by Stephen Hays of What If Ventures on 3/31/2020
The first quarter of 2020 has seen explosive growth in mental health startup funding as compared with prior years. The industry has also experienced challenges as well as opportunities presented by the COVID-19 pandemic. Here are our key takeaways on the Q1 2020 mental health startup market:
- Q1 2020 funding for mental health startups reached $462mm across 30 transactions, compared with a full year 2019 amount of $750mm
- COVID-19 response is driving systemic and regulatory changes that are a positive tailwind for many mental health startups
- Valuation trends are down in public markets for behavioral healthcare peers, but this doesn’t necessarily spell doom for startup funding
- Many mental health CEOs are reporting increased traffic and engagement, some at 15x month over month growth amidst COVID-19 and physical distancing efforts
As we noted previously, the size and scale of the mental health startup ecosystem is much larger than most people seem to believe. To date, we have identified 899 startups in the mental health space and 862 investors who have funded mental health startups. Of those 862 investors, 128 of them have invested in more than one startup in the space with only a handful investing three or more times (find the full list of 862 investors here).
Our focus on this industry, built upon our unique personal experiences with addiction and mental illness, has led to relationships with founders and other investors that are truly special (and such a blessing). These relationships have allowed us to gather uniquely insightful data about the supply and demand of effective, high-quality mental health resources and the funding dynamics surrounding bringing those solutions to market. This data puts us in a unique position to produce insights into a market that was until now, not just nascent, but not diligently mapped or analyzed. We found that the first quarter of 2020 saw an extreme increase in funding, compared to the amount invested in all of 2019, for mental health startups.
Q1 2020 Mental Health Startup Funding: $462mm
In Q1 2020 we identified 30 mental health startup funding rounds totaling $462mm invested. The average check size was $15mm per funding round.
Below are some of the notable financing rounds in the space this quarter. This table is not an all-inclusive list; it is only representative as some of the financing round data is private and will not be shared so as to respect the wishes of those founders.
Q1 2020 vs. Full Year 2019
In 2019, mental health startups raised $750mm spanning 105 total deals. Some of the largest capital-raising efforts from 2019 included Calm ($115mm), Pear Therapeutics ($64mm), Talkspace ($50mm), and Headspace ($37mm).
There are numerous reports of the total dollars invested into mental health startups in 2019. We are using $750mm as our baseline with which to compare the current market as it is the most generous. We have summarized some of the alternate sources and amounts below for reference.
- According to PitchBook’s “Wellness Tech” report, dated Q4 2019, there were 106 funding rounds in 2019, totaling $529mm of funding, compared with 112 deals in 2018, which resulted in $560mm of funding. We don’t have much confidence in this number because many rounds in this nascent market do not get listed on PitchBook, including rounds we have invested in.
- According to Rock Health, through Q3 2019, there had been 16 behavioral health companies to raise a total of $416mm. If we assume that represents 75% of the year, we can extrapolate a full year funding amount of $555mm. Comparatively, we suspect this is a much narrower view of the market.
- According to the Octopus Ventures’ January 2020 report referenced in Forbes (source link here), total mental health startup funding reached $750mm globally. This report leveraged PitchBook data, added their own market insights, and showed that the total number of deals in the space tripled over the six-year period ending in 2019 (from 30 deals in 2013 to 105 deal in 2019). This deal volume is similar to the volume listed in the PitchBook data, but the total funding number is more than $200mm greater. For our purposes of bench-marking to last year, we are relying on this number in making our claim of “explosive growth.”
Within those data sets, we don’t know with certainty exactly what is considered to be a mental health or wellness (or behavioral) healthcare startup. For the sake of making a claim that funding in the space is “exploding,” we are looking at the most aggressive estimates for prior periods and comparing with a conservative estimate for the current period. If you assume the Octopus Ventures number of $750mm of funding for 2019 to be correct, and compare the Q1 2020 number of $462mm, it’s safe to say there has been a significant increase in funding recently — Q1 2020 funding accounts for more than 61% of the highest 2019 full year number we could find.
What is Driving This Number in Q1 2020?
In short, it’s “big deals.” There were six funding rounds in which mental health startups raised over $20mm in Q1 2020.
If you consider the deal volume of 30 investments in Q1 2020 versus the 105 funding rounds for full year 2019, the deal volume and pace have picked up slightly, with an implied full year pace of about 120 deals based on Q1. However, that small uptick is not enough volume to account for the drastic increase in dollars invested this quarter. The big change is the size of the deals.
In Q1 2020, we saw numerous “huge” investment rounds in this space. As we note in the table above, there were numerous rounds in the size range of $20mm to $50mm and a few at $75mm and above. There was also one large deal this quarter that we have included in all of our statistics, but we can’t list here, that attributes to the total as well (also in the “largest” bucket).
