‘Investors Are Hungry To Find the Best’: It’s Feast or Famine in Digital Behavioral Health Investing

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When it comes to digital health investing, it’s feast or famine for behavioral providers, driving some startups to make tough choices.

In 2021, there was a massive influx of venture capital dollars pouring into the behavioral health space by firms eager to be part of the move to a more virtual future. Still, in the years since, there has been a slowdown of capital moving into the space, which has left some providers in a tough spot.


Bicycle Health’s recent layoffs illustrate today’s stark contrast in the digital behavioral health investment space.

On March 12, Bicycle Health told employees that the virtual addiction treatment provider would lay off 15% of its staff.

In an email obtained by Behavioral Health Business, Bicycle Health CEO Ankit Gupta explained to employees that the company is attempting to bridge a financial gap and has turned to cost-cutting measures due to the challenging environment for raising venture capital funding, a situation corroborated by other industry insiders.


“It’s not a secret that investment in health care has decreased markedly over the past two years and remains low, and we are not yet profitable,” Bicycle Health CEO Ankit Gupta told employees in an email obtained by BHB. “Every new expense requires additional revenue, raised funding, or a cut from somewhere else.”

Several industry insiders told BHB that the current investing environment will likely inspire similar actions that extend the funding runway of young and/or small companies. Still, there have been big-dollar digital behavioral health funding rounds this year.

That dynamic — Bicycle Health laying off employees while others raise big rounds — creates one of the sharpest contrasts to date of the haves and have nots in digital behavioral health: Some companies are winning over investors and keeping their startup vision going, while others have to scramble.

“Most investors know that the space was overfunded and also that the space can yield real help and real solutions and real businesses,” Stephen Hays, founder and managing partner of What If Ventures, told BHB.

Hays, who leads a venture capital syndicate, said the glut of funding in the digital health space resulted from a “perfect storm” of economic trends. The onset of COVID and reactions to it precipitated most of those trends, which included extremely low-interest rates set by financial regulators, high stock prices inspiring investors to seek more private investment opportunities, and behavioral health specifically gaining “superstar status” in both investor and popular discourse.

The end result was a massive amount of funding for a huge number of digital health companies. But nearly all those economic forces have abated, leaving little refuge for startups that haven’t found profitability.

“Investors are hungry to find the best of that generation of companies that were funded during the zero-interest-rate policy environment — find the best ones and double down on them,” Hays said. “It’s not unreasonable to me that some of the absolute best companies can pull off great funding rounds right now. But it’s feast or famine.”

What the data show

The onset of COVID forced digital behavioral health consumers, especially enterprise customers, to change their thinking about telehealth and virtual options from “nice-to-have” to “need-to-have solutions” in only a matter of weeks, Adriana Krasniansky, head of research for Rock Health, told BHB.

Rock Health’s work includes a venture fund, an advisory group and an equity-focused nonprofit arm.

Early on in the COVID pandemic, startups worked to capitalize on the moment. At the same time, the market size suddenly seemed immense. But that’s changed. As the world has settled into a new normal, starker operating realities have set in.

“The companies that were really active at that time adjusted their expectations for the months and years ahead relative to the runway and activity that they were seeing as well as the venture investment interest that they were getting,” Krasniansky said. “Cash was cheap, which meant more investors could use check size as a way to compete to be in deals in a way that they wouldn’t now.”

In 2023, Rock Health tracked $1.2 billion of funding invested in digital behavioral health companies. That came from 65 total deals and represented 11.3% of the overall digital health funding the firm tracked.

Behavioral health — and mental health specifically —has historically been the leader in funding amounts among digital health providers in recent years. Year over year, the total dollar amount for the space is down 49% and the total number of deals is only down 19%. The total funding amount for 2023 ($1.2 billion) is near 2019 ($1 billion), while the number of deals is much higher in 2023 — 65 compared to 45 in 2019

Other Rock Health data shows that overall digital health investment is down in terms of dollar amounts and average round sizes. Still, the number of deals is higher than it was before the 2021 funding boom.

While many of the drivers for investing in behavioral health, digital or not, remain unchanged, investors are simply responding to market conditions that inspire more conservative action. In that environment, Krasniansky said it’s never been more important for digital behavioral health companies to deliver outcomes for customers and manage cash flows to profitability.

This may be true in any market. But what makes this more applicable in conservative investment markets is that investors will have higher expectations for operators than when funding is more free-flowing.

