Written by Stephen Hays
Jan 4, 2021
During the last week of December 2020, I surveyed 150 mental health startup investors. I asked for their opinions on various issues, such as the latest investment trends in the industry as well as valuation expectations.
I’ve summarized the results below and presented the data as objectively as I can. My goal here is to share insights that founders and investors can leverage as they move into a new year of building, investing in and supporting entrepreneurs who are solving one of the greatest problems of our time around mental health and emotional wellbeing. Below you will find a few of my thoughts presented next to the data. I’m trying to make sense of it just as you are, but I wanted to share this with the hope that it does help everyone in our space.
Although this is not a scientific survey, I believe that the results can help us understand the challenges and opportunities in the mental health startup space. I’m sharing my thoughts along with the data in the hopes that we can learn together as we all work to support entrepreneurs in this space.
We sent the survey out to our active syndicate members, other VCs who have invested in the space, family offices, and angels who we know have been active in the mental health startup market. By active, I mean they have either invested in a mental health startup or are actively pursuing the space intentionally. As mentioned, 41 of our investors who responded did not invest any capital into this space in 2020. However, only one investor said she will invest $0 over the next three years. I think that alone tells you a lot about this market and its potential.
Let’s get to the data.
Mental health means different things to different people. Some people consider certain “verticals” to be included in the mental health market and some don’t. We polled our investors to see which verticals or solution sets were most appealing.
Investors were given a list of verticals and the option to choose the three that are most appealing. Here are the number of votes received by each vertical.
The verticals are color coded so you can see the discrepancies between how much love and hate each received , which is also quite telling. The second chart, below, shows results for least appealing, which we will discuss in a minute.
Psychedelic investments seem to be the most appealing to the investors we polled. This makes sense, there’s been a lot of hype, there are a lot of hopes and expectations, and we’ve already seen some public market exits and huge valuations with companies like Compass Pathways and ATAI Life Sciences.
For those of you who are not as familiar, Compass Pathways went public in September 2020 on the NASDAQ in the U.S. It’s initial stock price was $17 a share (implying a valuation just over $500mm) and traded up quickly to nearly $40 on the first day. Since then the stock has traded as high as $60 and currently is trading at $47. Regardless of how you slice it, the Company is a unicorn. Investors want to be a part of the “next Compass.”
For those looking into this space, please tread with caution. There are a ton of dangerous companies out there raising cannabis-style money, going public with thinly traded, low-volume stocks via RTOs and other methods in Canadian markets. We’ve made money in a company that did this, so we’re not saying it’s all bad (Field Trip Health). But my official position right now is to be overly cautious of companies who can’t, or won’t, raise funds traditionally (whether it be early stage, or late stage), or list with a greater trading volume on a more traditional exchange (like what Compass did, and what ATAI is going to do). It’s very hard to get your investment back out of these companies when they are so thinly traded.
Other desirable sectors, according to our investors, are:
You will see in the data below that these are also least frequently chosen as “least appealing” while that is not true for psychedelics.
I personally feel very strongly about the Measurement and Testing space. Humans have been measuring physical health for thousands of years, but we have yet to deploy a meaningful, accurate, test or measurement of mental health or emotional wellbeing at scale. I believe we can, we must, and we will. This is a space I’m very keen on.
This is similar to the question above. We asked investors which verticals are least appealing to invest in. You can see some interesting results not only by volume of votes, but by ranking/order and by differential in votes for and against certain sectors.
It’s clear that investors have seen enough AI-based therapy chatbots, or they aren’t excited about them, and the same goes for group therapy. I’m not saying you can’t build a unicorn in one of those verticals, but I am pointing out that investors are going to really need to hear a compelling story that distinguishes you from the rest.
It was interesting to me how many people really dislike the idea of investing in psychedelics and I suspect it has something to do with the words of caution I shared above, or because of the potential for abuse as a recreational drug.
I’m not surprised to see Measurement and Testing, B2B Provider SaaS or Addiction Treatment on the low end of this chart. Each of those verticals fared well in “what’s hot” charts and barely showed up in “what’s not.” That doesn’t mean that building or investing in those verticals will be easy, but it does send a very clear message to the market.
I expected far more respondents to answer “yes”. I believe some people were not willing to admit it, because of the stigma. But that’s just speculation on my part. Any way you slice this pie, it is clear that a lot of the investors in this space have been touched personally (or indirectly) by the need for help with their own mental health (or that of a loved one). Our belief at What If Ventures is that every human has mental health, just as you have physical health, and that we all need to be doing something proactively to improve our mental wellbeing, just as we do with our physical health.
This gives you a sense of the size of checks the respondent wrote into mental health startups in 2020. 41 of the investors we included in the survey did not invest at all into a mental health startup in 2020. At first glance, I was a bit surprised by this and wondered if I polled the wrong group of people. Then, I saw the results of the next few questions about outlook and intent to invest in the future and all of that concern was wiped away.
