The digital health investment environment is at a multiyear low. But the behavioral health industry represents a bright spot during a time when venture capital investment in digital health companies has hit near famine status.

In the second quarter of 2023, total venture capital investments for digital health companies totaled $900 million across 73 deals. Teletherapy and other behavioral health startups accounted for $378 million, according to a recent report by PitchBook. 

PitchBook tracked deals cumulatively valued at $1.7 billion during the same period in 2022 and $1.2 billion in the first quarter of 2023.

“Though not unexpected, investment in behavioral health has also been strong, and Q2 saw two notable deals in the space: Spring Health’s $71.0 million Series D and Author Health’s $115.0 million round,” the report said.

Spring Health and Author Health alone accounted for about half of all behavioral health investments. The former largely buried news of its funding round at the end of a company blog published in April. The latter launched a clinic business in Florida about five months before news broke about its huge investment check from General Atlantic and Flare Capital Partners.

“Deals that are getting done have weighed heavily toward structures with existing investors, and we’ve also seen greater rates of debt financing and rounds with undisclosed valuations,” the report states.

It pointed to Headspace Health’s announcement of a $105 million only-debt funding round as another example of the scarcity of venture capital funding for digital health startups.

With the spike in Federal Reserve interest rates over the last few years inflating the cost of debt, PitchBook expects the outlook for digital health investing to remain subdued going forward.

Another analysis of venture capital investment in digital health by Rock Health finds a similar slowdown and also assumes a continued slump.

“While we anticipate eventually writing once again about valuation jumps and new unicorns, the current reality is that digital health funding remains in a downtrend, and we don’t expect a material uptick in funding for at least the next several quarters,” the PitchBook report states.

The report does note some momentum for telehealth platforms, steady consumer use of telehealth and increasing demand for digital solutions from companies with commercial health plans. It also notes the frustration by employers disclosed by large payers about the glut of B2B-focused digital health point solutions and posits that employer demand will drive greater consolidation in the digital health space.

Consolidation and point solution fatigue will likely impact the prospects for digital therapeutics, according to the report. It cites the collapse of Pear Therapeutics — less than two years after going public — as a harbinger for continued hurdles to inclusion in payer-funding health care services.

“While Pear’s collapse does not mean an end to digital therapeutics as a market, DTx companies may explore different approaches given the ongoing reimbursement challenges,” the report states. “The digital therapeutics market will also need to resolve the very real issue of point-solution fatigue, as it makes little sense for payers and health plans to bring on multiple DTx vendors.”

The report also assumes that digital therapeutics will consolidate into a handful of large platforms.

The day the Pitchbook report was released, Akili Inc., a digital therapeutics company for ADHD, announced it would abandon seeking prescription clearance from the FDA for its products and would lay off 40% of its workforce.