Once sidelined as a digital-only contender, venture capital is becoming a more mature player in the behavioral health arena. And the numbers are starting to tell the tale.
In the first quarter of the year, venture capital firms invested $350 million in the behavioral health sector, according to M&A advisory firm Mertz Taggart. Similar quarterly figures from Rock Health back up this notion as well.
This could be a particularly interesting dynamic because several private equity firms have their capital tied up in practices they purchased at sky-high valuations, meaning they are still maneuvering the best exit options.
Meanwhile, venture firms still have some dry powder on their hands, though not nearly the levels they had in 2021 and 2022, leading some digital health providers to call the funding environment the “valley of despair.”
Still, those firms that continued investing in behavioral health in the post-COVID-19 frenzy could be in it for a long time.
And this changing dynamic of long-term venture capital investment could disrupt the status quo in behavioral health.
Why? Well, venture capitalists are seldom interested in investing in traditional players. Instead, they are often looking for scalable new care models.
This could mean new, novel frameworks could be the subject of new investments. And behavioral health is due for a shakeup, I believe.
The traditional behavioral health arena has been discussing alternative payment models, the use of peer specialists and measurement-based care initiatives for years. But it’s beginning to sound like a broken record, as there’s been very little meaningful movement in the space.
On their end, some venture-backed players are putting these issues at the center of their model. For example, virtual addiction provider Pelago, formerly Quit Genius, takes a 100% at-risk approach to its fee structure. In March, the New York-based provider landed $58 million in a Series C funding round led by London-based venture firm Atomico.
As part of this week’s BHB+ Update, I discuss venture capital’s growing role in the behavioral health ecosystem.
Beyond digital
While digital has often been the fallback for venture investments, that doesn’t necessarily have to be the case in the future.
GV, previously Google Ventures, has taken big bets in the hybrid care space. The heavy hitter investor poured capital into serious mental illness (SMI) startup firsthand early last year, for instance.
Firsthand – a company that has been expanding into new markets in 2024 – uses a peer-support model to help patients with SMI access care. All its peer-support specialists, called firsthand guides, have lived experience with SMI and are trained to engage with a patient at home.
Then, in late 2023, GV invested in Guidelight, a hybrid provider specializing in intensive outpatient programs (IOPs) and partial hospitalization programs (PHPs).
“I don’t love the pure virtual model. Virtual is clearly really great for some people some of the time,” Dr. Ben Robbins, general partner at GV, told me at BHB INVEST last year. “But the idea that it’s great for all people all of the time and especially if they live in a rural zip code, I don’t know about that.”
While firsthand and Guidelight both have an in-person component, one major commonality between the two companies is that they break out of the traditional provider paradigm, something we may see more of in the future.
For example, Robbins said there is a lot of potential in using non-clinical providers, including peers and case workers, especially outside of cities, which are often designated for digital health.
“I think it’s super interesting to see that you can use people who have a lower hourly wage, which makes it feasible to be reimbursed for the care and move them into places where you need somebody to drive longer distances,” Robbins said.
One reason VC has been slow to back in-person and bricks-and-sticks models in the past has been a generally more intensive upfront cost of capital. That’s still true, but some VC investors are now more willing to make that bet to fast-track partnerships with payers and health systems, both of which want continuum of care options for their members/patients.
Underserved areas in the spotlight
Because venture-backed companies are more likely to try out new models of care, they may also be positioned to address some of behavioral health’s most challenging topics.
For example, traditional private equity investors have often shied away from SMI care because of its complexity and high cost.
However, I think venture firms may be more likely to invest in experimental providers that seek to tackle care from a new angle. Traditional investors agree.
“I think [SMI] often requires a new model of care. Private equity is less about building a new model than expanding a model that has proven efficacy,” Terry Hyman, managing partner of Northwood Healthcare Partners, told me in February. “So I actually think that the venture community is well suited to do the work to build the models, in some ways better suited than classic private equity.”
firsthand isn’t the only venture-backed startup focused on SMI.
Amae, which closed a $15 million Series A funding round in April, offers behavioral health, physical health and supportive services to SMI patients. Similar to some of these other new venture investments, it uses an in-person model with technology backing.
It’s also leaning into new payment models. When the company closed its funding round, it said that it was focused on establishing value-based care contracts with payers.
Similarly, Vanna Health, which raised $29 million in capital in 2022, has raised venture investment to connect patients with SMI to community resources using a value-based approach.
I think we could see more of these types of venture-backed companies tackling some of the most expensive and complex issues while trying out new models of care in the future.
High-risk, high reward
So, will venture be the knight in shining armor, making value-based care a reality and investing in underserved populations? Probably not.
Unlike private equity, venture is high-risk and high-reward. Private equity makes bets they are likely to succeed based on a company’s track record.
Meanwhile, early-stage startups are coming to venture firms with a concept. While some later-stage companies have more outcomes data, many of the smaller ones are trying something new.
This means that while venture capital investment in the space could help propel many new models in care, you can bet on a lot of these startups they invested in failing. And that’s okay. The space is getting crowded, many models are unproven and the behavioral health space is still learning.
“I want to root for all of the companies and all these entrepreneurs, but there are way too many companies being created in this sector, and the word scale will not happen for 99.9% of them,” Richard Lungen, a partner at HC9, told me at Behavioral Health Tech 2023.
There have also been some major stumbles in venture-backed companies. For example, venture-backed Cerebral got in hot water for prescribing the ADHD medication Adderall and for its advertising practices.
Startups with fresh capital will not solve all of behavioral health’s problems, and some may even cause new ones.
But I think it’s worth considering that venture capital is here to stay in behavioral health. Investors and startups are becoming more mature in their moves, and the focus of venture could help move the dial on some of the significant changes the behavioral health world has been discussing for decades.