The average funding round implied from this data is $15mm per financing. If you look at the $750mm 2019 full year number and the 105 deal count, you get an average investment round of approximately $7mm. Regardless of what source data you use, it’s safe to say the size of mental health startup investing rounds has skyrocketed in Q1 2020.
COVID-19 Impact on Industry Valuations
We track a set of public companies that we use to benchmark valuations in the behavioral health space. Some of these companies are direct comparisons to much of what we see in the space, and some are outliers used as reference points on the healthcare market more broadly. It’s very hard to use public comps directly when setting early-stage private market valuations, so this data is just one component of triangulating valuation for private market transactions.
When we last published this comp set in January 2020, it did not include One Medical (included as a comp because of their healthcare focus and recent IPO — this is a valuation benchmark for earlier stage companies) and the market had yet to contract from the recent COVID-19 pandemic. We believe these benchmarks will adjust over the coming months as the revenue and earnings estimates (valuation denominators) have yet to be fully or accurately updated by research analysts to show the impact of the current economic conditions.
The broader peer group was trading at 1.6x EV / NTM Revenue in early January, 2020. Now the group trades 1.3x EV / NTM Revenue after having dropped to 1.0x in recent weeks (excludes ONEM as an outlier and who was not in the January comps pre-IPO for comparison).
What About One Medical?
ONEM trades at 8.8x EV / NTM Revenue. If you’re a startup looking to figure out valuation for your funding round, you could consider this data point as a benchmark valuation multiple to apply to your revenue projections. Some seed and series-A rounds will trade both above and below this, but this can be a starting point. A founder who wants to raise at a higher multiple will need to explain why her business is better than ONEM with respect to factors like growth rates, margins, payer mix, certainty of revenue, traction, product, technology, market size, competitive position, and other considerations.
Regardless, public market valuations have contracted during the COVID-19 pandemic, and whether or not people are willing to admit it, this pricing pressure will be felt in the early-stage markets to some degree, if not significantly, as the pandemic continues on. It’s hard to say exactly how much valuations will contract in private markets. In some cases, they may not at all, but those cases will likely be the exception to the rule in the coming months as the capital markets sort themselves out.
However, there is good news for founders and investors (who want to see valuations hold or increase, not drop).
While the stock market is highly volatile amid COVID-19, it would be easy to say this will negatively impact early stage funding in the mental health space as capital markets contract broadly. This could be the case in the near term.
Over the medium to long term, we believe the reaction to this situation by the government, the shift in consumer behavior to remote or telehealth visits, and the continuing focus on mental health and wellness while physically isolating ourselves will be mid- and long-term drivers of increased demand and funding for mental health solutions.
In recent weeks, we have seen government efforts to promote telehealth as a solution for overwhelmed doctors’ offices and emergency rooms. These efforts include lifting restrictions (including those involving privacy) on remote care to provide a springboard to telehealth broadly. This positively impacting startups in the mental health space who provide these services but have long been burdened by rules preventing services across state lines, while also removing friction around expanding operations in new geographies.
Some resources we have read lately that discuss these changes are:
- COVID-19 response could give long-awaited jolt to telehealth (Politico)
- Law coming to allow practice across state lines (FierceHealthcare)
- Limited Waiver of HIPAA Sanctions During Health Emergency (Dept. of HHS)
What Are Founders Saying About COVID-19?
Here is some recent commentary from founders and CEOs in the mental health space that we gathered in the last two weeks. COVID-19 is driving increased awareness, reduced regulation, and surging demand for cost-effective, accessible mental health solutions.
“Over the past few years, society has been increasingly recognizing the importance of mental health but this crisis is accelerating that dramatically. Our physical health is threatened by the virus but our mental health is under tremendous strain because of the swirling uncertainty, isolation, stress and anxiety.”
"The COVID-19 pandemic has brought great uncertainty and many challenges to every business. Among these is the disruption it has caused to employees, some who have been deemed essential workers having to go into work, others having to adopt new work from home routines, and, unfortunately, many who are facing furloughs or worse. All employees have faced the added stress and anxiety that this pandemic has brought them and their families, making the need for mental well-being support stronger than ever before."
“Our healthcare system will be under enormous stress for the foreseeable future due to COVID-19, and with the increased demand — combined with social isolation — anxiety and loneliness are bigger threats than ever. The only way our healthcare infrastructure can feasibly remain effective is to deploy resources to enable remote monitoring, scalable engagement, and dissemination of resources and information. The need is clear, and the demand is even more clear as it has forced our team to work around the clock to launch quickly and efficiently with health systems around the country, now supporting thousands of providers. In just the last few weeks, we have experienced over 15x increase in usage of our platform, including measuring outcomes remotely and using wellness tools and our various coping mechanisms.”