“In a less conservative market, investors are willing to take higher risk on the promise of a product … There’s more patience there to kind of see the proof of the work being done,” Krasniansky said. “In a more conservative market like today, operators need to prove out the viability of their solution and their model at every stage with investors. It becomes a much more consistent conversation around performing while still growing into the future.”

This is a notably challenging task for companies that are truly innovating with technology or moving into more complex areas of business and require longer runtimes.

Examples of digital behavioral health funding wins

There are three examples of digital behavioral health models that have managed to raise big-dollar funding rounds in 2024 so far. These include, coincidentally, Series C rounds by the following companies:

— Pelago secured $58 million, led by Atomico

— Grow Therapy raised $88 million, led by Sequoia Capital

—  Two Chairs hauled in a $72 million, round led by Amplo

Pelago provides B2B mental health and addiction treatment services under an at-risk funding model. Grow Therapy is one of many increasingly large online platform companies that seek to build a cohort of contract therapists and supply all of the business tools to provide care in a solo practice. Two Chairs provides hybrid (in-person and telehealth) care in select markets by employing therapists, rather than contracting with them.

“I think what you have with these examples is the best of the best being able to fundraise,” Aaron DeGange, senior analyst for health care at PitchBook, told BHB.

He added that each of these companies has several competitors operating similarly.

“You now have investors being discerning and saying that this is the one that we are going to bet on,” he said.

The plurality of similarly focused companies in digital behavioral health will lead to a number of mergers and acquisitions or other moves meant to extend the life of these companies as investors consolidate around a smaller number of companies. This could include more layoffs and shifts to partnerships with other health care companies.

Bicycle Health, for example, is in that spot. Several digital addiction treatment companies seek to deliver medication-assisted therapy (MAT) and psychotherapy via digital tools.

“If you look at a lot of these sub-sectors, it doesn’t make sense for there to be five, six or even 10 startups pursuing and doing the same type of thing,” DeGagne said. “It’s not going to be profitable for any of them … It needs to be sorted out if there’s going to be mergers or whatnot among these players.”

Many of the companies that raised funding in 2021 and 2022 could extend their runways through today using a number of tactics, including layoffs, unlabeled rounds, insider rounds, taking on debt financing, and the like.

DeGagne expects to see more action in the back half of the year. If conditions hold the same over the next six months, it will be even more difficult for startups that aren’t able to differentiate themselves in the eyes of investors to keep afloat going forward.

“As far as it stands right now, we’re on the borderline, so to speak,” DeGagne said.

So what’s next?

There may be reason to expect that investing in digital behavioral health will increase in the coming months. Further, the cycle of investing and raising could be healthy for space. Hays said it’s normal and important for sectors to go through waves of investment.

Investor and author Christina Farr expressed a similar sentiment. Now on her own as an advisor, she was previously a principal investor and health tech lead for the firm OMERS Ventures.

“I’m seeing more discipline and companies operating as if money doesn’t grow on trees,” Farr told BHB. “When there is a breakout star, you don’t see those companies struggling to raise. If anything, I’m seeing a lot more rounds get pre-empted in the past few months than I have in a while.”

Farr notes that the COVID-driven high and low for digital behavioral health investment is still generating billions of dollars of interest. Based on her experience, she predicts an uptick in funding in the second quarter of 2024.

Still, it’s a “have and have not market.” Companies that are separating from their respective cohort will have no shortage of funding to fuel their missions, while those that struggle will continue to do so — to the point where there are fewer “Hail Mary, bailout rounds happening now,” Farr said.

Looking forward, there are a number of digital behavioral health companies that were previously designated unicorns and appear to be on-track for increased growth and potentially flashy exits.

“There’s a bunch of growth stage companies like Lyra, Spring Health, Modern Health, Headspace that are likely inching towards the public market (the IPO window is still closed by all accounts),” Farr said.

Several industry insiders have said that it’s unlikely, but not impossible, that the market won’t produce a behavioral health IPO any time soon.

While somewhat unlikely for the digital behavioral health space, Farr says that a truly stand-out exit for the space would be an IPO or other move that demonstrates viability as a standalone business. For most companies, a successful exit will look like an acquisition by a competitor or other strategic entity.

Farr also expects that we’ll see a healthy bit of activity as the market sorts out duplicate companies. Some won’t make it, Farr adds, while others will be acquired once a long-predicted wave of consolidation crashes.

“There are a lot of companies that are doing the same thing; I wouldn’t be surprised to see more private equity firms swoop in and pull a few of them together,” Farr said.

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