With so much funding going to mental health companies, are they becoming overvalued?

Zoom, Kaiser Permanente Ventures, GSR Ventures, and Bessemer talked about at Invent Health

Investments going into the mental and behavioral health space have taken off like a rocketship over the last few years: in 2014, there was only around $100 million invested in the space. Jump to 2020 and mental health startups raised a record $2.4 billion in venture funding. 

There are many reasons for that, not least of which is the pandemic, which wreaked havoc on the nation's mental health. There's also a growing awareness of mental health issues, and a change in attitudes, with people being much more open about their struggles. All of this has contributed to the space exploding.

There's so much funding now going into mental health startups that some investors are even questioning whether there are too many startups now being funded and if we have a frothiness problem, with those companies being overvalued. Lyra Health, for example, just reportedly raised its fifth funding round in just the last year, a $200 million round that is said to have doubled its valuation to $4 billion in just five months. Another company, Ginger, just raised funding to gain a valuation of $1 billion. These are massive numbers. 

The topic of whether or not mental health companies are overvalued came up at the The Future of Mental and Behavioral Health, from Vator and UCSF Health Hub, last week in a panel moderated by Dr. Archana Dubey, Global Medical Director at HP, and Bambi Francisco Roizen, founder and CEO at Vator, and featuring Sam Brasch, Partner at Kaiser Permanente Ventures; Justin Norden, Partner at GSR Ventures; Steve Kraus, Partner at Bessemer Venture Partners; and Ron Emerson, Global Health Lead at Zoom.

The topic kicked off with Francisco asking the panel what's been happening in the space post-pandemic, and how activity has changed over the last year. Emerson responded first, mentioning how much Zoom had grown: from 10 million daily meetings in January 2010, to 300 million daily meetings in April. 

One of the biggest changes in healthcare in that, he said, has been the growing acceptance of telemedicine on the part of both physicians and their patients.  

"As someone who has been in telemedicine for 25 years, I live in the state of Maine, and way back in the day I was involved with something called the Maine Telehealth Network and became the executive director. We were just trying to get reimbursed; Medicare was like an 80/20 split, Medicaid didn't reimburse, privates didn't reimburse. One of my first experiences walking into an oncologist’s office and I said, 'I’m Ron Emerson, we're trying to set up a program to provide oncology services to northern Maine.' He says, 'So, you want me to see a patient over a television?' and I said, 'Yeah,' and he basically said, 'Get out of my office.' Because no one had even heard the term," he said.

"Over the years we've seen that incremental change in telehealth and the acceptance of it and the normalcy. But it really did take the pandemic to push things to this next level of where we're at now."

Emerson cited a study from Forrester that showed that the rates of telehealth usage went from as low as 3% to as high as 90% during COVID, though that number has now settled do be between 15% and 30% of visits. 

"The topic is mental health today, and an interesting part of that study is that 50% of the video-assisted virtual visits were for just general elements, and 38% were mental health, and then the rest during COVID were actually related to actual COVID specific disease. It's changed a lot. That should give a a picture of what we saw, and what we think the new norm might be as we roll out on this from a healthcare perspective."

Brasch picked up on what Emerson said about telemedicine, saying that the most noteworthy thing that he experienced or observed is "not just the increase in volume," (though Kaiser Permenente did see 85% to 90% of visits in many specialties being done virtually) but the fact that it showed the possibilities for how technology can change healthcare. 

"What's been most interesting for me, and why I'm very optimistic going forward, is our clinical leaders who are thoughtful leaders, and are looking for ways to deliver healthcare better, admitted that they assumed it wouldn't work so well. They realized that, not only does this version of telehealth, which is pretty simplistic but effective, work, but it's opened up a lot of eyes across an organizations like ours, and I think pretty broadly, that this means a lot more can work," he said.

Essentially, it dispelled the notion that you can't get clinicians and patients to change their habits, proving that that's wrong.

"That concept is quickly disappearing in a lot of leaders' minds, and they're starting to say, 'What else can we do?' They know we don't have it all figured out, but as an investor, and thinking about innovation, it's pretty encouraging because now their perspective is, 'Oh, virtual works, innovative solutions and ways of engaging work. What else is possible?' That’s been probably the most interesting observation for us."

Emerson agreed, saying, "Now that clinicians and patients are used to this, it's not going to be be about just the clinician seeing the patient or the patient being admitted to the hospital and generating revenue to that system, it’s going to be about the entire care team. Anything that's virtual, where we have increased touch points across the care continuum, it's just going continue to increase."   

Bessemer's Kraus spoke next. "The pandemic was horrible, in general, but if you think about a forcing function to have that broader healthcare system change, it was pretty powerful. The medical industrial complex in America works really well. It works really well on the fee for service system for the incumbents, and that's not a bad thing; incumbents do a lot of good things, but it's actually failed, honestly, both a lot of consumers. What we deliver is really high quality care, but we do not do it at a cost that is low enough, and also in a way that's friendly enough, for the consumer," he said. 

Continuing to speak about the changes to the healthcare system in general, Kraus said that "the hardest thing in healthcare is behavior change," which is why most venture capitalists stayed out of it for so long.

"The sales cycles are so gosh darn long that when you compare it to Zoom and selling Zoom into the enterprise, their sales cycles are probably six to 12 months; a typical healthcare IT solution is like 12 to 36 months because the answer was always 'no, no, no, we’ve got to change things, got to integrate all these stakeholders.' Well, it turns out that COVID was a great testing ground for this because everyone had to stand up a telehealth solution like yesterday, and they realized they can actually do it," he said.

