Behavioral health providers were collecting capital like a reservoir during a deluge in the wake of the COVID-19 pandemic.
From Cerebral to Sondermind–digital behavioral health startups were achieving unicorn status regularly. In fact, in 2021, investors poured a whopping $4.9 billion into the sector, according to Rock Health.
But the bar is now higher for behavioral health companies starting out. High interest rates have affected the macroeconomic environment, and many investors are cautious about saturation in the behavioral health industry.
“The funding sizes for certain rounds have come down a little bit, the valuations come down a little bit, and also the bar in general, of just what it means to be a Series A company has also gone up,” Anna Wang, vice president on the investment team at GreyMatter, said at Behavioral Health Business’ INVEST.
Grey Matter Capital is a venture firm specializing in behavioral health investments. Its investments include Blackbird Health, Coral Care, Era, FamilyWell, firsthand, Flourish and Manatee.
Investors are now looking more at a company’s nuts and bolts and ensuring it is financially sustainable before investing.
“I was an investor in my previous life, and so I’ve seen the transition from the other side as well, which is investor to founder and as an investor, I think that we used to perceive this focus on sort of glitz and glamor and top line, and I think that has shifted fundamentally. It’s now really that focus on the bottom line, that focus on profitability, on very core business metrics,” Surabhi Bhandari, CEO of Soulside, said at INVEST. “I think that’s a great shift to happen, to be honest. And I think that’s very valuable, additive to the industry overall.”
Soulside is an AI-enabled mental health platform designed to help clinicians deliver behavioral health support.
But it isn’t just the financials that investors are now considering when investing in a startup. There is also a big emphasis on clinical quality.
“I would say, over the past three to five years, there’s been a transition and a pivot, at least from our perspective, from access to now, quality and the focus is okay, the access is there,” Matt Schappell, an investor at Frist Cressey Ventures, said at INVEST. “We’ve got telehealth, we’ve got more bricks-and-mortar. We’ve got more solutions out there. But how do we now actually start driving higher-quality care and behavioral health? And that tends to be what we’re seeing from the payers, from the providers, from the entrepreneurs even, is driving a little bit more of a focus on quality, outcomes, measurement-based care, those kinds of things.”
Frist Cressey Ventures is a venture capital firm focused on the health care industry. Its behavioral health investments include Array, Bicycle, Blackbird and Spero Health.
The opportunity
While the behavioral health industry has seen massive investment over the past decade, the bulk of investment has focused on lower acuity conditions, such as mild anxiety or depression. But there is still a lot of white space in specialized or higher-acuity services.
“I think for us, the thesis, the last couple of years have always been around these more specialties …. players focused on pediatrics, maternal mental health, substance use disorder value-based care and serious mental illness,” Wang said. “We feel like they can also rise to become unicorns, just because of the tremendous size each of those substitute verticals. Each one of those verticals are worth tens of billions of dollars, and these companies can be unicorns with only a small 1or 2% market share.”
GreyMatter’s portfolio reflects this trend. It has invested in FamilyWell, a provider specializing in behavioral health services for pregnant and postpartum patients; Blackbird Health, a pediatric mental health provider; and Nema, a virtual provider for PTSD and trauma.
Another reason this could be a prime time to invest in behavioral health companies is that founders have learned from past industry mistakes.
“There’s an interesting opportunity, and this is where potentially the underfunded piece comes in,” Schappell said “We’re now starting to see a wave of these, like V2 or like version 2.0, of these businesses that I think creates some really interesting opportunities for investors to say, ‘Okay, we saw what didn’t work in the 2019, 2020, 2021, businesses.’ But now folks are coming back around with some pretty interesting and innovative solutions that maybe solve the problems.'”
