Digital behavioral health startups scored $588M in funding amid COVID-19 pandemic

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U.S. digital health companies raised $5.4 billion in venture funding across the first six months of 2020 and 11% of this funding went to behavioral health startups. (Pinkypills/Getty Images)

Digital health is on pace to have its largest funding year ever thanks to the rising demand for virtual care and disease monitoring.

U.S. digital health companies raised $5.4 billion in venture funding across the first six months of 2020. The first half of 2020 saw more funding than any previous first half of the year from 2011 to 2019 and beat the prior record of $4.2 billion set in the first half of 2019, according to venture capital firm Rock Health's midyear report.

The COVID-19 pandemic has opened up new opportunities for virtual care as stay-at-home orders practically mandate the use of telehealth and digital health, according to Megan Zweig, chief operating officer at Rock Health.

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Investors have doubled down on current investments. We also saw some capital that may have been invested in other sectors now being invested in digital health and investors see the necessity of these solutions," Zweig told Fierce Healthcare.

It has been a roller coaster ride for digital health funding in 2020 so far. After coming out of the gates quickly with a record $3 billion in funding in the first quarter, digital health investment—and overall venture funding—hit the brakes in April as COVID-19 spread rapidly around the globe, Rock Health reports.

But investors came roaring back into digital health in May as several regulatory and reimbursement barriers to digital health adoption fell away.

Investors slowed the pace of investment in March and April to turn their attention to the needs of their existing portfolio and out of risk aversion. 

The record stock market rally in late May and early June, reduced volatility in public markets and a surge in demand for digital health solutions helped to reverse the trend.

RELATED: Mental health startups saw record funding in Q1. Here are other sectors attracting investment amid COVID-19

Overall digital health funding in the second quarter was $2.4 billion, 33% higher than the $1.8 billion quarterly average for the prior three years, Rock Health reported.

And average deal size in the first half of 2020 was $25.1 million, well above the previous record of $21.5 million set in 2018.

Rock Health researchers Nina Chiu, Alex Kramer and Aditya Shah caution that it's difficult to predict the spread of COVID-19 and the impact on the financial market for the remainder of the year.

"A potential second wave of the virus could quickly reverse the Q2 public market rebound and growth in private digital health investment. While the pandemic appears to have stoked investors’ appetite for digital health companies, in particular, their focus could shift in a longer-term economic downturn," the researchers wrote.

Looking ahead, Rock Health researchers project that macroeconomic turbulence will continue to drive enterprise buyer, consumer and investor interest in digitizing healthcare in a way that offsets the negative effects of a recession.

"Thinking about digital health venture capital in the latter half of the year, we don’t expect the momentum to slow down much. Ther is so much interest in digitizing healthcare," Zweig said.

But not all digital health companies will fare the same, the researchers said. 

"Startups who sell to providers and employers may face stiffer headwinds than those in other categories," Rock Health researchers said.

Behavioral health startups attract investors

With healthcare's COVID-19-driven shift toward virtual care, it's no surprise that on-demand healthcare services and disease monitoring received a significant amount of investment in the first half of 2020.

But there also was a significant upswing in behavioral health investment in the past six months.

The COVID-19 pandemic has ushered in unprecedented levels of anxiety and isolation. Nearly 100,000 Americans have reported anxiety or depression as a result of the pandemic, according to a recent survey by Mental Health America. 

Google searches for "virtual mental health" quickly spiked at the end of the first quarter as people searched for alternative options for in-person behavioral health services, according to Rock Health.

RELATED: Digital health investments were off to a record start. How will COVID-19 change things?

In the first half of 2020, digital behavioral health startups scored $588 million, roughly the annual funding for this segment in any previous year, Rock Health reported.

Total behavioral health funding in 2019 reached $539 million while it hit $658 million in 2018 and $273 million in 2017.

"Funding has gone to companies with a range of product features, from fully-automated chatbots to video chat platforms with additional tools that augment patient-clinician interactions," Rock Health researchers said.

The majority of funding in this segment so far in 2020 has gone to digital behavioral health companies that provide solutions that enable providers to provide remote treatment for acute and chronic conditions and digital therapeutics that are themselves a clinical treatment like Lyra Health or a nonclinical service like Headspace, according to the report.

Funding for behavioral health startups also increasingly makes up a bigger portion of overall digital health investment. Of the $5.4 billion raised by U.S. digital health companies, 11% of this funding went to behavioral health startups. That compares to 7% of overall funding going to behavioral health companies in all of 2019.

RELATED: Hims & Hers expands into virtual mental health services

  • Headspace landed $140 million to continue building its mindfulness and meditation application.
  • Mindstrong, which makes an app that pairs patients with a network of providers to deliver personalized mental health care and utilizes a digital biomarker tracker of mood and cognition via patterns of smartphone interactions raised $100 million in a series C.
  • Lyra Health, a platform designed to deliver customized behavioral and mental health care virtually and/or in-person, alongside self-care lessons and exercises, closed a $75 million series C.

In the short run, investor interest in the segment may complicate the marketplace for enterprise and individual customers navigating what is still a relatively new market, Rock Health researchers said. But behavioral health companies with proven business models and clinical results will stand out in a growing landscape.

"The low-to-mid acuity behavioral health market has become very saturated, but there is still a major opportunity for companies that address high acuity mental and behavioral health issues to help the portion of the population that is driving the majority of the cost," said Alyssa Jaffee, vice president of 7wire Ventures, in the report.

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