He also mentioned the effect telehealth had on access, while also noting a number of equity issues, including if people have broadband and if underserved populations are getting access.

"But these solutions provide access on demand, and for working moms and people who work two jobs and name any any folks who have been faced with the medical industrial complex, which says you see us from nine to five on Monday through Friday, during your work hours, like that's a really tough choice for most Americans to make. COVID just blew that away with the adoption of digital health. So, it actually is moving the needle on access too, which is really important to solving that meta equation," said Kraus.

In terms of investing, a lot has changed in the last decade, when "no one really cared from the venture capital perspective about healthcare."

"It wasn't even called digital health back then, we weren't cool enough. Like, literally, no one cared. There were like 10 firms that did it, it was a $300 million cottage industry, and they didn't do it because the sales cycles are long, there were lots of regulatory issues, yada yada yada," he said.

Francisco raised valuations concern, asking whether the startups were overvalued.  

"Yes. It went from being like we were just out of the batter's box, to now we’re in inning two. As a result, lots of entrepreneurs have poured in, strategics have poured in, and venture capitalists who never even knew what healthcare was, and still probably don’t, are pouring in. 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." 

Still, Kraus noted, it has created some issues, including the fact that valuations are off, as is speed to decision making, which makes him worry about the quality of decision making that's being done, since there's so much capital now available to entrepreneurs.

"If I were an entrepreneur, I’d be doing the same thing, by the way. They should. I would take advantage of it, and take the risk of raising capital off the table and I’d do it quickly to make sure I get a good partner, so I don't blame them, but it's going to lead to some bad decisions. But, net-net, I'm a big fan, even though I don't love it as an investment now, because it's really hard to figure out where to successfully win deals, it's great for the industry because it's way better than it was 10 years ago, when no one gave a you know what," he said.

"From a meta-perspective in the system, COVID was a great forcing function to change behavior, change access and frankly, as an investor, even though it's hard for me selfishly, if I care about the system it's been a great thing because it’s brought more capital into an industry where, literally, we just left the batter’s box. This is not a thing where there's a finite period of life, this is a 20 or 30 year roadmap ahead and it’s really exciting where we're going."

Dubey then asked Kraus if there are actually too many companies raising money right now.

"Sometimes, especially in mental behavioral health, you almost can’t tell the difference between one solution to the other. Is it getting too crowded? Are there too many solutions that we are funding, especially in this space, mental and behavioral health?" she asked, to whi which Kraus compared the situation to what was happening with CRMs five or 10 years ago, where there were way too many companies, but eventually the space calmed down when some companies started to win.

In addition, in healthcare, and in mental health specifically, there are so many sub-specializations that there's room for a lot of different companies to make it. 

"A lot of people think about healthcare as a $4 trillion space, but it's literally 400 $10 billion markets. It's probably more; it’s probably 4,000. I don't know what the number is, but in behavioral there's probably 20 markets that are billion dollar plus markets. So, yes, in general behavioral there will only be a few winners, but we have to differentiate between what Ginger’s doing and what NOCD’s doing and what Brightline’s doing. They're very different," he said.

"There's a lot of subspecialization; they all deserve several companies that can treat those indications. That's at least my view." Brash noted that he doesn't see bad companies getting funded, but said that the risk is that there’s so much capital available that companies are maybe taking on too much.

"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.

"There may be some consolidation, 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."

Norden agreed that it's not that bad companies are getting funded, but brought up an subsector like teletherapy, which is "one area that has gotten a ton of funding for the past year."

"Not every one of these companies, like Sam said, is going to grow into its valuation. The cost of recruiting a therapist is going up, it is getting more competitive and, fundamentally, someone is going to have to innovate on that business model of taking a therapist and putting them on their network, employing them completely. Whatever that model is, someone is going to have to improve on that business model to really change and transform what we're doing in mental healthcare," he said.

He also reiterated what Kraus said about subspecialization.  

"I don't think all of those companies that have raised that much money in teletherapy will be success stories from the valuation perspective. Maybe they merge, maybe they consolidate. But I do think there are many, many pockets that are getting investment, as Steve mentioned, and, as companies specialize," said Norden.

"One of things Bambi and Archana had in their opening slides is adolescent mental health, so there’s companies able to come out now and focus on adolescent mental health, or even healthcare at schools, or, again, specific conditions, all of which there is space for successes. How big they will be, we’re all waiting to see, but, as Steve mentioned, there are so many billion dollar, multi billion dollar industries, that a company has the potential to dominate."

Future of Mental and Behavioral Health is brought to you by Vator and UCSF Health Hub. Thanks to our sponsors: Advsr, Scrubbed, Stratpoint. As well as BetterHelp, go to  BetterHelp.com/Vator for 10% off BetterHelp. This podcast is also brought by Octave, your partner for mental health and emotional well-being. Learn more at FindOctave.com. Also thanks to NeuroFlow which is working with hundreds of healthcare organizations to provide best-in-class technology and services for the effective integration of behavioral health. Learn more at neuroflow.com). You may still register for our June 9 and July 14 events, which are part of the Future of Mental and Behavioral Health series. 

(Image source: houstonagentmagazine.com)