The digital health industry is currently experiencing a significant downturn in venture capital investment, marking a multiyear low. However, within this challenging environment, the behavioral health sector stands out as a bright spot. While overall venture capital funding for digital health startups has fallen drastically, investments in behavioral health companies—particularly those in teletherapy and other related services—have proven to be more resilient.
In the second quarter of 2023, total venture capital investments in digital health companies reached just $900 million, spread across 73 deals. Of that total, behavioral health startups accounted for a significant portion—$378 million, a testament to the growing importance of mental health services in today’s healthcare landscape. This shift is notable, especially when compared to previous years when total digital health investments were far higher—$1.7 billion in Q2 of 2022 and $1.2 billion in Q1 of 2023, according to a recent report from PitchBook. Despite this overall decline, behavioral health market trends indicate that the sector remains strong, with investors continuing to show interest.
Behavioral Health’s Resilient Investment Landscape
Even though the broader digital health sector has faced challenges, behavioral health market trends suggest that this space is holding its own, with investors consistently prioritizing mental health services. The second quarter of 2023 saw two major deals that garnered attention within the behavioral health sector: Spring Health’s $71 million Series D funding round and Author Health’s massive $115 million funding round. Combined, these two companies accounted for almost half of all the investment in the behavioral health space during that period.
Spring Health, a leader in providing mental health services through digital platforms, discreetly announced its $71 million Series D funding round at the end of a company blog post in April. Author Health, another rising star in behavioral health, made headlines with its significant investment from General Atlantic and Flare Capital Partners. The company had also expanded into Florida, launching a clinic business just months before the announcement of its large funding round.
This growing investor confidence in behavioral health suggests that, while the digital health sector as a whole faces headwinds, there remains strong interest in the mental health space. Many of the deals getting done have been driven by existing investors, and there has been an increased focus on alternative funding structures, such as debt financing. For instance, Headspace Health, a digital mental health platform, announced a $105 million debt-only funding round, demonstrating a shift in the way digital health startups are securing funding in a tighter capital market.
A Long-Term Downtrend for Digital Health
The broader outlook for digital health investments remains uncertain. With the Federal Reserve’s series of interest rate hikes over the past few years, the cost of debt has significantly increased, making it harder for startups to secure traditional venture capital. As a result, PitchBook expects that the outlook for digital health investing will remain subdued for the foreseeable future. While the industry remains hopeful for a recovery, the report indicates that there is little chance of a significant uptick in funding within the next few quarters.
A similar analysis by Rock Health confirms this downtrend in digital health funding, offering a sobering perspective for the future of the sector. The report highlights that while investors are optimistic about long-term prospects, the current reality is that digital health investments remain in decline. This sentiment points to a period of consolidation within the sector, as fewer startups secure funding and larger players continue to dominate the space.
However, there is some optimism when it comes to telehealth. The report notes that consumer demand for telehealth services remains steady, and companies that offer digital solutions integrated with commercial health plans are seeing increasing interest. Additionally, large employers have expressed frustration with the growing number of B2B-focused digital health solutions. This frustration could drive further consolidation within the industry, where companies merge and streamline their offerings to better meet the needs of employers and insurers.
The Future of Digital Therapeutics
Digital therapeutics (DTx)—an emerging field within digital health that focuses on delivering evidence-based therapeutic interventions through software—has faced significant challenges. The collapse of Pear Therapeutics, less than two years after it went public, has raised questions about the viability of digital therapeutics companies, especially in the face of ongoing reimbursement challenges from insurers and healthcare payers. Pear’s struggles highlight the difficulties these companies face when trying to integrate into traditional healthcare systems, where payers and health plans are reluctant to adopt multiple digital therapeutics vendors.
While Pear’s collapse doesn’t signal the end of the digital therapeutics market, it does suggest that the industry must adapt in order to thrive. Digital therapeutics companies may need to explore different business models, particularly as reimbursement challenges continue to impede growth. Moreover, the digital therapeutics market faces the growing issue of “point-solution fatigue,” where multiple individual solutions become overwhelming for both payers and health plans to manage. It’s becoming increasingly clear that the future of digital therapeutics may involve greater consolidation into larger platforms, which can offer a more comprehensive and integrated approach to patient care.
The challenges facing digital therapeutics companies were further highlighted when Akili Inc., a company focused on using digital therapeutics for ADHD, announced it would abandon its efforts to seek FDA clearance for its products. The company also revealed plans to lay off 40% of its workforce, underscoring the volatility in the sector and the difficulty in securing long-term funding. This move is a sign that even successful digital health companies are struggling to adapt in a rapidly changing market.
Looking Ahead
The current investment landscape for digital health is one of caution and consolidation, but the behavioral health market trends remain optimistic, offering a glimmer of hope for growth and innovation. While overall investment in digital health has slowed, behavioral health continues to attract substantial attention, particularly from investors who see the long-term value in mental health services. Companies in the behavioral health space will need to navigate the evolving landscape of healthcare funding, balancing the need for sustainable growth with the pressures of a tightening capital market.
As telehealth platforms continue to gain traction and consumer demand for mental health services grows, the behavioral health industry is likely to remain a bright spot in the digital health sector. However, as the broader digital health market consolidates, companies will need to be strategic in their approach, building integrated solutions that meet the needs of employers, insurers, and patients alike. The next few years will be crucial in determining which companies in the behavioral health space will thrive and which will struggle to adapt to the evolving landscape of healthcare investment.
