Stephen Hays
Jan 10, 2020
As any entrepreneur would do, I quickly wondered, “Who else has this problem, and how big is it?” As it turns out, the problem is catastrophic:
There is very little dedicated capital for early-stage mental health- and addiction-related startups. There is no shortage of angel investors, but there are only a few digital health funds that invest in mental health startups, but certainly not their main focus. However, many of those heath-focused funds have grown in scale in recent years and can’t focus on seed stage investments. So, I started What If Ventures to fill the funding gap for early-stage mental health startups.
The natural question to ask when wondering why this void exists is, “Can the market support a dedicated fund for mental health startups?” In the following paragraphs, and with the data shown below, I believe I’ve found the answer to be “yes.”
To arrive at this conclusion, I decided to map the startup investment landscape. I needed to know how many mental health startups are there out there, how many have been funded over time and where the concentrations of ideas, problem sets, capital and startups are today. Before I took the leap, I needed to know if I was diving into a shallow pond or a deep ocean of opportunity.
At first, I imagined the market to be ~100 to ~200 startups if I squinted my eyes. My expectation was the space is rather small, but growing and in order to justify a thesis in this niche I’d need to include anyone and everyone remotely mental health-oriented. This would include the later stage companies that have raised a lot of money in the last couple of years such as Calm, Headspace, Talkspace, Mindstrong, Ginger, Pear Therapeutics, and others.
How did I go about mapping the landscape?
Anyone can start with a search on CrunchBase, Pitchbook, CapIQ, Google, or other databases, but since this is a nascent market where the business descriptions for two similar businesses often use very different language, relying on database searches would not suffice. For nine months I gathered data, met with founders and traveled the country from coast to coast spending thousands of hours tracking down ideas. I found ideas in the places I least expected, like an Alcoholics Anonymous meeting in Bellevue, Washington, or through a connection via someone I met in rehab a year prior.
I started to build a network of interested investors, community builders, founders, clinicians, and academics who all echoed the same thing: The time is now for someone to dedicate funding to early-stage mental health founders as stigma and other limiting factors have drastically declined and paved the way for an influx of ideas, talent, and businesses in this space.
During my quest I found 717 mental health startups that have been formed dating back to 1987, with just over $4.5 billion dollars invested.
I categorized the startups in this space into seven different “buckets,” or types of businesses. More details on how each category is defined are outlined farther down. The image directly below is a representative sample of the types of companies you will find within each of the categories. It is not meant to be all-inclusive; 700+ logos would have made your head hurt, so, I’ll spare you.
The Categories — Defined
Based on my lived experience with the problem set, talking to others who struggle with addiction, and mental illness, and spending time with hundreds of founders in the space, I came up with the following “categories” for most startups in the space (sorted by size based on number of startups in each segment):
My list excludes treatment centers, individual clinics or small groups of clinics not intending to scale, rehab centers, individual practices, and locally focused solutions that don’t appear to be scalable. Also of note, four startups in our database remained un-categorized at the time of writing.
The largest category by number of startups, is the Mental Wellness Applications category followed closely by three categories of similar size: B2B Tools and Sourcing, Measurement and Testing, and the Telehealth categories. Next I wanted to find out how funding aligned with these “concentrations.”
So I decided to follow the money. Here is how the funding breaks down by the categories mentioned above. It’s not what I expected to say the least.
There are some stark contrasts between where founders are focused and where investors are focused. Wellness applications make up the bulk of the startups in the space, but Digital Therapeutics have received the lion’s share of funding to date. This is partially driven by the capital-intensive nature of going through FDA approvals versus building an app. Measurement and Testing is another area where we see very little funding to date, but we see a lot of founders building tools and features. These tools and features are absolutely necessary, but often investors see these as “nice to have” features that should be part of a larger platform, therefore, less funding is available unless these features are part of a product road-map that leads to a platform opportunity. As humans, we have been measuring our physical health for an incredibly long time, but we have never (outside of a few subjective surveys) objectively measured emotional wellness. That is changing now.
This is a first draft (of the database), or a starting point when it comes to mapping the space. I will continually update the database behind this list. The detailed database will be kept private to protect the startups who would prefer to stay in stealth mode.
I am publishing a list of startup names, location and website only (in order to keep any sensitive information private) for the 700+ startups in this google spreadsheet. My intent is for this to be an open-source resource for the mental health startup ecosystem. You can find the list here.
As with all first drafts, I welcome feedback, critiques, comments, and input from anyone with an interest in mental health technology and startups. I hope that with the help of our peers in the industry we can continue to build this into a resource that benefits all industry stakeholders.
This is meant to be a resource for founders, investors, and those observing from a distance, with the goal of helping quantify our industry and encouraging people to join us in this space.
