Vet care for the 21st century with Modern Animal’s Steven Eidelman

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0:45Allie:Gemini and Chrome is here for it. Ready to make anything online make sense? There's no place like Chrome. Check responses set up required compatibility and availability varies 18+. We're at a point now where it's really even in question of whether people can afford or even have pets. Hello, hello. Welcome to the Termsheet podcast. I'm Allie Garfinkel, senior writer here at Fortune. And every week on Termsheet, we go over the latest deals, news and insights in venture capital, private equity and startups. Here is where you can listen to some of the most exciting figures in the private markets. And this week, I want to talk about something that I've been asking people about for months.

1:23Allie:will we ever see a trillion dollar startup? Now, I asked a bunch of people this question, probably dozens of VCs on and off the record, and almost everyone unanimously, to my surprise, my editor's surprise, said yes. And to be fair, OpenAI is about halfway there, valued at$500 billion. So recently I've been going around asking people, if we are going to see a trillion dollar startup, if we can call it such a thing. What should we call it? Unicorns refer to, of course, billion dollar startups, a term coined by Aileen Lee more than a decade ago. And I think it's time to coin another term. Some of my favorite terms that have come back to me so far include gigacorn, terracap, triceratops.

2:07Allie:One of my suggestions is dragon. However, I would argue the best suggestion is kaiju corn. Kaiju is a Japanese term for a giant strange beast most commonly referred to as Godzilla. I love all of these names. I would love to hear more names from all of you. But it is important to say that calling a company with a trillion dollar valuation a startup is a little bit of a misnomer. As one person pointed out to me, that's basically its own economy. Speaking of companies that are basically their own economies, OpenAI recently released its much-anticipated, long-rumored web browser called ChatGPT Atlas.

2:46Allie:It's important to say for anyone watching, why does a web browser matter? Why was there so much fur and rumor around this in the first place? Think about it in terms of Google Chrome, so named for a reason. Google, of course, internally developed Chrome around 2008. If you own a web browser and you're in the search business, it is a way to own that search experience. And OpenAI has certainly expressed interest in ChatGPT being a place where search can really happen and live for consumers. Now, it's important to say there have been a lot of mixed to positive reviews of the product itself, but Atlas also has brought up some concerns around privacy and data collection.

3:25Allie:And now it's time to talk about pets. Actually, I'm sort of serious because this week's guest is Stephen Eidelman, founder and CEO of Modern Animal, which is a veterinary clinic network. It is backed by a number of VCs, including Upfront Ventures and Founders Fund. Recently, Modern Animal raised$46 million in Series D funding. And I am so excited that Stephen is here. I've been tracking his company for about 18 months, give or take. And one of the things I find fascinating about Stephen is I think he is good at something very few founders are good at, which is setting up why his business is important in the broader context of the macroeconomy.

4:06Allie:Stephen, like almost no one else I've met, is really good at establishing why modern animal is at the intersection of all kinds of economic trends, from inflation, labor dynamics, concerns around healthcare pricing, concerns around how consumer behavior is evolving, and of course, the ways in which how we feel about our pets is evolving. Veterinary clinics as businesses are in a time of serious transition. And talking to Stephen, I find, illuminates not only where pet care has been, but where it could be going. Here's Stephen. It's game time. Welcome to the Term Sheet Podcast. Thanks for having me, Allie.

4:43Allie:I am really excited you're here because we get to talk about pets, but there's a lot involved in that. And I want to actually go back to the beginning for you. You actually started, You have a background as an investor in part. What do you consider your first term sheet? My first term sheet? Well, I did a couple of deals as an investor and then realized I had so much admiration for the founders that I was trying to invest in that I had to go do it myself. So I started my first company in 2012 and we went to pitch our lead investor at their annual summit. And I'll never forget the partner who led the deal for us.

5:28This was for my company, Whistle, came to our hotel room where we were staying in the hotel where their annual summit was and came to kind of give us the good news that the partnership had approved the deal. And so that was that was my first term sheet.

5:43Allie:Pet care is a famously tough business. Why did you decide the veterinary business was ripe for disruption when you started Modern Animal? So I started the first company was in the pet space. And what was hard about that was we were doing hardware. So to your point, you know, couldn't just go do software, had to go do hardware. And then after that, we sold that business. We sold it to a company that started buying a few really large veterinary companies as part of their broader strategy around pet care and pet health specifically. And what was amazing to see when they had brought some of these businesses in, they acquired a few businesses that people might know, VCA, Danfield, a few thousand hospitals around the U.S.