“Since the onset of COVID, demand through MyWellbeing for remote therapy specifically has quadrupled. Our reach (the number of people who have seen our social posts) is up 125% to 1.25 M so far in March. Followers are up 36% since the beginning of this month.”
“Our surging March enrollment and the halving of dis-enrollment rates to 4.9% have in part been driven by the COVID-19 pandemic. As more states have recently entered the ‘stay at home’ and ‘lock down’ phase of the pandemic, we anticipate continued and sustained improvements in our enrollment metrics.”
Who Are the Investors in This Space?
In February 2020, we published an article on the Top 100 Investors in Mental Health Startups. At that time we had identified 833 total investors who had invested in the space, and of those, 113 had invested in more than one deal within the space.
During Q1 we saw nearly 30 new investors enter the space bringing our total list to 862 investors as of the end of Q1 with 128 having invested in more than one. This shows us that more investors are coming to the space, and dozens of investors who had “dipped their toe” with one investment have liked what they’ve seen and decided to invest again. We find this to be a very strong indicator of the capital availability around the mental health problem set and increasing momentum for the space.
We’ve decided to publish the entire list of investors as a resource for founders, other investors, and anyone else interested in this space. You can find our full list of 862 investors who have invested in mental health startups here. If you think we missed someone, or we missed you, please let us know by filling out this form and we will amend the list. We hope this is a great resource for founders and investors alike. We will continually update this list as we learn more about the market and as more financing rounds happen.
Building the Industry’s First Detailed Data Set
One of the biggest struggles we have found in trying to diligently understand the mental health startup landscape is finding a fulsome data set of startups, funding rounds, investors, etc. If you go onto a data website such as CapitalIQ, PitchBook, Crunchbase, or CBInsights, you will find data, but it is limited. They are typically compiling lists from mostly public data, or worse, user-generated content within their broader databases. However, in a nascent market like this one, those databases regularly have major flaws such as lack of access to private data and inaccurate categorization of data (e.g., if you search those databases for “mental health” and “behavioral health,” you get vastly different search results).
We are dedicating time and effort to building a proprietary data set comprised of the startups, investments, and investors in the space in order to try to map the market, gain unique insights, and leverage those insights to inform our investing. This will also allow us to provide considerable market-specific value-added advice to our portfolio companies and friends in the space. We are sharing a great deal of that data with the public via these regular research posts.
Updated Mental Health Startup Market Map
Since publishing “Approaching 1,000 Mental Health Startups in 2020,” we have been pleasantly surprised by the number of founders, investors, journalists, etc. who have reached out. One of the benefits of the many inbound messages we’ve received is that we were able to improve our database and provide you with an even more accurate market map. We have learned of an additional 182 mental health startups in the last 90 days, bringing our total to 899. Here’s the updated list and here is a form where you can add your startup if we missed you. We are grateful for everyone’s input.
As people begin to talk more openly about mental health, a broader cultural awareness of mental health, illness, and addiction problems has blossomed. This awareness is driving increased demand for scarce high-quality, effective mental health resources. The primary solution to this supply/demand imbalance is to build, fund, and promote new solutions to add increased supply to the market as demand increases rapidly. This is happening as evidenced by the explosive growth in funding behind companies taking advantage of this space.
Our view, and our thesis, is that we are in the very early days of this trend, and many of the mental health solutions coming to market today will be the generation-transforming businesses in the decades to come that will significantly impact the human experience for good. We believe that the funding trends outlined in this report confirm that this is taking place right now.
A special thank you to Ed Gaussen (CEO of Mantra Health) and Solome Tibebu (CEO of Cognific), Shawn Kernes (CEO of LARKR), Graham Smith (Principal at What If VC) for contributing to the list of Q1 deals, resources listed and helping to refine these thoughts. None of these insights are possible without each of your contributions!
About the Author: Stephen Hays — After decades of addiction and struggling with bipolar disorder, Stephen was fortunate to receive help and has focused his attention on funding solutions to the problems he lived with. You can read more about his story here.
About What If Ventures — What If Ventures exists to invest in mental health and addiction focused startups. The fund was launched in 2019 by Stephen Hays. You can follow our syndicate on AngelList here. Join our deal distribution email list here.
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Startup Community Slack Channel — We have created a slack channel for founders, investors, and supporters of the mental health startup ecosystem. Here’s the invite link. Please join the conversation and don’t forget to introduce yourself when you join.