I’m not the first person to try to map this space. Ed Gaussen, former VC at White Star Capital and founder of mental health startup Mantra, did it in 2018, and you can find that work here. That blog post and my conversations with Ed largely drove the decision to pursue making my own data set (Ed also gave this post a quick review before I published it).
Mental health startup funding has increased steadily in recent years. I believe that funding is a “dependent variable” tied to broader industry dynamics resulting from a decrease in stigma, increased public dialogue about mental health, and the immense demand for mental health solutions that is being released into the market as stigma decreases.
To give you a sense of how funding has trended lately, the chart below shows how many funding rounds have been completed in recent years. This data is from Rock Health’s Q3 2019 report. Nobody has better data or research reports on funding in the behavioral health space than Rock Health. If you want to dive deep into this data, we recommend you go to their research site here.
When I overlaid this data on the chart below that shows how many startups were created in each year, you can see how funding has tracked versus total startups created. Funding really started to pick up in 2013 and 2014 which lagged the uptick in new startup formation which picked up in 2011 and 2012. Of the 717 startups, over half of them were created in the last five years.
This data makes it look like there is a drop off in startups created recently, but there’s a bias in this data for companies that show up in databases because of prior funding rounds. Keep in mind, there are countless startups entering incubators, germinating in the minds of great founders, and coming together in places we cannot detect, no matter how many relationships we have in the industry. Many of those will make themselves known once they announce a funding or major partnership (likely a year or two after the initial company formation in many cases). Also, we were unable to identify the origin year of 50 of the startups in the database.
Prior to 2006, there were a total of 34 startups in this space, with the earliest one we could find having come to market in 1987. Prior to 2007, there were never more than four startups founded in this space in any one year, with most years having zero to two startups formed.
Our primary conclusion from this data is that there is a healthy early stage market forming in this industry, and in a few years, there will be a very robust set of later stage investment opportunities in this space as well. We cover historical funding in the space farther down below. When I adjust for the lack of visibility we have into the market, plus the trends in the data, I think it’s safe to say that around 100 new mental health startups are forming per year right now, and I suspect that to go up, as funding increases and stigma decreases.
An anecdote here — I signed up to go through YCombinator’s free ‘Startup School’ program during the summer of 2019. My conclusion from that experience is that there are more founders approaching the mental health than ever before. Many of those startups did not make it onto the list for 2019 because they are just ideas that haven’t even formed into companies yet. Out of respect for their privacy, I’ve not included them for now. Just note that the 2019 number on this chart is significantly understated.
The market is substantial and flourishing. Funding has increased in recent years, so this begs the question, “Where do we invest?”
Investing in the mental health tech space isn’t just about looking for a contrarian silver lining in all of the data. In our opinion, it’s about framing the customer/patient landscape in a way that makes it clear which customers or patients need the most help and will see the greatest value proposition in the solutions we are building. One way to frame this is around what makes a high “lifetime value” (LTV) customer or patient in the mental health space.
We have been using this framework to think about the mental health tech landscape in terms of a spectrum of “customer types.”
This is literally a screen shot from my pitch deck, page 10 :)
Everyone exists somewhere on this acuity range of “ill” and “well” whether we like it, or admit it. You can also consider that we are all either proactive or reactive about our mental well-being and, for the most part, there is a strong correlation between wellness and pro-activity.
Some people live on the right side of this chart. They are highly engaged and very proactive about meditating, breathing exercises, therapy, and leveraging other resources to improve their emotional well-being. Those people are early adopters of the meditation apps. But, try convincing someone who is living in addiction, and ignoring the obvious signs of mental illness to download a meditation app. It’s probably not going to happen.
On the other hand, the far-left side is where you find negative consequences of ignoring mental well-being. These outcomes include death, jail, rehab, or some other sort of loss of freedom due to mental illness or addiction. Think about it this way — the day before I went to rehab, I wasn’t using Calm or Headspace. I’d never heard of them at that point, and it’s likely that many people who were or are in my situation also have not heard of any of these resources.
The goal of a tool, product, or company in this industry should be to move people from wherever they are today, toward the right. For some, that means marginal incremental gains, while for others that means lifesaving, life altering changes to their emotional and mental wellness.
People who live on the left side of the spectrum are or are about to be, very expensive for their insurance companies, employers, families, and others. The greatest value proposition in the space is stopping someone from sliding to the left and getting them to proactively turn around and move toward the right side. Whoever can do that (meaning companies, or startups) will have the highest LTV opportunity in the space. This is where I intend to invest.
So, if we invest, will we ever make any money back? Have there been exits in this space? How much capital has been deployed into mental health startups? How can early-stage investors get more comfortable with monetization opportunities?
