The digital behavioral health sector has seen a dearth of venture funding. And what funding is available has been especially hard to get since the peak of digital behavioral health funding in 2021.
The year 2024 reiterated essential lessons for digital behavioral health companies seeking funding as total funding amounts lingered near the bottom of the funding cliff. Those top lessons are actually and profitably solving customers’ problems and having the competence to achieve profitability.
“You have to get back to fundamentals — you’ve got to solve the patient’s problem,” Rob Pahlavan, partner at the venture studio Healthcare Foundry, said during a panel chat at Behavioral Health Business’ INNOVATE conference. “You have to do it with the model that you really believe in. That’s the only way that you’re going to build a long-term and enduring company.”
Investors, potential employer clients and payers alike are not facing an incredibly crowded digital health care space, especially the digital behavioral health space. This allows these essential partners to be extremely discerning. Thus, companies with the best leg to stand on in terms of business elements such as ROI, health care outcomes and profitability are best positioned to get deals done.
The venture funding and dealmaking market in 2024 proved harder than ever, with startups struggling to get a foot in the door and then convince investors to make the deal. This was one of the key learnings of Natalie Schneider, CEO and founder of the digital youth mental health provider Fort Health, who said one of her top learnings from 2024 was “to have a very thick skin.”
“We benefited from this societal shift focused on the youth mental health crisis,” Schneider said. “We were able to overcome barriers because we have a very specific clinical model that’s differentiated. We have a very specific go-to-market [strategy] through pediatricians and good clinical outcomes.”
New York City-based Fort Health raised a $5.5 million round led by venture capital firms Twelve Below and Vanterra in a deal announced in November 2024. Fort Health was founded in 2022.
During 2024, Schneider said she saw the investor market continue its flight from pie-in-the-sky valuations and fantastical topline growth projections to accelerated paths to profitability. She noted that this is especially hard for sub-scale providers because they often lack the clout to establish favorable deals with their payers or business partners.
However, she noted that there are good reasons to suppose that the frosty investment and dealmaking market will thaw somewhat in 2025.
Behavioral Health BusinessThe arrival of President-elect Donald Trump and a Republican-controlled Congress may mean lower taxes. This will help make digital behavioral health providers’ balance sheets look a little better, potentially boosting valuations and making dealmaking that much easier. She also noted that the Trump administration might back off the Biden administration’s scrutiny of antitrust enforcement, making bigger deals more feasible from a regulatory standpoint.
Plus, she touched on something of an M&A and investment backlog in both the venture capital-backed startup world and the private equity world, echoing the insights of other market observers.
After a continued lull in venture funding for digital health generally, there is also some expectation that there will at least be a bounce off of the proverbial bottom.
Rock Health data shows that — while mental health remains the top finding-getter for health care startups — overall funding in mental health is down to $1.4 billion, 71% off of the record-setting 2021 funding year.
“It can only get better from here,” Pahlavan said. “I’ve been raising for 16 years; I think this is probably as bad a year as I can remember in terms of investor sentiment, reticence, etc.”
Venture funding consolidation and AI
Rock Health also notes that capital drying up will likely have a hand in the long-anticipated uptick in closures and consolidations of digital health companies. As many companies couldn’t land new series funding rounds in the years that followed 2021, many have landed bridge financing or smaller down rounds to keep them going, assuming they didn’t cash in on the irrational 2020 and 2021 funding market.
More mature digital behavioral health providers might be able to consolidate the market and better meet the demands of payers and employers to offer all-in-one digital health solutions and address the phenomenon of point-solution fatigue.
Rock Health and other Behavioral Health Business reporting has shown that investors, potentially burned by previous behavioral health deals, made something of a flight to later-round companies with a more established track record.
“We want to be able to tell our members that NOCD can sustain the test of time and serve [them] for life because [we’re] serving a chronic population,” Stephen Smith, co-founder and CEO of NOCD, said during the panel. “It’s important not just from a financial standpoint and from the market standpoint, but also it’s important for our mission as a company.”
Still, Pahlavan added that there has been so much overhang from the previously high level of venture funding to enable the endurance of “walking wounded and walking dead companies.”
Behavioral Health BusinessNOCD, a digital anxiety disorder treatment provider, was founded in 2018. The company landed a $34 million funding round it announced in early 2023 that brought its funding total to $84 million
Since then, the company has been able to sustain its growth while keeping its operating expenses relatively flat. One key tactic to doing that has been to develop its own AI team and tools that boost the productivity of its infrastructure and clinical workforce. At NOCD, this has included creating chatbots that help employees answer questions, automate certain administrative tasks and ensure that written communications to patients are written empathetically.
Citing other examples, Smith said that dictation tools and chart review tools could further enable startups.
“That’s what I’m most excited about, frankly. … We’ve seen what happens when you invest in optimizing different workflows,” Smith said. “You don’t need as much service to support clinicians or caregivers and patients. It’s actually a really remarkable thing.
“That’s maybe one of the unlocks that will help the industry really evolve to the next level.”
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