Why Behavioral Health Startups With Strong Value Propositions Could Thrive In A “Bear” Market 

Almost all financial portfolios show signs of a bear market. Still, the possible downturn could be a ripe setting for mental health startups with a strong value proposition.

The broader economic climate has begun to impact the behavioral health industry, with venture capital investment in digital mental health startups declining. However, this financial situation also offers mental health startups the opportunity to define their value proposition and focus on results from the start.

Additionally, a bear market has historically also made mental health services in high demand.

Mental health care needs tend to increase during a recession. In fact, research has found that the risk of anxiety and depression increased by 22% during the Great Recession.

“We saw during the financial crisis of 2008, skyrocketing increases in anxiety and depression,” Margaret Malone, principal of Flare Capital Partners, told Behavioral Health Business. around what is happening in the public markets.

Flare Capital Partners is a Boston-based venture capital firm whose behavioral health investments include Oui Health and BeMe Health.

Even before the market took a volatile turn, rates of anxiety and depression were rising with the pandemic. The Kaiser Family Foundation reported that during the COVID-19 pandemic, 4 in 10 adults in the United States had symptoms of anxiety or depression.

“At the macro level, when you look at what is happening in the world, [there’s] a second pandemic, if you will, of mental health,” Amanda D’Ambra, CEO and co-founder of virtual eating disorder treatment company Arise, told BHB. “It’s not going to go away. Rates are still incredibly high.

D’Ambra’s New York startup Arise recently announced $4 million in seed funding to help launch its beta program this year.

Investors cool behavioral health startups

Yet investment in behavioral health startups is slowing. Digital mental health startups have seen unprecedented venture capital funding in recent years, with investments reaching an all-time high of $5.1 billion in 2021. But that hasn’t necessarily meant a better use of investments, according to Nisha Dua, managing partner of BBG Ventures.

BBG Ventures is a New York-based venture capital firm that invests in early-stage companies, with a focus on female founders. His behavioral health investments include Arise and Real.

“I think in the last few years a lot of people have done a little with a lot,” Dua told BHB.

Venture capital funding in the sector is slowing down. Rock Health reported that digital mental health ventures raised $1.3 billion in the first half of 2022. Additionally, the bulk ($1 billion) was raised in the first quarter of the year.

This slowdown in funding isn’t necessarily a bad thing for all founders.

“I think the best founders emerge when they’re scrappy and when they have very little to do something big with,” Dua said. “I think that’s the market we’re entering now.”

Falling investment and valuations could also be key to helping companies exercise more discipline

“They need to be much more mindful of capital efficiency, especially around technology costs, but also operating costs and headcount in general,” Dua said.

Despite the tough market, payers and employers will always look to work with point solutions, said Malone of Flare Capital Partners. However, emerging mental health companies will also be under pressure to prove their value proposition early on.

“These buyers will likely become more selective and seek out these clinical outcomes,” Malone said. “And there will have to be more focus on the ROI story for those buyers. Because obviously budgets can change a bit.

While important in any market, results are crucial when trying to get money from investors and clients with tighter purse strings. But a more results-oriented market could also mean better outcomes for patients.

“As we think about where we’re going next in terms of future fundraising, we’re very mindful of what results and milestones we really want to demonstrate,” D’Ambra said. “I think that makes a lot of sense, especially when we’re talking about companies that are building meaningful care delivery for real people. I think that aligns incentives with care pretty well. It will really make a difference for people.

A bear market also forces companies to define their business model from the start.

“I think it’s actually a pro that companies are going to spend more time thinking about the fundamentals of their core business: your margin profile, your ability to recruit and retain psychiatrists, psychologists, therapists on the platform, which I think is going to be really tough,” Malone said.

A leap of faith for the new founders

Although healthcare has traditionally been a bear-proof market, there are still many uncertainties about starting a business in the current economic climate.

“What’s interesting right now is how quickly market dynamics have changed and also how mixed the effects on the economy are right now (employment and consumer spending are still favorable while interest rates and the stock market are unfavorable),” Stephanie Greer, co-founder and CEO of Akin Mental Health, wrote in an email to BHB. “For us, this has added a layer of uncertainty more than any specific impact on our business.”

Founded in 2022, Akin is a San Francisco-based startup focused on supporting family members of people with serious mental illness.

This uncertainty is especially true for companies that do not have venture capital or private equity funds to fall back on.

“I have no other way out. I haven’t won a million dollars, where I have this incredible cushion to fall back on,” Nicholas Neral, founder of Haley, told BHB. “And so, starting a business in a bear market, starting it for a while, you have to be sure it’s going to work or maybe you’re looking for a job six months from now in a bear market.”

Based in Florida, Haley is a mental health navigation service dedicated to connecting patients to mental health services that meet their needs.

Neral said it was important for him to differentiate his company from other startups in this tough market. One way he’s trying to do this is to launch a behavioral health browsing service, instead of a telehealth company.

“I think we try to differentiate ourselves by not being a competitor of just one company. We’re just trying to connect you with the right resource for you,” Neral.

As interest rates rise and inflation remains a concern, new economic indicators suggest the US may actually avoid a full-blown recession, which could also give healthcare companies a boost behavior in the start-up phase.

U.S. employers added 528,000 jobs in July, the Bureau of Labor Statistics reported Friday. This surprisingly impressive update means that total employment levels have fully recovered to pre-pandemic levels, as in February 2020.

Building proposal products will always win

There are still a number of areas where innovation is desperately needed, according to BBG’s Dua.

“I don’t think the [investment] is a reflection on mental health as an opportunity. I think all investors have taken their cues,” Dua said.

There are still many underfunded and in-demand areas of behavioral health, she explained, including adolescent and geriatric behavioral health services.

“Teen mental health is still not cracked,” Dua said. “I think teenagers will always be a tough market to break into because teenagers by their very nature want to develop their own solutions to things, and that’s why they are the harbinger of what’s new and what’s is still and better to come.But I will say that teenagers and young adults are one of the greatest opportunities.

But no matter what behavioral health sub-sector a startup is looking to tackle, Malone said purpose-built solutions will always win out in the end.

“One of the big opportunities today is to really think about those needs and how to design a solution that’s perfect for that population, and then how it evolves over time,” Malone said.

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