and-mortar business segments may hold promise for venture capital.
Innovative value-based business models that use in-person facilities or mobile vans to meet patients “where they are at” may be an attractive segment for venture capital, Malone said.
Even as venture capital investors increasingly move into domains outside digital, they will likely avoid traditional private equity strategies.
“I don’t know if you’re going to see VC invest in a traditional roll-up strategy,” Malone said. “But I think you will see VC invest in companies like that have been really thoughtful about how to de-risk the brick-and-mortar capital leads and have a differentiated clinical model or business model to innovate in this space.”
Venture-backed hybrid or brick-and-mortar behavioral health providers will also need a solid patient acquisition strategy and strong technology stack to drive margins, Malone said.
