In recent years, venture capital in behavioral health has surged, with billions of dollars poured into the sector. Over the last five years, the influx of investment has been substantial, and behavioral health continues to be one of the top targets for venture capital. This capital has enabled the development of groundbreaking technologies and business models aimed at improving access to and the quality of behavioral health services.
However, there is a shift underway within the world of venture capital in behavioral health. Investors are increasingly looking for companies with proven business models that combine innovation with potential for long-term profitability. This marks a departure from the previous focus on rapid expansion and growth without always considering the sustainability of these ventures.
The focus on venture capital in behavioral health contrasts sharply with the more traditional private equity approach. While private equity investors tend to back businesses with stable and proven track records, venture capitalists are more willing to take calculated risks on novel ideas. This strategy allows them to place bets on companies that could fundamentally reshape the industry by introducing disruptive technologies or new delivery models.
The Evolution of Investment Focus: From Access to Quality
For years, venture capital in behavioral health was largely directed toward expanding access to care. With so many individuals unable to access the mental health and addiction treatment they need, increasing the availability of services became a major priority. Digital health platforms, telehealth services, and virtual care models emerged as solutions to address these gaps.
However, as the market matures, investors are now shifting their focus to improving the quality of care, not just the quantity. While expanding access remains a priority, venture capitalists are increasingly looking for ways to ensure that the care provided is effective, personalized, and sustainable. This shift in focus reflects a growing recognition that providing access to behavioral health services is insufficient without also addressing the quality of those services.
According to Margaret Malone, principal at Flare Capital Partners, “We’re still early in the quality part of that.” As Malone suggests, the industry has made significant strides in improving access, but enhancing the effectiveness of care delivery remains a challenge. As a result, venture capital in behavioral health is now increasingly focused on finding solutions that not only broaden access but also improve patient outcomes and experiences.
Over $12.5 billion has been invested in digital behavioral health companies over the past five years, according to Rock Health. In 2021, funding peaked at a staggering $5.7 billion. Yet, as the sector evolves, investors are realizing that access alone is not enough. The next challenge is ensuring that the care provided is of the highest quality, both in terms of clinical outcomes and patient satisfaction.
The Venture Capital Approach: Risk and Reward
The venture capital approach to behavioral health is distinct from the strategies employed by private equity firms. Private equity investors tend to focus on companies with a proven track record and stable, predictable growth. In contrast, venture capital in behavioral health is about taking risks. Venture capitalists are more willing to place bets on unproven, innovative ideas with the potential for disruptive impact.
This high-risk, high-reward model is what attracts many investors to the behavioral health space. As Michael Yang, senior managing partner at OMERS Ventures, explains, “Venture capitalists raise money from limited partners with the expectation of generating exceptional returns.” This drive for high returns fuels the emphasis on rapid growth, even if the path to profitability is uncertain in the early stages of a startup’s life.
As Malone states, “It’s our responsibility to help invest in founders who are forward-thinking and see where the puck is going.” This approach highlights the importance of innovation in the behavioral health space, where venture capitalists are betting on the future, not just the present. Investors are looking for companies that can navigate the complexities of the existing infrastructure while disrupting traditional models of care delivery.
The Emergence of Enablement Services
In recent years, one of the most promising trends in venture capital in behavioral health is the rise of enablement services—businesses that provide ready-to-go solutions for therapists and practices looking to scale. These platforms reduce the overhead associated with running a business by offering services such as billing, insurance contracting, and patient acquisition. By lowering operational costs, these businesses can scale more rapidly and create network effects that help them grow faster than traditional providers.
Enablement services like Headway and Grow Therapy are examples of businesses that are capturing the attention of investors. These companies offer a comprehensive suite of services that allow independent providers to operate more efficiently and expand their reach. According to Marissa Moore, principal at OMERS Ventures, these companies have achieved “spectacular growth and even profitable growth,” making them highly attractive to venture capital in behavioral health investors.
Despite the promise of enablement services, there is a concern about market saturation. Michael Yang from OMERS Ventures cautions that, while these services are valuable, the market may eventually become oversaturated. The question becomes: how many of these companies can the market sustain? For investors, the key challenge is identifying which enablement platforms will thrive in the long term, and which will struggle to maintain their momentum.
Collaborative and Integrated Care Models
Another area where venture capital in behavioral health is finding opportunity is in the integration of behavioral health services into broader healthcare models. Integrated care, where behavioral health services are seamlessly integrated into primary care or other healthcare practices, is seen as a promising solution to the fragmentation of the healthcare system.
Many venture capitalists are looking to back companies that adopt collaborative care models. These companies partner with primary care clinics, women’s health providers, and other healthcare systems to offer integrated behavioral health services. One such company, Concert Health, offers digital behavioral health services that integrate with primary care and women’s health clinics.
Chirag Shah, partner at Define Ventures, a firm that invested in Concert Health, believes that integrated care is crucial to improving patient outcomes. He states, “Ultimately, there needs to be a connection back to the patient’s existing care delivery for it truly to be impactful.” This collaborative approach could help solve the fragmented nature of mental health care by ensuring that patients receive comprehensive, coordinated treatment across various healthcare providers.
The Challenge of Profitability and Sustainable Growth
Despite the high level of investment and excitement surrounding venture capital in behavioral health, the road to profitability is not guaranteed. The industry remains high-risk, and many startups fail to achieve sustainable growth. According to Kevin Taggart, founder of Mertz Taggart, “Venture capitalists swing for the fences, but with frequent strikeouts.”
The challenge lies in the fact that patient outcomes in behavioral health are complex and can be difficult to measure, particularly for virtual and digital health platforms. While some companies, like Two Chairs and Pelago, have secured substantial funding rounds, others have not fared as well. For example, the Center for Autism and Related Disorders (CARD), which was acquired by Blackstone in 2018, shut down operations in several states and eventually filed for bankruptcy.
Ultimately, the key to success for venture capital in behavioral health is striking the right balance between innovation and sustainability. While growth is important, the path to long-term profitability is equally critical. Venture-backed companies in the behavioral health space need to show that they can deliver high-quality care while also achieving the financial sustainability necessary to support their operations.
Looking to the Future of Venture Capital in Behavioral Health
As venture capital in behavioral health continues to evolve, the future holds exciting possibilities for both investors and patients. Innovations in digital care, integrated healthcare models, and enablement services have the potential to transform the way behavioral health services are delivered. However, investors must remain strategic, focusing on companies that offer scalable solutions with the ability to sustain growth in the long term.
The rise of integrated and collaborative care models, as well as the increasing focus on improving the quality of care, suggests that the behavioral health industry is on the cusp of a major transformation. By supporting forward-thinking companies that balance innovation with operational excellence, venture capital in behavioral health will play a crucial role in shaping the future of mental health and substance use disorder treatment.