6:27I started to learn a lot more about the veterinarian, the experience that they were having, working in a practice. And of course, as a pet owner, I've had dogs my whole life. There was a lot more I expected from my own experience going to the vet. But in that moment, I was pretty set on I want to build a software company. I don't want to go do something so hard again. And the challenge was like once I saw the need to build a fundamentally different experience for pet owners like myself, and even more, I'd say more motivating for me was for the veterinarians and technicians and people who work in a practice.

7:01You couldn't unsee it.

7:03Allie:I was going to say, what do you feel like people don't consider enough or don't even fully understand about the veterinary business and sort of the challenges that a lot of vets face? A lot of people think about the puppies and kittens and how fun it must be. And a lot of people think about, from a business perspective, what a great business. There's been dozens of private equity firms that have been attracted to the category in recent years to buy up clinics. There's been a huge backflash against that now. So I think what people don't realize is, well, what is it that makes this industry really tick?

7:36It isn't just four-wall EBITDA. It isn't just, you know, being able to roll up clinics. And it isn't just about, you know, pets. It's really about this incredible ecosystem that developed of people, first and foremost, who are wildly passionate about doing this work, which is providing care to animals, right? The motivation that someone has to have to pursue this as a career is tremendous. to go to veterinary school for four years, to accrue a lot of debt, to deal with the ups and downs of providing care on a day-to-day basis. You only choose to do that because you love animals and you want so deeply to commit your life and your career to caring for them.

8:17And there's a lot of negotiating that has to happen along the way of how do you balance cost of care with the, you know, the reality of the care that might be needed in any given moment in time. How do you balance your own sanity, you know, and dealing with all the difficult things that might come in, you know, from one appointment to the next? It can be life-saving care one moment to just a difficult customer conversation because someone's unhappy about the price you're charging for something versus something that's online. So there's a lot of complexity in the day-to-day. I think there's, it gets taken for granted is what I would say.

8:52Allie:I remember vividly the first time you and I talked about this, and I think we talked about how there are actually very high suicide rates among vets. And it had never occurred to me, not only the depth of the challenge emotionally, but logistically, because unlike a human, a dog can't talk back to you and say, this is what I want. You only have the owner and whatever diagnosis you're able to make. And it creates a lot of uncertainty around something that's really important to people. People, I mean, we talked about this a lot during COVID, but people love their pets a lot. There's a lot of emotion in this industry.

9:28I think that's what gets taken for granted when people think about this as a business. This is really a line of work people do purely out of passion. And then the customers are there because they love this being that they're seeking care for more than anything. And, you know, they, I mean, especially now, younger generations of pet owners really do treat pets as children. And you're on a regular basis navigating these life and death decisions and also very expensive care decisions. I think a lot of times people leave a veterinary practice and say, I can't believe it's so expensive. I must be getting ripped off.

10:01But the thing that a lot of consumers don't appreciate and the general population doesn't appreciate is we are providing care as a veterinary practice that is equivalent in many cases to the care you receive as a human being for a fraction of the cost. We don't have a payer system. We don't have Medicare. We don't have employer-based health care. Right. So even if you have pet insurance, you are still paying full freight either for the insurance or for the care without insurance. And it's really expensive. And so that adds a heightened sense of sensitivity to those conversations. And for the veterinarian, it's a really complex, when I say veterinarian, I really am talking about the veterinary professionals, whether it's the paraprofessional, the technicians or nurses or the doctors and everyone else who's involved in providing care.

10:46They are having to deal with their own challenges of how do I recommend care that someone may not be able to afford and feel okay when they reject that care. And I know that that patient requires that care. that can be heartbreaking.

11:01Allie:What is your view on how private equity has affected the veterinary business as a whole? Yeah, this has become a really big topic lately. I think important to note that, first of all, this has been happening for some time. Veterinary practices started being rolled up really in the late 80s, early 90s. And it started to hit fever pitch sort of in the 2010s up until the end of sort of COVID and when interest rates were zero. People realize this is a good business. The secular trends towards younger populations getting pets at a higher rate, especially during COVID, the pandemic. And so that drew a lot of interest from private equity.