Survey Question: Will you allocate MORE or LESS capital to for-profit mental health investments in 2021?
Over 95% of the investors surveyed said they would invest as much, or more capital into this space in 2021 compared with 2020. This result made me feel much better about who I surveyed after seeing that 41 respondents did not invest in the space in 2020.
While we are comparing estimated investment over the next three years to the single prior year, it is noteworthy that every investor, excluding one investor, indicated they will invest. It appears they will be investing more as there is more volume on the right side of this chart than in the 2020 chart above.
These results are fascinating, as they could mean several things. It could mean that more capital is flowing into a space where there is a supply/demand imbalance which means a lot of investors will make money while a lot of these entrepreneurs will help many people. However, it could also indicate that too much “dumb money” is flowing in too rapidly and it is going to get harder and harder to invest intelligently in this space unless you really understand it.
Investors were asked if their motivation for investing in this space is primarily driven by financial gain, helping people, or another motivation. I expected more people to say their motivation was to help people. I am pleasantly surprised at how many people agree with us that the supply/demand imbalance in the space makes it very attractive to generate return on investment (ROI). However, I don’t think this question and the answers fairly depict the expected returns in this market, so we decided to dig in a bit more below.
Even though helping people was a more popular motivating factor than profit, it appears the vast majority expect investments in startups in this space to return capital to shareholders in line with or better than other sectors.
Now for the part that I know you came here to see!
A lot of capital flowed into the mental health space in 2020. It is still a nascent market, but it isn’t a secret anymore. A lot of investors realized this was happening and started piling in. We’ve seen deals getting done at valuations of 28x to 30x ARR (although this is the exception to the rule, not the norm) while the relevant digital health public companies trade around 10x forward annual revenue (which is up quite a bit from just a year ago).
We asked investors what they think a fair multiple of Annual Recurring Revenue (ARR) is for startups in this space. Here is the distribution of their responses.
I’m not surprised to see the bulk of investors expecting valuations in the 10x-15x range, which is where I’d peg the average myself. I was surprised to see how many investors think some of the higher ranges here represent fair market valuations.
For sake of comparison, I’ve updated the public trading comps that we track for benchmarking purposes here as well so you can see how they are trading. The average public company one year forward EV/Sales multiple is 10.5x.
There is some debate about whether or not startups can or should be expected to save us from the worsening supply/demand imbalance. Some people argue that making a profit off of mental health is “bad.” I can see their point, but at the same time, I believe that for-profit solutions are needed as the government can’t, and won’t, solve this problem any time soon. I recommend reading the book “American Psychosis” which shows that the government is largely the problem in this space and has been since the mid-19th century.
Some people believe the surge in funding for mental health startups is a short-term fad. Others believe we are in the early days of a major market shift. Our investors seem to have mixed views here. We will let the results do the talking on this one.
More of the results skewed toward “fad” than I expected from a group of people who overwhelmingly said they are going to invest more in this space in the future. I think this has something to do with the “what’s hot” and “what’s not” charts at the top of this post. Some areas within the mental health vertical are easier to build in than others, and those areas have seen a lot of the low hanging fruit snatched up by entrepreneurs and investors. Some of the harder places to build are still wide open and I think this dynamic drives this distribution of these responses.
As we head into 2021 I expect to see increasing capital flows into the mental health space. I also think 2021 is a year of “doing.” A lot of money has flowed into the space at very high valuations and now it’s time to see if those companies can grow into those valuations. I know there will be more “large” funding rounds, and of course plenty of seed stage rounds as well. Capital will be rather easy to obtain for good founders solving the right problems.
The mental health space is certainly still a nascent market. There is a chance we are too early, still. As any early stage investor knows, being early, can be the same as being wrong when investing in seed stage companies.
There is also a chance that too much money has rushed in too quickly pushing valuations of bad companies too high, which will in turn set the market back when it corrects as investors could get burned and then stop funding anything at all in the space. That’s a worst case outcome of these large rounds at high valuations we are seeing.
On the other hand, we could just be approaching the tip of a huge iceberg of opportunity. I personally believe this to be true, but I also believe there are many valid concerns about this space. I believe it is going to get much harder to invest intelligently in this space. I believe the best investors in this space have a real connection to the problem, approach their view of the market from a place of vulnerability and personal wellness, and care more about helping people, than making money. I believe the byproduct of investing from that place, will be making money and helping people.
I could be very wrong about everything, but I do believe in one thing for sure. I know that helping people is the key to helping yourself and getting well. For me, part of my sobriety, and managing my own bipolar disorder is finding ways to help others.
My mission is quite simple. I want to encourage the flow of capital, into solutions that can help people be well. I don’t care if the capital flows through What If Ventures, goes around us, over us, or we even help investors make direct investments. Those are all minor details. I just want to be part of seeing more good solutions available to those who need them.
I hope you’ll find a way to join me in this journey.