Scorching Digital Behavioral Health Market Primed for Consolidation, But ‘Expectations Mismatch’ Could Put Deals on Ice

With as many as 20,000 digital mental health apps on the market, there is bound to be redundancy.

This coupled with the money invested into the sector has made digital mental health prime for consolidation.

However, a mismatch of valuation expectations and digital health’s disappointing performance on the public market has created challenges for startups looking to exit via M&A. Investors advise that companies need to provide unique assets and a solid infrastructure to appeal to potential buyers.  


Setting the stage for acquisitions

“The consolidation hasn’t begun in tremendous earnest. But I think all the pundits and anyone who’s just got a rational head on their shoulders is like, ‘It’s got to happen,’” Michael Yang, managing partner at OMERS Ventures, told Behavioral Health Business. “You can’t possibly have the sheer number of digital behavioral health companies that were birthed, like in 2021, 2020, 2019 – whatever the cohort.

“They cannot all persist and sustain themselves going forward,” Yang continued. “They couldn’t before this ‘22 correction. And they’re definitely not going to in light of that.”


OMERS Venture, is an international VCs firm with offices in Toronto, London and Palo Alto, CA. Some of its digital mental health portfolio companies include Muse by Interaxon and HelloSelf.

Others feel the same, pointing to the unique circumstances that led to the launch of so many digital-first companies at the same time.

Digital behavioral health came into the spotlight over the last two years due to the demand in mental health care needs and the uptick in virtual care usage during the COVID-19 pandemic.

“We saw some maximum financing rounds, … which was an indication mental health really came to the forefront because of the pandemic,” Alyssa Jaffee, a partner at 7wireVentures, told BHB.

Chicago-based 7wireVentures is an early stage digital health focused investment company. Some of its recent investments have included Brightline and NOCD, among others.

Over the last few years, investors have poured billions of dollars into the digital mental health space. In 2021, digital behavioral health companies raised $5.1 billion in venture deals, according to Rock Health.

That trend continued into the first quarter of 2022, where digital mental health companies raked in $1 billion of investments – making it the most well-funded sub sector in digital health that quarter.

“For a while, it was like anyone, any founder, any entrepreneur with reasonable qualifications, gumption, ambition, could raise money with a personal tale about how behavioral health … hit their own lives,” Yang said.

This was a recipe for similar digital mental health companies all getting funded and flooding the market. But the road to acquisition is very different from the road to funding, and not all digital health companies will make it to consolidation.

“Now you’re actually going to really see separation, like who are real legit operators with a real business and a real strategy ambition versus, I won’t call them pretenders,” Yang said. “I think they meant well, but they’re going to realize like, ‘Oh, darn, I’m over my skis here.’”

Finding a good match

The high valuations of digital mental health companies set by investors has led to a potential mismatch between the prospective buyer and acquiree’s expectations. CBI Insights reported that as of 2021 there were 85 digital health unicorns, though not all in the mental health space, with valuations of $1 billion or greater.

A buyer may be reluctant to pitch a deal because a company’s valuation is too high.

“There’s just ships passing in the night that could be matched, but won’t be matched,” Yang said.

Companies are also facing pressure from their investors, and investors are reluctant to show degradation of their investments, according to Yang.

“Have they gone and told their limited partners, the investors and venture funds, that they rate this private company at an ‘X-million-’ or ‘X-billion-dollar’ valuation?” Yang said. “Because if they’ve done that, then they’re going to have egg on their face when they ultimately have to sell it or liquidate or something, and it’s a fraction of that.”

A bear market and a mismatch in valuation expectations means that digital mental health acquisitions are changing – and founders and investors need to reset expectations. Deals like Optum’s $470 million acquisition of mental health provider AbleTo may be a thing of the past, according to Chrissy Farr, a principal at OMERS Ventures.  

“In today’s environment, … it would just not make sense,” Farr said. “Companies are facing huge valuation when they don’t have revenue, or very much revenue. And you have to wonder who the buyers are going to be.”

After a flurry of IPOs and SPACs in 2020 and 2021, overall, digital health companies have taken a major hit on the public markets within the last year.

Companies that could have been acquired in the past may not have the same kind of liquidity they wanted, said Jaffee. Private companies that have raised capital may also be more cash conservative in this environment.

Additionally, companies on the brink of going public may be holding off, she said.

“I think that there’s definitely a question around timing for a lot of these folks, particularly at the top end when they’ve gotten so big, as they are starting to enter into a place where maybe whatever their exit is, either M&A or IPO, potentially is not as straightforward as it was a year ago,” Jaffee said.

Partnership opportunities

Historically, payers have been buyers in the digital mental health space. While that is still a major avenue for potential deals, M&A is changing to include fellow digital health companies as well.

“I see probably the biggest growth opportunities … where you see two different companies who have core competencies in different areas, and independently have achieved success,” Jaffee said.

Jaffee gave the example of the Headspace and Ginger merger. In 2021, digital wellness platform Headspace completed a merger with virtual care company Ginger, creating a joint company worth $3 billion. This allowed the joint company to have more of a continuum of care than either of the individual companies.

Buyers are looking for sustainable infrastructure, a proven supply and demand of services, and real clinical outcomes data, said Jaffee.

“We need to show that people with a severe mental illness can get better and that we can offer a digital solution or a hybrid solution or whatever it may be, in order to ensure that that is clinically appropriate for what that consumer is facing,” Jaffee said. “And that’s really hard to do, and it takes a long time to do it. And it’s very attractive for buyers. Many companies do not necessarily set themselves up for that kind of success in the early days.”

Buyers are looking at what the underlying assets of the company are, said Yang. That could be a provider network, a patient panel, a reimbursement model, payer contracts, science or other factors.

“What is truly novel and unique? Because if it doesn’t stand out, in reference against something that anyone else could reference, how is it not basically a commodity?” Yang said.

Payer contracts can help prove validity of a product.

“I think to get those contracts, you have to be able to show superior clinical outcomes. So it’s not for the faint of heart,” Farr said. “But if I had to kind of make a guess, which one of these will be [acquired], that would be where I would place it.”

Some of success comes down to timing. This is particularly true when there are many companies providing the same service. Yang said it’s “musical chairs” and the first one to start the process has the best likelihood of success.

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