11:46What happened over the last few years is as COVID sort of subsided and things had started to revert back to normal, there's all these new players and all this private equity capital that's come into this category and it's seeking a return. And historically, how would they do that? They would raise price. They would optimize operations. Right. They would try to lower costs. And so once enough hospitals, I think, had been bought in this country and now demand has kind of reverted back. It's not COVID where everyone and their mom is getting a pet. Right. And no one can get into their local neighborhood vet.

12:20All of a sudden, sort of the tide's gone back out. And a lot of these private equity owned practices are being forced to reckon with, well, I don't know how to really create a better place to actually work. I don't know how to actually create a better experience for a customer. And so they're struggling. and their attempts to sort of improve the business while they're struggling leads them to further wanna increase price, leads them to further wanna squeeze margins. And what that I think does is it starts to become really obvious to the consumer. And so you're starting to see a lot of people complain about it.

12:54And how is it manifested? It's manifested in the form of higher prices, but that is not necessarily just because of private equity. We've seen broad-based inflation in all categories And we've seen about 60 % higher prices in veterinary care, which is almost two acts what we've seen outside of this industry broadly in the economy. And so when you ask yourself, well, is that because of private equity? Not necessarily. I think that's an easy scapegoat. I think the reality is 50 % of revenue of most veterinary practices is labor. So we've seen a huge increase in labor costs. Wages have gone up. Doctors are earning more, which is great because this is a population of people that have historically been underpaid.

13:35but it has to show up in the cost that we all as pet owners pay. Also the cost of the other inputs, diagnostics, supplies, things like that, all of that has gone up as well. So now we are facing this situation where a lot of private equity consolidators have bought up a lot of hospitals. Costs are higher, and the consumer is left really asking themselves, can I even afford to have a pet?

13:59Allie:The thing I've sort of learned as I've sort of spent time working on this story and as we've gotten to know each other a little bit from you is that the vet business as a business is evolving and has to evolve. Right. It's sort of it's sort of at maybe not an inflection point, but a moment of substantial pressure. How do you think about modern animals business model today and how has it evolved over time? Yeah, the industry has to change. And I saw that in 2018 when I started the company. But it's interesting now with technology accelerating, even in an industry that has resisted technological change like the veterinary industry.

14:36Now with AI, it's sort of inevitable. And so the change is coming. I think that at Modern Animal, my view is we have a role to play in shepherding the future and we're building the future of veterinary care. That's our mission. How do we do it thoughtfully? How do we integrate technology in a really intentional way to make the thing that everyone is here for, which is care for the animal, to be optimized, right? So that means make it easier for a veterinarian or a technician to deliver care. Make it easier for a pet owner to understand the care, to have a direct relationship with the veterinarian.

15:10Those are the things that have been pressured, right? As the demands of the pet owner have increased, as the work-life balance has been challenged. The veterinary profession now is about 80 % female, 90 % of graduates coming out of veterinary school are women. The needs are different. We see a huge increase in the number of veterinarians who don't want to work full-time anymore. They work relief shifts where they want to work part-time. So there's a huge need for optimizing the workflow, eliminating the things that take up a ton of time, that don't actually further. The thing that the veterinary went to school for, the technician went to school for, which is to practice medicine.

15:47and the thing that we as pet owners go for, which is help me with my pet's issue right now. So our goal is how do we continue to build a platform and a system that makes that as easy as possible and it will never be easy, right? Because of all the things we've talked about today. So that's really the business model is make it the absolute best place to deliver medicine and to access care.

16:09Allie:What does it actually mean to implement AI in veterinary care? I think what's fascinating about AI right now for service companies is there's a lot of work that gets done that is inefficient and there's no other way to do it other than a person historically doing it. And I think software has had an opportunity to streamline some of those things, but deterministic software is pretty rigid. And I think veterinary care and in health care in general, it's not black and white. It's not if this, then that. There's a lot more nuance. There's a lot more subjectivity. There's a lot of connecting different dots.

16:44So our mental model for AI has been, first of all, it's here and it's happening and it is up to us to choose to embrace it or not. And I'm seeing a lot of innovative thinkers in this industry for the first time really start to be much louder in their voice around this. individual practitioners, practice owners, and other groups where people are saying it's happening and we can either choose to be a part of it this time or we can reject it. Let's be a part of it. And so I think there's a lot of people being really creative around how AI impacts this profession, finally, because that was not the case with technology broadly.

