A Silicon Valley VC in the hottest area of healthcare explains what's driving a surge in interest for mental health startups

• Researchers at Rock Health, a Silicon Valley-based venture capital firm dedicated to the hottest area of healthcare - digital health - say interest in mental health startups is starting to pick up.
• The VC fund has backed dozens of digital health startups including Omada, which helps people fight heart disease and diabetes using virtual coaching, and Marigold, a platform that links people with addiction to text-based peer support.
• In a new report, the firm's researchers explore how and why these startups are attracting the attention of other, more established companies seeking to acquire them.
• Visit Business Insider's homepage for more stories.

Mental health was once a sleepy arena for venture capital investments.

But that's changing fast, according to researchers at a Silicon Valley venture capital firm in the hottest area of healthcare. Called Rock Health, the firm is the first fund dedicated solely to an emerging area of healthcare known as digital health.

Over the past several years, folks at the fund have noticed a hopeful trend: financial activity around startups offering services from coaching for anxiety to therapy for depression has begun to heat up. More VCs are placing bets on startups in mental health, total funding is increasing, and there's been an uptick in the number of mental health startups acquired by more established companies.

Total funding for mental health startups has skyrocketed from roughly $3 million in 2011 to $378 million in 2018, according to Rock Health. Investment in the field stood at just $159 million in 2017.

Based in San Francisco, Rock Health has backed dozens of companies ranging from buzzy startups like Omada Health, which helps people fight diabetes and depression using virtual coaching, to Marigold Health, a platform that links people with addiction to text-based peer support.

In a recent report, Rock Health researchers explored how digital therapeutic startups like Omada and Marigold are validating and expanding access to their approaches to mental or behavioral health. In the meantime, they're also attracting the attention of funders, health plans, and even executives at traditional pharmaceutical companies.

"There's a lot of exciting activity happening," Chipper Stotz, one of the report's authors, told Business Insider.

VC deals and funding for mental health startups has skyrocketed in the past 8 years

There are other signs that interest in mental health startups is surging, Stotz and Sean Day, a Rock Health research analyst who contributed to the report, told Business Insider.

The number of VC deals for such companies has steadily increased every year since 2011, when there was only a single mental-health-related venture capital deal, according to data generated by Rock Health and shared with Business Insider. In 2018, there were 25.

More recently, Rock Health has seen signs of an increase in mental health startup acquisitions, Stotz and Day said.

There were only two mental health company acquisitions across all of 2018. Audio equipment giant Bose nabbed Sync Project, which used machine learning and music to boost sleep quality, and pain management platform WellBrain scooped up Mevoked, which used behavioral analytics to improve expecting parents' health.

But during the first quarter of 2019, Rock Health saw the same number of acquisitions. First, diabetes platform Livongo snapped up mental health platform myStrength, and then virtual therapy company AbleTo grabbed digital coaching service Joyable.

"I think we're still early, but we are definitely seeing more of these," Day told Business Insider.

Successful digital health startups take what works in person and make it virtual

One of the reasons interest in mental health startups is increasing could be related to how digital health works in the first place.

With companies like Livongo and Omada, both of which offer digital treatments for diabetes and depression, the secret sauce seems to have to do with translating what works well in a clinical setting to a smartphone, tablet, or computer.

For example, in-person counseling and peer support work well for managing the symptoms of diabetes and helping patients lose weight. Those same approaches also appear to help people when they are delivered virtually by way of a program on a smartphone or laptop, according to clinical studies both companies have published.

Enticing options for improving treatments and taming a Wild West of mental health startups

Investors are also increasingly eyeing mental health startups because of their potential to lend a more objective hand to assessments of issues like depression, anxiety, and ADHD, according to Stotz. Today, most tests for these conditions rely on self-reported questionnaires, which can lack consistency. Digital programs might give patients and clinicians more reliable measures.

That's something that even established leaders of health plans and digital-skeptic pharmaceutical executives appear to agree on, said Stotz.

"Compared with a disease like diabetes, where there are tangible measures like blood sugar levels, behavioral health is more fuzzy," Stotz said. "So there's interest around the idea of using novel digital biomarkers."

Another driver of financial interest in mental health is related to taming the Wild West of mental health startups, many of whom offer similar tools and services. When one of these companies can acquire another, it can essentially "roll up" the services they offer in more convenient way. That doesn't just help patients - it helps health plans too, said Stotz.

"We're always hearing from employers and health plans that they're overwhelmed with all of these products," Stotz said.

Read more: E-cig company Juul is considering creating a digital health tool for smokers who want to quit

By contrast, a packaged treatment option - like what's available now that virtual therapy company AbleTo has scooped up coaching platform Joyable - is simpler to use and reimburse.

Another carrot that's driving action in the mental health space is the potential to offer services that complement and reinforce one another. For example, while Livongo previously only offered tools for obesity-related conditions like diabetes, its recent acquisition of myStrength lets customers simultaneously treat issues like depression. Those conditions frequently occur together (something called co-morbidity), meaning that people must typically tackle both to see lasting results.

"There's huge co-morbidity between diabetes and depression, and that makes it a really logical fit," Stotz said.