Headspace merging with Ginger is the start of fierce consolidation

With the tsunami of money pouring into mental health space, it's time to join forces

Headspace is merging with Ginger. Headspace is a popular consumer brand, offering a meditation app to 70 million users. Ginger is a mental health benefits company offering on-demand coaching as well as psychiatric services to corporate customers. Both companies started in 2010 and have separately raised $200-plus million venture financing rounds. The merger creates a company valued at some $3 billion with combined bookings of $300 million by the end of this year.

Why is this consolidation happening? There's far too much money swelling up the coffers at these companies. Depending on what report you consider, venture financing in mental and behavioral health startups has hit record levels. CB Insights pegs it at $1.5 billion invested in 2020 while Rock Health estimates it at $2.5 billion (Rock Health adds more behavioral health companies into its calculation). Compare this to around $100 million invested in the space in 2014. With the funding came significant boosts in valuations. One might even say ridiculous valuations. Lyra, founded in 2015, raised a total of $675 million in funding, with two of those rounds coming this year, doubling Lyra's valuation to $4.6 billion in only five months. Modern Health, which only started in 2017, saw its valuation balloon to over $1 billion with its latest $74 million financing round earlier this year. Both Lyra and Modern Health compete with Ginger, the oldest of the three startups.  

When we held our mental health event on May 19, many venture capitalists who've funded these startups predicted consolidation soon. Of course, we've already started seeing mergers and acquisitions pick up across digital health as companies try to beef up. Earlier this year, we saw One Medical buy Iora Health for more than $2 billion to go after the Medicare Advantage market. According to CMS, the number of seniors grows to 70 million by 2025, up from 62 million in 2020. And direct-to-consumer health provider, Ro bought Modern Fertility. 

Sam Brasch, Partner at Kaiser Permanente Ventures, noted that he didn't see bad companies getting funded, but too many were getting funded. "Maybe they would have been better served to take on less capital and not need to grow into being a $3 billion company to be a successful exit. I'm not as concerned that bad companies are getting funded and they're gonna fail; what I do think might happen is we have maybe too many companies that are billion dollar, multi-billion dollar, valuations, and there may not be room, at the end of the day, for that many $10 billion exits, even in the mental and behavioral health space," he said during our conference. 

"There may be some consolidation," Brasch addd. "Some of these companies may need to merge with each other, top then grow into a big enough market. Maybe it's an unimportant nuance, but, again, I'm not concerned about bad companies getting money; the risk is too much money is going into every company and they might just not be enough big exits available across the board. At least that's the way I’m feeling about it."

But there's a bright spot to all of this. This is a nascent industry. 

Steve Krauss, Partner at Bessemer Venture Partners, pointed that out at our event. "The capital markets have woken up to the fact that you can build really long term sustainable companies; and, by the way, we're only in inning two, at best. In value-based care, we're not even out of the dugout, honestly. This is a roadmap that can run for like 20 years. And, for us, people who have been doing this for a long time, who aren't really cool, honestly Sam and I can tell you we're not cool, it's kind of nice to be treated like the cool, interesting sector. And that's great." 

So what of the new Headspace Health? It's a great direction for Ginger, whose focus is the corporate market and more clinical cases, despite having 80-90% of their employee members using Ginger for mild anxiety and sub-clinical mental states. Headspace is focused on sub-clinical, which is a much bigger market and a better approach to mental health in the long run because even as Ginger CEO Russ Glass admits, most people need coaches, not therapists or psychiatrists.