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A group of investors discuss the current digital health market, how behavioral health startups are doing, and what trends we should look out for in the coming months.

The Current Market for Investment in Behavioral Health Technology

CB Insights reported that funding for digital health in Q1 2022 fell by 36% compared to Q4 2021, with mental health, particularly, experiencing a significant decline, tumbling 60% compared to Q4 2021. They also found that mental health tech raised $792M across 76 deals in the 2022 year, where the average deal size for mental health tech is down so far in 2022, and early stage rounds drop to 66% of deal share in 2022 YTD.

Digital health has seen a downturn overall so far in 2022, and there are conflicting ideas about whether digital health is in a bubble or not. There is a consensus that 2022 will fall behind 2021’s staggering funding. Many investors predict funding slowing down, lower funding rounds, and consolidation. 

We spoke with an incredible panel of investors at our conference in June of 2022, including 

The conversation covered the current digital health market, how behavioral health startups are doing, and what trends we should look out for in the coming months. 

Will this Downturn Continue for Behavioral Health?

Chrissy remarks that after seeing so much enthusiasm for the space in recent quarters, “some investors are saying, maybe now’s not the right time to invest. I can’t get in at the valuation that I want, and I’m going to kind of wait and see what happens.” And specifically within behavioral health, Chrissy thinks that anxiety and depression “will continue to be a tricky funding environment in the next couple of years. But more investors I’m talking to are thinking about severe mental illness… I think those companies will do quite well in the coming years because it’s a space that has not been invested in the same way.” Conditions such as OCD, eating disorders, and others have not received the same attention and funding, so they could be a greater focus moving forward.

Aike mentions some outside forces that influenced the digital health industry, such as traditional tech investors that found their way into digital health during the pandemic. She says, “it was a lot of capital outside of the typical digital health investment circles. And what happened in the correction in the first quarter of 2022 is as public markets corrected, as valuations went down, a lot of that, what I would call tourist capital, left the digital health ecosystem. So the tech generalists are now going back to investing in SaaS software versus service-based digital health businesses.”

Consolidation

The digital health space is ripe for consolidation. Alyssa mentions, “what I would predict, and what we’re starting to see, is this consolidation of taking a lot of those SMI (serious mental illness) players where the bulk of the cost is, where they’re proving those outcomes. And seeing some of those players getting acquired. Or those players being the acquirers, as they tack on to the lower acuity conditions.” As the market of startups focused on lower acuity conditions becomes more saturated, we may see more consolidation.

Deena remarks that employers are exhausted by attempting to evaluate all of the different mental health solutions. She continues, “while I think we’re all excited and happy for the proliferation of funding and innovation that’s going into the space, there are only so many direct or even known employer-targeted companies that can be evaluated at scale. So I think more comprehensive solutions or integrations of mental health solutions within other platforms will continue to be a trend that we’ll see.”

Direct-to-Consumer (D2C)?

Some digital behavioral health companies are sold directly to consumers, which has pros and cons for their growth and metrics. As Aike mentions when thinking about the direct-to-consumer (DTC) space, “quality is going to win out. Quality is going to be able to help a company diversify its channels from just direct-to-consumer to employers to payers. And it’s also what’s going to give you a long-term sustainable reputation in the industry.” She continues, “I think direct to consumer yields much better products for the patients…Direct to consumer is an incredibly powerful tool in aligning incentives with patient outcomes, but there are some guard rails that we need to think about as an industry to put in place.” While the D2C experience can help companies align with patient needs, there are not always efficient quality metrics in place.

Alyssa continues the D2C conversation by saying, “where I do like direct-to-consumer, I think on the acquisition side, it’s very interesting because you start to now find people where they are… Most of digital health was built off claims data… It’s built off the lagging indicator.” Instead of using claims data to find people, you can target them much more precisely by being a D2C company.

Alyssa points out the most significant concern with D2C: “at the end of the day, the bulk of the dollars in healthcare do not live with the consumer. They live with the incumbents. They live with the health plans. They live with the self-insured employers… so there has to be a balance of how can you unlock the bulk of the dollars while still maintaining the integrity of the consumer experience.”

Advice to Startups 

These prolific investors also had advice for startups moving forward. One piece of advice was to stay mission-driven. As Deena explains, “you can move that fast and break things in tech, but when it comes to health care, if you move fast and break things, there are lives at risk. And ultimately, you’re misaligning investor-fueled growth at the expense of actually improving health outcomes.” Digital health companies have a different value proposition than other tech companies, and it’s imperative that they keep patient health and safety in mind as they manage their growth.

Alyssa chimes in, “we really are different than the rest of tech, and it takes a lot of smart people around the table in healthcare to build really powerful solutions. And there’s a reason we’re thoughtful and methodical because people’s lives are in the hands of these companies.” She also reflects how transformative and powerful it is to build something new in digital health during a global pandemic. Startups and investors must remember their mission and keep patient health and safety at the forefront.

Please browse our video library to hear our entire conversation with Aike, Chrissy, Deena, and Alyssa.