In recent years, the world has experienced a cascade of concern over mental health. However, with the onset of the covid-19 lockdowns in early 2020, such concerns were turned into priorities.

Indeed, in March of this year, the World Health Organization reported that the global prevalence of anxiety and depression increased by a quarter during the first year of the pandemic.

The mental health crisis has also had a considerable economic impact. A report by Deloitte in April found that poor mental health is costing employers in the UK up to £56 billion ($68 billion; €65 billion) – a figure that has grown by a quarter since 2019.

“Mental wellbeing has been pushed further up the corporate agenda,” says Michael Preston, partner in the private equity practice at Cleary Gottlieb Steen & Hamilton. “It seems that more businesses are becoming aware that it makes business sense to invest in the mental wellbeing of their staff.”

Meanwhile, stigma around mental illness has begun to erode; but as people have become more willing to seek help, established mental health services are struggling to cope with demand. To compound the issue, face-to-face treatment suddenly became difficult under covid restrictions.

Amid such a large and growing market for mental health and wellness services, “people have come in with solutions to fill those gaps”, says Lisa Suennen, a long-time venture investor in healthcare who sits on the advisory boards of several venture funds.

Suennen notes that companies aiming to provide digital wellness solutions have been “enabled by digital capabilities and telemedicine; enabled by there being lots of capital out there; and enabled by a willingness to admit that people might need help”.

“Wellness information and technology is a last mile in terms of connecting a broader population to the world of health and wellness”

David Thibodeau
Wellvest Capital

Investors are certainly seeing the potential. Mental health tech start-ups received a record-breaking $5.5 billion in funding in 2021, up 139 percent year-on-year, according to research firm CB Insights.

Several start-ups have also reached unicorn status in recent years. In June 2021, Talkspace – one of the most prominent online therapy apps – became the first of its kind to hold an IPO and reached a valuation of $1.4 billion.

An increasing range of services is being delivered through digital channels. At one end of the spectrum, telemedicine apps allow patients to receive professional help without needing to visit a therapist in-person. Other apps sit more within the ‘wellness’ category. These typically aim to help people manage less acute issues, such as stress, through offering mindfulness support, breathing exercises or lifestyle

“Wellness information and technology is a last mile in terms of connecting a broader population to the world of health and wellness,” says David Thibodeau, managing director at Wellvest Capital, a Boston-based firm that invests in wellness services. The growth of wellness technology, he says, has been facilitated by a “generational shift in willingness to take information in through digital sources”.

Doubts about apps

While capital has flooded into the sector, the ability of digital services to retain and grow their base of patients and consumers is less than certain. One obvious question that investors looking for value-creation opportunities must ask is whether apps actually work in improving mental wellbeing.

Nicole Martinez-Martin, an assistant professor at Stanford University’s Center for Biomedical Ethics, says the answer is often unclear. “If you look at the very large number of apps and digital health tools that are available, a fairly small percentage have been evaluated in some way that studies whether they’re able to do what they claim to do.”

“More businesses are becoming aware that it makes business sense to invest in the mental wellbeing of their staff”

Michael Preston
Cleary Gottlieb Steen & Hamilton

Funding is unlikely to continue flowing into companies that cannot keep their users satisfied. Preston warns that “some studies indicate that less than 10 percent of people who download the most frequently installed unguided mental health apps, which require user input and interaction, continue using such apps after 14 days”.

Another question impacting the industry is whether digital products can compete with traditional services now that covid restrictions have largely been lifted.

Martinez-Martin says that there is “certainly a place for telehealth”, noting that “a number of mental health providers reported fewer missed sessions. Without those barriers of having to take time off work or get parking, more people actually did show up for care”.

The challenge is finding the right balance between remote and in-person care, especially for more serious conditions. “Oftentimes in mental health, one of the keys to diagnosis is literally sitting with the person,” says Kristin Pothier, global lead in KPMG’s healthcare and life sciences deals advisory practice. “Seeing their whole body, seeing how they tap their foot, seeing how they look away from you, seeing how they react; you miss some of that with virtual. It’s absolutely essential to have a balance.”

Market maturation

The market for mental health and wellness apps grew at a frenetic pace following the start of the pandemic. Cerebral, a platform for mental health treatments that has been backed by several PE and venture firms, including SoftBank’s Vision Fund 2, saw its valuation reach $4.8 billion in December 2021. The company had been valued at $1.2 billion in its previous equity round held just six months earlier.

Now, however, the bubble seems to have burst – or at least significantly deflated, mirroring trends in the wider tech sector. “Valuations are coming down like a rock,” says Suennen, following a period when they had been “going along as if gravity didn’t exist and without any link to standard fundamentals”.

Despite softening covid-19 concerns, Suennen and Preston believe that opportunity beckons for astute PE investors to acquire companies at realistic valuations and drive this corner of the market towards much-needed consolidation.

“Often the goal of PE investors is to roll these digital health investments up and create a large-scale player that can provide these services efficiently,” says Preston.

Suennen expects the great companies will continue to flourish, partly through consolidation. “What they will do is roll up the little companies that can’t succeed on their own and build a platform for a broader market capability that will rise in value over time.

“For private equity, it’s actually probably the best opportunity, because they are in a position to buy up multiple assets and put them together.”