To answer these investor questions, we have summarized a handful of the most recent later stage or larger funding rounds in the mental health tech space in the table below.
Early stage companies have proven an ability to raise significant later stage rounds in this space as there is quite a bit of investor demand within larger funds to put money to work in social impact opportunities. As you can see below, there is plenty of liquidity available for companies as they progress in this industry.
Yes, there have been exits in the space. We have identified quite a few exits (29 to be exact in the last 10 years). Our list excludes all acquisitions of rehab centers, treatment centers, and other brick and mortar businesses. We also exclude anything that is typically considered broader “digital health” with no mental health specific application.
The list of select exits below is representative of what we have seen in the industry in recent years. This is not meant to be a comprehensive list, but it is intended to give you a sense of how these companies are exiting, and who is buying them.
There has been a lot of consolidation of the fragmented, and undeserved, addiction treatment and mental health treatment center market in recent years with a keen interest lately from private equity firms. We believe this consolidation will create more large “acquirers” of technology as these platforms look to differentiate with technology, and provide their patients cutting edge treatments in the years to come. In order for these treatment center platforms to achieve maximum LTV, they are going to have to find ways to leverage technology, and post-treatment solutions to keep their former patients healthy, and out of relapse. As the incentives of the insurers and treatment centers align in the coming years, the demand for M&A will increase significantly.
Here are some M&A deals from the mental health space that can give a sense of select recent activity:
We have seen and expect to continue to see a diverse set of acquirers buying platforms, bolt-on features, and IP in the mental health space at an increasing pace in the coming years. Some of the buyers are the obvious ones such as insurance providers, healthcare providers, etc. However, there are a handful of non-traditional buyers who have made acquisitions in the digital health space recently which gives us reason to believe the same will be true in the mental health sector.
One thing to point out here is that insurers are experiencing what we would call “vendor fatigue” in the behavioral health space. As you can see from the data presented, there are a LOT of small behavioral health businesses in a very fragmented market. This market will be consolidated in the coming years, meaning plenty of exit opportunities for the right startups. A lot of that consolidation will be done by what I call “strategic” buyers which are the leading behavioral health companies (some are still “startups”). These companies will be acquiring complementary products to bolt onto their platform in order to fully address the full acuity spectrum for their insurance partners.
You can read more about digital health M&A broadly in recent reports from Rock Health, like this one.
It’s often hard to peg a valuation for the acquisition of a startup. Valuations for early stage fund raising rounds are usually derived by considering what others in the space have achieved recently (comps) and assuming a certain percentage of the company that is being sold for the amount of money raised (which implied a valuation).
As companies mature (later stage, larger companies, with stabilizing growth and margin) we can expect them to begin to be valued in the ballpark of their public comparables. This doesn’t mean that a strategic acquirer will not come in and greatly over-value the company on a multiple of revenue or cash flow in order to acquire patents, market entry or positioning. That will always be a possibility. But, for planning purposes, we like to look at a handful of publicly traded companies that, while not all pure play comps, do give us a sense of how the market values behavioral health companies.
These comps indicate that behavioral health companies can expect to be valued around 1.5x their next 12 months revenue, or 9.1x forward EBITDA. Keep in mind that these companies above are mature, public companies who have lower growth rates, and more established margin profiles than most startups. Higher growth, and of course, higher margins will allow businesses to command much higher multiples than these companies currently trade at. Another note to keep in mind though, is that if a startup plans to be acquired by one of these public companies, then you have to consider whether the deal is accretive (and or meaningful) so the acquirer‘s multiple is relevant.This is just a baseline for valuation and meant to be a tool for founders, and it changes every day.
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About What If Ventures — What If Ventures is a mental health focused early stage investment syndicate run by Stephen Hays. What If Ventures closed its first mental health startup investment in January of 2020 and intends to syndicate its investments for the remainder of 2020.
About Stephen Hays — Stephen is a West Point trained leader with an MBA from Vanderbilt and nearly 7 years of investment banking experience on Wall Street. Prior to founding What If Ventures, he ran a venture fund that invested in 25 seed deals over 3 years before going to rehab due his personal struggle with addiction and bipolar disorder (His detailed story is here). Stephen found sobriety and wellness and seeks to invest in solutions based on his lived experience with these problems. Stephen is also the host of the Stigma Podcast where he and his guests share their stories of experience, strength and hope with the intent of reducing stigma and encouraging others to share, and get help when needed.
Sources — In studying this space, and preparing this report, we relied heavily on the work others have done in the past, our own research and relationships in the industry. Some of the past work that we leveraged included Mental Health and Wellness research from CB Insights, Rock Health research, Ed Gaussen’s 2018 post on the mental health landscape and others.
