Behavioral Health: Pandemic Boom to Post-Hype Reality

Behavioral health has been through its own hype cycle over the past decade. The industry has made enormous progress in helping millions of people access the care they need, and yet it’s far from a solved problem. So why is it attracting so little funding compared to the heady days of the pandemic? 

Behavioral health tech attracted meager investment for decades, in large part because it was hard for providers and clinics to get reimbursed. That all changed during the pandemic when it became the hottest category in digital health in 2020 and 2021. Investor enthusiasm was buoyed by policy changes that bolstered access to telemedicine, and the fact that payers seemed more amenable to paying out better, out-of-network rates for behavioral health treatment. There had also been a few exits that generated strong returns, such as Optum’s acquisition of AbleTo, which represented a big success story for the category. In 2021, per Galen Growth, investors poured $7.4 billion into behavioral health startups, up from $3.5 billion in 2020. 

A lot has changed since then. In 2024, the space attracted just $1.3 billion in investment, and my hunch is that 2025 will be worse, unless we see a few more growth-stage deals getting done. So it’s fair to say that behavioral health investment has plateaued. There’s still capital moving in, but it’s far more challenging for companies to raise than ever before, particularly at middling rounds between early-stage venture and growth, like the Series B. Echoing trends we’re seeing across the industry, the startups that incorporate AI into their offerings are attracting the lion’s share of dollars. One recent example is Slingshot AI, which raised $93 million for its behavioral health chatbot “Ash.”

And yet, despite all the efforts to use technology to bolster access to mental health services, none of the clinical experts I spoke to for this piece think we’re much closer to solving the core problems. 160 million Americans still live in areas with behavioral health shortages and are struggling to access care. Only about half of the people with a diagnosed condition are getting treatment, as we continue to face a massive workforce shortage of mental health professionals. This crisis is particularly profound in younger generations. There’s been a rise in anxiety and depression, as well as an increase in suicide attempts and deaths, in the years since the pandemic. People with severe mental illness are still facing huge waitlists, waiting months if not years to get help. Lower-income patients are struggling the most. Studies have found that the majority of psychiatrists accepting new patients appear to favor commercially insured patients, with only 43% accepting those with Medicaid coverage and 60% accepting Medicare. A big reason for that is the lack of reimbursement, meaning that mental health professionals are paid better by patients with private insurance or by those who are willing to pay out-of-pocket. 

Another challenge that is not often discussed in our industry: An oversupply of patients with means who can pay for therapy out-of-pocket, but may not need it. Not everyone needs to be seen by a clinical professional without a clear end date, either paying cash or through their health plan, while those who have a clinical-level problem often can’t afford it or get stuck on a waitlist. “That could be a way to increase (reimbursement) rates,” said Trip Hofer, CEO of Redox, an interoperability company, and the former CEO of behavioral health company AbleTo. Hofer explained that payers perceive behavioral health as a high utilization category, and there are challenges in determining the exact ROI. Without a universal standard of measurement, it's hard to determine that the intervention made the difference, versus say any other variable (going to the gym, starting a new diet, new medication, or whatever else). He believes companies that can find ways to differentiate between those who need clinical-level care and those who do not will have an edge in the market today. Those who do not need clinical-level care can still access sub-clinical support, such as coaching, peer counseling, AI-chatbots, and more. 

Behavioral health company Headspace’s new CEO Tom Pickett agrees with this assessment, noting on a call with me that most behavioral health companies in the market today emphasize giving people access to more therapy. Very few companies are working to figure out who actually needs it. “A lot of people are using therapy who should not be using it,” he said. For those who do not, Pickett is in talks with health plans about the need to roll out more scalable, digital-first interventions, particularly those that leverage AI. It might also unlock more scalable business models, because reimbursement for therapy remains low compared to physical health, meaning that many companies struggle to sustain healthy margins as they grow. 

Technology may represent a big unlock, but capital remains extremely challenging to access in this market. That’s because many venture capital and private equity firms have already made a bet in the space and are still waiting and watching to see if it’ll be a fund returner. In their minds, they’ve ticked the box on behavioral health and can move on to the next thing within health-tech, or outside of the sector altogether. These firms may also be conflicted out of making another investment in a competing company or business model, as there are only so many bets a single firm can make in behavioral health. This is having an impact on founders because venture remains the primary mechanism for them to raise capital for solutions that are built for scale. 

Another challenge? Private equity and venture capital firms may need to see more exits in the category to justify further investment. Despite rumors for years that companies like Lyra Health and Spring Health are waiting in the wings, there’s been a dearth of IPOs. As a result, investors like Saurabh Bhansali, a partner at Health Velocity Capital, are expecting to see some consolidation in the category. He told me that might include mergers and acquisitions involving behavioral health companies, like Lyra’s recent buy-up of pediatric-focused Bend Health, or larger digital health companies purchasing solutions to be more comprehensive. One example: I wouldn’t be surprised to see Hinge Health making a purchase in the space, particularly as its competitor Sword just released its own mental health offering. As several friends in private equity noted to me, payers don’t seem to be as active as they may have been in the past in exploring acquisition opportunities in behavioral health. The big factors include antitrust, concerns about high utilization in behavioral health, and the lack of highly profitable businesses that are also growing at a solid clip. 

Exits are important. Not only do exits bolster enthusiasm in the category, they also lead to so-called alumni networks that can catalyze the next generation of companies. Those who made money through an exit can afford to do a startup (not everyone can pay themselves below market for years), and they have the access to talent, the network, and the lessons learned to tackle the category and win. Take Oscar Health as a good example in the venture-backed health plan space. Since the company went public in 2021, more than a dozen of its employees have spun out to create new companies that are tackling different aspects of insurance. And they’re applying lessons they learned from the trenches while in operator mode. I’d argue behavioral health needs those kinds of seasoned entrepreneurs and operators to enter into the category, who will avoid making the same mistakes their predecessors did. 

The firms still making investments tend to be the “die-hards” that are genuinely committed to the category. That level of conviction is required in this market, because the companies that are seeking funding now are looking at more niche areas within the category, tackling complex populations, or building totally new technologies that haven’t been seen before. “All the obvious deals have been done,” said Julia Bernstein, the chief operating officer of Brightside Health, a fast-growing company in the space that connects patients with behavioral health services, including psychiatrists. “There are a lot of firms that have a company in the portfolio that is taking care of mild to moderate behavioral health patients, providing care both synchronously and asynchronously.”