'They're making the decisions': How 1 PE-backed DSO is empowering dentists 

Southlake, Texas-based Phase 1 Equity has set itself up for continued growth since launching last year.

Phase 1 Equity was launched in September 2022 through a collaboration between DuneGlass Capital and Colorado-based practices Williams Orthodontics and Kohrs Orthodontics. The company aims to help entrepreneurial orthodontists and pediatric dentists improve their operational and economic performance. The company recently added its first Texas practice.

CEO Kristen Cusack spoke with Becker's about the company's growth and how its business strategy differs from other companies.

Note: Responses were lightly edited for clarity and length. 

Question: How would you describe Phase 1 equity's recent growth?

Kristen Cusack: So we're really still pretty new. As we started the company, we've grown to three practices in two different states. We've got several different [letters of intent] out there, so we expect to double that over the next year or so and continue to grow past that. 

One of the things I really enjoy about doing this and one of the reasons I came here to do this job is that I think we have a real opportunity to truly teach our doctors how private equity works from the inside and to teach them how it could benefit them and how they can be the ones who actually gain from all the work they've done just like the private equity companies do now. Us being that allows us to teach them those things and help them really be a part of the decision-making process, the growth and the evolution so that we're really building better DSOs. Us being able to push the envelope from this standpoint helps to drive that. 

Q: What challenges has the company faced during this growth period?

KC: The biggest challenge is that there are mixed feelings about what a DSO is. Everybody in the market knows that, whether you're a DSO or not. There are definitely some doctors who are very skeptical. So if I would say anything, it's overcoming how people feel about that in general ... So there's that bringing together of the things they maybe have been missing and helping them over the hump of, it's scary to change when you feel like things are going pretty well. I like to use the phrase, "The enemy of great is good." It's really good out there if you're an orthodontist and a pediatric dentist. I think the temptation is to say it's all just going to stay that way. What we want to do is help support doctors in the ways we know are coming for them in the industry. How can we help them make sure they're prepared as there are more DSOs, that they're prepared as there are potential changes in the way reimbursement works and that they're really able to continue to grow and thrive? That's where combining the best of both of our skills really makes a big difference. That barrier will continue to be there because if things are really good, then you kind of want to say, "Well, do I want to make change?" This is us really looking at the fact that things are changing. It's a matter of how we help make that change positive and help make that change continue to benefit the doctors.

Q: What goals are planned for the rest of the year?

KC: Our specialties are specifically orthodontics and pediatric dentistry and we intend to stay within those specialties. We have focused on that for a reason. There are some specialties we haven't seen as much focus on and they're also a really great area for growth and opportunity. The two specialties also work together, so there's a lot of synergies between those two specialties and we think there's a great opportunity for that to continue. So we'll continue to be specifically orthodontics and pediatric dentistry. 

As far as ongoing growth, our growth strategy is to find those doctors who are like-minded [and] really suit our model, and grow around them. From a geography standpoint, it's going to be more about that. So right now what's great is we kind of have a lot of green space. So we can really go out to a variety of different areas because we still have a lot of growth we intend to have, so we can find those great doctors and then go from there. Most of our doctors come to us through referrals from current doctors or other doctors that are involved with Allied OMS, which is our sister company. Doctors who are in our pipeline will often refer us other doctors before they are fully in our organization. It may be someone they went to dental school with and maybe somebody they worked with. So [there is] a lot of organic growth that way.

Q: How does your business model differ from other private equity companies?

KC: There are a few different things. Number one is we're really considerate to finding those great doctors who have these strong, entrepreneurial-type practices. They really enjoy the work they're doing and are always looking to continue to make that better. We combine that with the acumen of a lot of tenure and experience in private equity ... Dentists don't have the experience on the business side. They're not trained in it. There are some great dental entrepreneurs, but they're learning as they go, so what this allows us to do is combine that knowledge we have from having been in the private equity world for a very long time and we get to exchange that knowledge. That's really one of the big differences. We're about really helping each other bring out the best in what we know and what our experience is. The other part of that is that we make the doctors a private equity company. So instead of having those investors who then make more of the decisions, the doctors are the investors, so they're making the decisions. We're making those decisions with doctors being the lead. So when we say doctor-led and doctor-governed, it definitely has a different twist on it. 

Q: Why do you think orthodontics and pediatric dentistry are primed for more growth?

KC: When you look at how much of the market has been penetrated as far as DSOs and things like that, there is still a lot of opportunity in both of those areas. They are specialties that are doing well. I don't think anybody's recession-proof, but they're definitely very resilient. And that's been proven time over time that they come back very quickly, and dentistry in general does that. As we could see even from the pandemic and those kinds of things, the bounce back for those specialties has been really strong as well.

Q: What other trends are you following in orthodontics and pediatric dentistry?

KC: In orthodontics, there are a few things. There's definitely been an ongoing shift to more adult patients. Some people call it the Zoom effect, that there's been a lot of people who like us are sitting here looking at each other and seeing teeth and thinking, "Oh, mine could be straighter, mine could be whiter," those kinds of things. I think it's almost more awareness that's happened as more adults have gotten into orthodontia. A lot of different things [are] happening with aligners, too. We're just starting to see some things on the aligner front. There are so many people who have gotten into that market, but I think now [there is] more advancement that hasn't necessarily happened. A lot of it was just the same thing. So I'm seeing some interesting things there, too. 

Pediatrics, because it covers really all the specialties, they're definitely affected more by things like reimbursement and changes that are happening there, or sometimes lack of changes, meaning there's not a lot of movement towards increasing reimbursement and things like that. The increase in DSOs affects all of those specialties as well because it changes a little bit about how you compete, how you're normal referral sources are configured and things like that. All of those things are definitely on the radar of our doctors.

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