Early-stage investors are demanding that digital behavioral health providers have it all, regardless of the organization’s level of development.
In short, industry insiders expect digital behavioral health startups to have rock-solid fundamentals, profitability now or in the near term, some degree of scale and a compelling vision for differentiation with tech innovation. Investors have also become more sophisticated in assessing digital behavioral health. They have also become more skeptical of the space, with some investors expressing disappointment with the present results.
On the other hand, that increased savvy and skepticism has helped providers and investors set more realistic expectations for what each wants in entrepreneurship in this slice of behavioral health.
“The conversations centered on unit economics, care quality, and long-term sustainability — not just speed of expansion,” Robin McIntosh, co-founder and CEO of Avela Health, told BHB. “That reflects where the broader market is today.”
Avela Health is a digital autism diagnostics and therapy provider. Its services encompass caregiver support and coordinated services that include occupational therapy, speech therapy, psychiatry and feeding specialists. It recently raised about $10 million, including a simple agreement for future equity (SAFE) and $6.4 million that was later disclosed in public filings.
“Investors understand that this space requires clinical depth, operational rigor, and economic sustainability. That level of sophistication wasn’t always present a few years ago,” McIntosh said.
Still, venture capitalists often bring prior expectations and assumptions about digital services that don’t necessarily fit with growing behavioral health companies. McIntosh said that there were some investors who asked for a plan for Avela Health to get to $100 million in revenue in three to five years.
“That’s a fair question in many categories, but hyper-acceleration isn’t our objective,” McIntosh said. “We’re building in a complex health care space where responsible growth matters.
“We chose partners who value durable, sustainable expansion.”
With the increased familiarity, providers can also better gauge the investors they bring into their work.
Jeff Beck, CEO of AnswersNow, a digital autism therapy provider, told BHB that it was able to, in part, distinguish between investors who would and would not be a good fit based on their level of awareness of the ABA space.
“There have been times where I’ve met with an investor, and they say, ‘Explain to me how ABA works,’” Beck said. “And that’s how I know this is not going to work.”
AnswersNow announced it raised $40 million as part of a Series B round in January. The company has developed its own software and, in addition to a geographic and payer partner expansion, is using about “half a million” hours of recorded virtual therapy to optimize and deeply personalize the most effective treatment for children with autism and their families.
On the whole, Beck and AnswersNow largely pitched investors on a new vision for the delivery model for applied behavior analysis (ABA), the most widely used therapy in the autism space. Its digital-only, heavily parent-moderated model is profoundly different from most autism therapy providers. This kind of tech-forward, what’s-next approach is usually what venture capitalists look for.
However, during the effort to raise the Series B round, Beck heard from multiple venture capitalists that they had overindexed and were overexposed to the digital health sector. In other cases, they presented a more bullish stance for in-person services for behavioral health care, a departure from the digital-focused past.
With heightened investor demands, there are also more realistic expectations that companies will show additional results to some degree, Beck added.
“I think investors, from my perspective at a digital health company, are looking for ways to change the way that health care is delivered while maintaining quality,” Jeff Beck, CEO of AnswersNow, a digital autism therapy provider, told BHB. “If you can do those two things, you’re going to get a lot of interest.”
Focus on quality
Robert Krayn, co-founder and CEO of digital psychiatry provider Talkiatry, told Behavioral Health Business that the key to both fundraising and payer relations is care quality.
“They’re looking for scale. They’re looking for you to operate appropriately. But they’re also looking for good outcomes,” Krayn said. “I think we’ve seen investors pass on folks that have great financials, but they don’t see what they need to see clinically.”
More and more, investors are bringing in “physician experts” into potential investment processes who have a “much, much deeper understanding” of health care than other staff.
Overall, Krayn posits that digital health generally struggles to deliver impressive care outcomes.
“Most people are not good at it. I’m not saying that they’re wrong,” Krayn said. “I’m saying that it has not been common to find people that do this well — it’s very, very hard.”
This makes companies that can control quality at scale appealing. This was the key for Talkiatry’s latest funding round, Krayn said. In turn, the key to that is a W-2 employment model for Talkiatry’s psychiatry and therapist workforce.
The company announced a $210 million Series D funding round, led by Perceptive Advisors. Banc of California provided a debt facility to the round.
On the other end of the investment round spectrum, McIntosh and Avela Health shared a similar sentiment about quality.
“What resonated with investors is that we operate with disciplined economics, strong clinical leadership, and were profitable when we raised this round,” McIntosh said. “That combination — clinical rigor plus financial sustainability — is not common in early-stage health care.”
Providers setting their own course on AI
With so much of every industry influenced by AI directly, or through the idea of AI, it may be surprising to learn that provider organizations ultimately set their own vision for AI use in their organizations.
“I would say that we were volun-telling investors how we should think about AI,” Beck said.
Beck said he looks at three segments for AI application in digital health: increasing individual employee capacity, improving operational efficiency/leverage and clinical enhancement.
“We can truly individualize the care and the environment virtually,” Beck said, noting the company’s corpus of session recordings.
Beck and Krayn said they see clinical applications insofar as they make clinicians’ lives easier.
At Talkiatry, AI has helped the company to build a revenue cycle management apparatus that is disproportionately efficient compared to traditional models. AI has also eased the intake process and helps ID patients’ insurance coverage even if they don’t have their insurance card handy.
Talkiatry offers tools for clinicians, such as AI scribes, but it doesn’t force clinicians to use them, Krayn said.
Dr. Georgia Gaveras, co-founder and chief medical officer, told BHB that it looked to its clinicians to identify and test tools and filter learnings on best uses to the leadership team.
“They want to be able to focus more on patient care — the direct practice of care,” Gaveras said. “We really wanted them to feel comfortable with how we were integrating things that they would use in their day-to-day work.”
While the jury is still out on AI in digital mental health, it is clear that it will have a place in the digital behavioral health. Part of the present allure of digital health is its capacity to test the latest in digital tools.
“Folks are really interested in digital health because it is a bit of a click ahead from an innovation perspective,” Beck said.