17:18Allie:I was going to say, because you say this time very specifically, implying that maybe there was the mobile wave got missed, the shift to cloud got missed. I mean, what are we talking about here? I just I'll never forget going to an industry conference and there was a veterinarian on stage speaking who you could sense like his practice had been impacted. And it it sucks. You know, you built this practice over a long period of time and your business is being impacted by this force technology. This, you know, a force that no one that you cannot name or does not have a face. It is just technology, a broad sweeping historical force.

17:53And it was like, we have to beat it. You know, it's like, how do we beat, you know, the way Uber beat taxis? Like, how do we how do we win? And that was the wrong approach, of course. Right. And I think this time, you know, there is a number of, you know, veterinarians who I follow and listen to what they say and what they write, who are being really thoughtful with just in their own practice, how they're implementing technology and AI specifically. And so I think the way we approach it, you know, we started our sort of AI journey really testing, like, how do you summarize things really easily?

18:25Take the cognitive load off of the doctor who has to look at, like, my dog, Layla's medical records at Modern Animal are 400 pages. And she's, like, pretty healthy. I'm a very paranoid pet owner, but she loves chocolate, and that's a problem for her. And so there's a lot of history. Reading all of her history is not possible for a human being, right? And so I, as a pet owner, expect my doctor to have read the notes, to know everything, but it's not physically possible. So AI makes that easier. How do we summarize the past? How do we summarize, how do we transcribe the medical notes during the appointment?

18:59How do we summarize the discharge instructions and the follow-up care? It starts to get a little bit dicey when you start thinking, well, how do we use AI to interpret diagnostics? How do we use AI to aid clinical decisions? so that's where i think for us the thing that we've built uniquely i think a lot of muscle around at modern animal is our care team are partners in building all of this when we roll out features they're piloting it they're part of the the team that's building that feature they're raising their hand they're saying i'm interested in this feature i asked for it i want to help pilot it i want to iterate on it i'm going to provide feedback and i will let you know when it's ready to go live that's not how we used to do it and that did not work so we built this like change management culture around everything.

19:41It could be operational workflows or technology changes that allow us to iterate quickly and stay safe. Because staying safe is really, really important when you try to change anything, I think, in healthcare.

19:51Allie:Well, and sort of to this point, when we've talked before, you've said, hey, if someone who I really respect says we need to stop this right now or stop and reassess what we're doing here, you've said, okay, got it. Pulling the plug. Start over. Yeah. And that wasn't the case before. So no, we've done all of our beta testing and our QAing and everything is ready to go. But until, you know, I'm thinking of specific doctors on our team who I really trust and have not always listened to, but like Dr. Berkenthal and Glendale, like our lead doctor there, who was a software engineer early in his career.

20:22Like if he says something's not ready, it's not going to go live. And we as a team have had to learn, how do you iterate in a category that has historically rejected technology or had at least a very hard time incorporating it?

20:34Allie:Well, and sort of to your point about industries that have resisted technology I know you've been looking to retail businesses for inspiration lately. Why? So a lot of the veterinary industry has been, in recent years, as we talked about earlier, mostly people selling legacy practices. And when we started Modern Animal, we said, OK, we have to build from scratch. And the reasons for that were there was just too much historical legacy that would not allow for us to change things and build a unified culture and really build the brand and the experience that we wanted. So we speak, we're not going to buy existing practices.

21:09We're going to build our own. What starts to happen is the core motions of the business started to look a lot like retail. Identifying real estate, building out the clinic itself, managing costs, timelines. How do you have a really strong leadership muscle and bench around local leaders? And what do they own? And what do you own centrally? How do you think about expanding to a new market versus densifying an existing market? All of these learnings were not learnable within the veterinary industry. And that's where I had been continuing to look for learnings. They were learned many times over by many incredible retail brands that we all know.

21:50And so I finally started to seek out wisdom from those folks. And I wish I had done it sooner because there was countless mistakes we could have avoided. but talking to you know great companies like sweet you know starbucks sweetgreen kava oak street health one medical you know all these companies had to learn these lessons whether it's health care or retail and it was very easy to be cynical and say oh well we're so different from a coffee shop well of course we are we're a health care practice but if we don't get the real estate right if we don't know how to build it out if we don't know how to build a really strong culture of local leadership, regional leadership, and growth and development, we're never going to succeed building de novo physical locations.