Mapping out the Mental Health startup ecosystem

Earlier this year, our Partner Christian Hernandez wrote a post about the importance of Backing S**t that matters. Not only did that resonate with my ideology of Venture Capital, but it also coincided with some people I hold close to my heart admitting that they suffered from mental illnesses. From depression and anxiety to borderline personality disorder, I discovered a wide range of illnesses rooting from different causes. But what was the one thing in common amongst all these people? None of them used digital products to deal with it. What was another common symptom? Increased isolation, meaning possibly more time spent on their phone/computer. The post that follows is the result of a research on startups looking to tackle this issue.

The problem

Today, 1 in 5 people have a diagnosable mental illness, and 1 in 20 people have difficulty leading their everyday life due to mental illness. However before even talking about the prevalence of the issue — and I believe this post does a fantastic job — one must realize how ineffective the current infrastructure is. Here are some of the most mind-blowing findings:

• Misdiagnosis: 60% of Americans go undiagnosed and therefore never seek mental health treatment. In the UK, nearly half of adults believe that, in their lifetime, they have had a diagnosable mental health problem, yet only a third have received a diagnosis
• Inadequate drug prescription: In the US, 80% of psychotropic drugs are prescribed by primary care physicians (PCPs) rather than psychiatrists. In the UK, 75% of GPs have prescribed medication even though they felt psychological therapies would be more effective.
• Shortage of therapists: There is a 26% appointment rate in the US, with 25 days on average to book an appointment. It is estimated that 75% of people with mental health problems in England may not get access to the treatment they need.
• Cost: Mental health costs the US $201bn and the UK £105bn every year, this excludes loss of productivity in the workplace and comorbidities. A session with a psychotherapist costs $80-$120 on average, 45% of untreated individuals cites cost as a barrier, and serious mental illness is more prevalent among adults who are uninsured and those who are poor.
• Workplace discrimination: Today, almost two out of three people who have received hospital treatment for a mental health condition say they have experienced discrimination at work or when trying to get employment.

The prevalence of mental health is ultimately very well documented but the bottom line is this: for an issue of this size, the infrastructure to solve it is simply too inefficient.

Enters technology

Founders and investors got down to work and the amount of venture capital money deployed in mental health tech deals is projected to almost triple in 2018 compared to last year (2018F: $793m, up from $322m in 2017). Apple pegged self-care as one of its top four breakout trends for 2017, saying “never before have we seen such a surge in apps focused specifically on mental health, mindfulness and stress reduction.”

But the space is still very nascent. We’ve managed to track down over 230 active startups that received VC funding over that time period and have talked to over 50 of them. Below is the breakdown of funding by stage ($ in total funding):

Mapping out the space

The landscape at the top of this article is non-exhaustive and illustrates the most capitalised or promising companies. We categorized all companies into 6 buckets. (It’s important to note that this is not a perfect way of segmenting companies, as some startups may fit into 2 or 3 categories above).

Computerized Cognitive Behavioral Therapy (CCBT):

• Description: Leveraging mobile interfaces to create self care behavioural change programmes instead of pills to cure mental illnesses. While most of these startups go directly to consumers, some use enterprises as a channel for employees, or focus on empowering therapists with better treatment.
• Top companies: Headspace, Calm, Akili, Cureapp, Happify
• Percentage of companies: 33%
• Average funding amount/startup: $5.8m
• Key business models: Freemium or SaaS
• Framework for analysis: Is the content proprietary or from third parties? If the latter, is it scraped or purchased? If the former how much time does it take to push new content? And how much does it cost to produce the content? Are there any therapists in the loop to provide support throughout the user journey? Are any distribution channels used for acquisition (enterprise, practices, insurers, airlines, etc)?

Telepsychiatry:

• Definition: Startups providing therapists with a communication interface to connect with patients digitally, or creating an independent digital practice from scratch.
• Top companies: Lyra, Ableto, Talkspace, Ginger, IESO
• Percentage of companies: 16%
• Average funding amount/startup: $6.7m
• Key business models: SaaS
• Framework for analysis: What interface is used to communicate with patients (text, video, phone call)? Does the company use in house or 3rd party therapists? Is content being created to help patients train on their own between consultations?

Provider Tools:

• Description: Building a new generation of software to help in the operational efficiency of therapists, or empowering interoperability between practitioners and other key stakeholders of the medical ecosystem.
• Top companies: Quartet Health, Valant, Mindstrong, CMHC Systems, Inflexxion
• Percentage of companies: 15%
• Average funding amount/startup: $5.7m
• Key business models: Enterprise sales
• Framework for analysis: Is the company selling to the public system or private clinics? How long are the sales cycles? What are the regulatory hurdles? If so what are the steps to be compliant? What KPIs prove the increased efficiency of the product for the end user?

Consumer Tools:

• Description: Building non-therapeutic mobile products to either enable patients to set daily personal goals, facilitate communication between patients and other peers through vertical networks, or create educational content on the space.
• Top companies: Thrive Global, Huddle, WeConnect, Webpsychology, Circles
• Percentage of companies: 13%
• Average funding amount/startup: $1.8m
• Key business models: Freemium
• Framework for analysis: These companies often offer free products with no short term monetization, what is the business model in the long term?

