This is an exclusive BHB+ story

Once investor darlings, budding behavioral health companies have found it more difficult to raise funds over the last two years.

In 2021 and 2022, venture dollars were flowing freely into the space. Rock Health reported that investors poured a staggering $4.9 billion into behavioral health in 2021. In comparison, digital behavioral health companies raised $1.4 billion in 2024.

That’s not to say investors have lost interest in behavioral health companies. In fact, in 2024, mental health still ranked as the top-funded clinical indication of investment among digital health companies.

“Mental health is a global issue,” Heather Gates, audit and assurance private growth leader at Deloitte & Touche, told me in December. “I think, as a result of that, it lends itself well to a venture model that expects outpaced returns and also lends itself to, I’ll say, non-traditional VCs.”

Venture firms have less capital to play with than in 2021 and 2022, which means new startups have more pressure to prove their business case. Additionally, there was also an explosion of new companies coming onto the scene in the wake of the COVID-19 pandemic, which means that startups need to differentiate themselves.

In this week’s exclusive, members-only BHB+ Update, I examine:

– What mental health startups need to prove to rake in new capital

– Why investors are continuing to pour money into struggling startups

– Where the industry is heading

Clearing investment hurdles

While VCs have tightened the purse strings over the last few years, a steady stream of behavioral health startups has managed to raise funds.

For example, in November, digital pediatric behavioral health startup Fort Health raised $5.5 million in capital. Three major themes kept coming up for Fort Health when it was seeking new investment, CEO Natalie Schneider noted when she spoke at our INNOVATE event last month.

First, investors were concerned about the supply of behavioral health providers and companies being able to meet the huge demand for services nationwide.

Secondly, VCs are pushing startups to prove profitability and sustainability – which can be tough, especially for small startups looking to negotiate favorable rates with large payers.

Lastly, potential funders are putting the pressure on startups to differentiate themselves. This last point can be particularly challenging with thousands of mental health startups on the market.

“The behavioral health industry has changed dramatically, I would say over the last four or five years. I think it is a lot harder now to start something, unfortunately, than it was five years ago, for sure, because I think there’s a lot of large players in the space, and people are still waiting to see what’s going to happen,” Robert Krayn, CEO of Talkiatry, told me at INNOVATE. “You really need to be articulate on why you’re different, why you’re building, what you’re building, … and people have to believe in what you’re doing, but then you also have to have follow-through.”

Last year, Talkiatry landed a whopping $130 million in a funding round led by Andreessen Horowitz.

We’ve seen some startups differentiating themselves by catering to a niche market. For example, in December, Anise, a behavioral health platform dedicated to caring for Asian Americans, raked in $3 million in seed funding.

On the other side of the coin, we’ve seen a growing number of companies trying to differentiate themselves by being the one-stop shop. For example, maternal mental health provider Maven has now waded into the behavioral health space with a new offering.

But differentiation can also be really sticking to your core business and securing the financial element.

“You are the subject matter expert of the problem that you’re trying to solve. I think investors are really sharp about market trends and players in the space, but don’t get discouraged nor talked away from a problem that you very much believe in and know a lot about,” Sonia GarcÍa, chief product officer of Amae, told me at INNOVATE. “And from the get-go, be very, very crisp on the financial tie-in and the numbers, and make that connect directly into your care delivery model, into your business model, and think about how that tracks over time, how that scales with contracts that you add on.”

Many, like Amae, are also turning to non-traditional investors, such as health systems or insurance companies’ venture arms, for funds. For example, in December Amae raised $6 million through a partnership with nonprofit academic health system Cedars-Sinai.

Several non-traditional investors have a specific problem they are looking to tackle and are investing in companies set to align with this mission. Take virtual provider Octave, which raised $52 million in Series C funding. Cigna Ventures, the venture arm of large payer Cigna, is a strategic investor and partner with Octave. At the time of the investment, Cigna Ventures said the companies were aligned with giving patients more access to care.

Lifeboats for sinking startups

And while getting investor interest in a new behavioral health startup poses a number of challenges, it’s not uncommon for return investors to pour money into their struggling portfolio companies with a Hail Mary that they’ll make it out of whatever trouble they are in.

Because of this practice, we’ve seen behavioral health companies stick around for longer than expected.

Within the last year, the BHB team has heard of companies going through rounds of layoffs to try to sustain their business and then finding SEC listings about new infusions of capital.

I always remember what Jon Gordon, a general partner at HC9 Ventures, told me a few years ago when we sat down at Behavioral Health Tech: “I like to call it the foie gras method of investing: stuff a bunch of food down the goose’s throat and you’re hoping you’ll get some big tasty in the end.”

Still, some companies landed so much capital during the 2021 and 2022 investment frenzy that, despite significant challenges, they are able to continue operating.

“There’s a lot of walking wounded, walking dead companies still out there. I think that’s part of the VC overhang right now,” Rob Pahlavan, partner at the venture studio Healthcare Foundry, said at BHB’s INNOVATE conference in December. “There are a lot of reserves just to keep folks afloat.”

Digital health unicorn Cerebral faced public scrutiny and a Department of Justice investigation for its prescribing practices. Yet, the company appears to be still afloat and able to pivot.

While I have no insights into the company’s books, I would have to speculate that the $462 million of investment the company garnered in the early 2020s certainly hasn’t hurt.

Digital behavioral health is still relatively new. There could be an argument that seasoned founders understand the industry and that businesses that may be working out some of the kinks – still have brand recognition and a loyal client base.

However, with capital tied up in these struggling ventures, it means less funds to go around for younger startups.