Last year, investors poured $2.1 billion into behavioral health companies, a 56% decrease from the $4.8 billion raised in 2021.
That’s according to the latest report from the San Francisco-based digital health venture capital and advisory firm Rock Health.
The funding drop for behavioral health tech is in line with an overall slump in digital health investment.
“Overall, U.S. digital health funding scraped by with $15.3 billion, underperforming 2021’s pot and just beating out 2020’s total,” the report states. “Not only did 2022’s annual funding total come in at just over half of 2021’s $29.3 billion, but it also just squeaked past 2020’s $14.7 billion sum. Notably, 2022’s Q4 $2.7 billion total was less than half of last year’s Q4 raise ($7.4 billion).”
Still, behavioral health tech is the top-funded clinical indication of 2022, according to Rock Health. It has been the No. 1 clinical indication Rock Health has tracked since 2018.
Rock Health describes 2022 as the end of a three-year cycle “entered around the COVID-19-era investment boom.” At the end of such cycles, investment markets recalibrate to more sustainable levels. The peak of this funding cycle crested in the second quarter of 2021. All quarters but one leading into that saw continuous increases in the amount of capital going into digital health. Since then, quarterly totals have declined, the report states.
“Drivers toward this cycle’s ‘crest’ in mid-2021 have been well documented,” the report states. “The COVID-19 pandemic catalyzed digital health innovation, investment, and regulatory reform throughout 2020 and 2021.”
Inflation, supply chain challenges, interest rate hikes and investor pullbacks put the brakes on the increases in funding, according to the report.
On the consumer side, uncertain economic indicators have made many wary. Companies with heavy direct-to-consumer (D2C) exposure were hit hard in 2022. This is reflected in the stock market.
On the behavioral health side, the publicly traded companies Talkspace (Nasdaq: TALK), Teladoc Health Inc. (NYSE: TDOC) and Akili Inc. (Nasdaq: AKLI) saw notable drops in their share price by the end of 2022.
“For D2C startups, 2022’s Achilles’ heel was rooted in larger economic forces, rather than sector-specific factors,” the report states. “In the absence of cheap cash to purchase consumers or a captive audience of pandemic-time buyers, D2C companies were forced to look hard at operational efficiency and customer lifetime value.”
One key trend in 2022 was the increased activity of provider venture capital funds.
“Provider venture capital funds remained the top corporate investors by deal volume, and provider organizations increased their acquisitions by 5x, from three deals in 2021 to 15 in 2022 (acquisition targets included specialty care coordinators and telemedicine startups),” the report states.
This includes partnerships between health care systems and venture capital firms. The report points to the giant venture capital firm General Catalyst adding more system partnerships in 2022, including with the behavioral health and acute hospital operator Universal Health Services (NYSE: UHS).
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