Hardware:

• Description: Using connected hardware — whether it is a VR headset, an intelligent wristband, or any kind sensor enabled device — to capture biometric data and help patients or therapists with monitoring, or build more immersive therapeutic content.
• Top companies: YBrain, Pivot, Rendever, Find Me, Neuroflow
• Percentage of companies: 12%
• Average funding amount/startup: $1.1m
• Key business models: SaaS
• Framework for analysis: Is the company giving away the hardware to try and upsell on the software? VR content: what KPIs demonstrate the increased efficiency of that approach vs more standard mobile-based CCBT? Is the content proprietary or is it made by 3rd parties?

Applied AI:

• Description: Using techniques such as conversational intelligence, predictive analytics, or machine learning at the core of the product to provide a more personalised and efficient approach to prevention, treatment or diagnosis.
• Top companies: Neurotrack, Mequilibrium, Cognoa, Woebot, Shine
• Percentage of companies: 11%
• Average funding amount/startup: $3.8m
• Key business models: SaaS
• Framework for analysis: What data sources are being used to train the algorithms? What is the level of dependency with 3rd party data providers?

Observations

When looking at the data and connecting the dots with recent events, here are some of our observations:

• Verticals: Companies solving core infrastructure issues by innovating on enterprise software for the space (i.e. Quartet Health) are mostly backed by funds vertically focused on digital health or medtech. Similarly, it takes strong knowledge of the space to back founders building electroencephalographic helmets (i.e Flow, Muse), which limits Software/Internet funds to CCBT, Telepsychiatry, Applied AI, and Consumer Tools if we take the categories above.
• Monetization: Two business models have proven to be sustainable in the four categories. Telepsychiatry with companies like Talkspace reaching over 1m users, and meditation focused CCBT with Calm, Headspace, and other “self care” apps gaining significant traction.
• Geo distribution: 68% of the total pool of startups that we analysed are based in the US, with no other country represented in the top 10 most funded companies. There were only 25 companies in total that were identified between the UK, France and Germany, with only 2 companies having raised more than $5m in Europe (IESO and Big Health in the UK)
• Regulation: Headspace recently announced that they will start a series of clinical trials to launch FDA-approved meditation apps. This could be a strategic move that other CCBT apps will follow in order to give users the ability to legitimately claim their subscription fees as treatment to their health insurers (users currently pay out of pocket for self care apps)
• Lack of exits: While some natural acquirers come to mind both in the medical industry and FAMGA focusing increasingly on digital health (Pillpack to Amazon, Senosis to Google, Gliimpse to Apple), no mental health tech company so far has generated significant realized returns to VC investors. The space is however nascent, and the value of the data created by the underlying products has no parallel in the digital health industry.

Building a thesis as a non-medtech/biotech fund

The goal of this deep dive is of course to not only come down with a framework to analyze future dealflow in the space, but most importantly to understand the trends and build conviction on where the next unicorns will be built.

Based on our research, we are excited about the following trends:

• Full stack approach: An increased amount of companies are starting to offer solutions at the convergence of CCBT and Telepsychiatry in the same product which solves key problems in both business models. Humans in the loop allow for accountability and follow ups on the development of the patient, it is however hard to scale as a standalone service. CCBT allows for a “self care” type of treatment, with features to track your development over time. Churn is however an issue given no one is there to nudge the patient. Proprietary quantitative data from exercises and qualitative input from therapists can be mined to personalize the treatment. That data can also be anonymized and used to build insurance products.
• Prevention/Mental Wellness: Spearheaded by meditation apps, the trend towards the democratization of mental wellness is well underway. There is a category of companies within CCBT that do a great job at creating a brand/lifestyle around their product, nailing digital marketing and building gamification features. Celebrities are helping to break the stigma (Prince William/Harry, Lady Gaga, etc) and we are seeing a strong trend around millenials’ pro-activeness in treating their mental wellness/fitness.
• Targeting a specific condition: 42% of startups that we analyzed are focused specifically on a single condition. Whether in behavioral (addiction, stress/anxiety, depression) or mental disorders (Alzheimer, Schizophrenia, Bipolar Disorder), the market for each condition is ultimately large enough if you account for direct (specific therapy, medication) and indirect (estimated loss in productivity, crime, associated physical illness) costs. For instance, addiction accounts for $740bn in aggregate value while affecting 47m people in the US alone. Taking this targeted approach allows you to: create more efficient products, lower your CAC as you get more targeted with marketing, and build a more engaged community of users with the exact same issue.

Conclusion

While this remains a challenging space, we are confident that we are entering the golden age of Mental Health tech. VCs are waking up to the fact that this is an enormous market, and that the stigma around mental health is decreasing globally by the day, driven by millenials. The trend around the future of work has gotten employers increasingly willing to invest in their employees wellbeing, as data from the WHO shows that investing in your employees mental wellness yields a fourfold increase in productivity.

New promising business models are starting to emerge including digitized physical practices (I.e. Two Chairs) and DTC drug subscriptions (i.e. Kick). We currently see a higher level of early stage deals, innovation, and pro-activeness from consumers in North America — but shall remain on the lookout for great founders on both sides of the Atlantic. Finally, our portfolio companies Dialogue and Echo are already making an impact in the space, by providing telemedicine and drug delivery services (Stephen Bourke, Co-Founder of Echo, recently wrote a fantastic piece on breaking the stigma around Mental Health).

I am extremely excited about this space and always willing to learn more. Please do reach out if I missed your company in the landscape or if you’re passionate about this issue: edouard@whitestarvc.com

Thanks to Tarek Abillama for helping me in this analysis and all founders/VCs/accelerators for the insight.

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Update: After 3 wonderful years in venture capital, I left my role as an Investor at White Star to build something of my own in the mental health space. Feel free to reach out to learn more at ed@mantrahealth.com