Why I Worry About Venture-Backed Mental Health & Addiction Startups
By: Hunter Walk
Tags: Technology, Tech, Addiction, Therapy, Startup

Why I Worry About Venture-Backed Mental Health & Addiction Startups

And My Ask Of Investors In These Companies

It’s frustrating if you’re a customer of an expense report SaaS startup and the company goes out of business, but it’s potentially devastating if your tele-therapist or addiction counselor suddenly disappears because the platform that employed them ran out of money. This is my most significant concern about the wave of mental wellness startups being funded with venture dollars — what happens to the clients of the ones which fail?

Photo by Matthew Waring on Unsplash

Traditional venture capital models lean into what’s called ‘power laws.’ Basically the idea that you are backing risky new ventures, many of which will stumble along the way, but one or two of the companies you back will be such outsized successes that the investment gains from those will more than offset the others.

Venture capital is a great instrument for high growth companies, or those who are very early in their development but intend to pursue a high growth strategy. If a normal small business must optimize for unit economics and profitability early in its lifecycle, a venture-backed business seeks product-market fit in a big industry and then trades nearterm profit-taking for long-term marketshare, with the idea that profits can be extracted later. I’ll pause for a moment now to emphasize that I don’t believe there’s anything fundamentally wrong with this tradeoff, which shouldn’t surprise you since I am a venture capitalist. If you’re reading this post because you think capitalism is a fundamentally broken system or that venture itself is evil, I’m sorry to share that I don’t agree. But I will absolutely acknowledge that companies which take any outside capital implicitly and explicitly incorporate the needs and expectations of that capital into their business planning. And for venture-backed startups this tends to be “get them customers.”

Which leads us to the fundamental difference between, say, a small self-funded online therapy practice and one that has taken millions of dollars in seed capital: the latter can acquire a larger number of patients much faster using investment dollars for both customer acquisition and to subsidize the economics of serving those clients. That’s what always gives me a little bit of pause in this particular area — the scale ahead of the sustainability

This post is an open question, not a conclusion, because there are plenty of startups which are trying to grow this market using technology and new approaches. Their success will mean that many more people can access mental wellness and addiction services than were potentially able to do so before. And hopefully the efficacy of these programs is even higher when software can be used to support provider matching, behavioral nudges and other extensions to what counselors themselves can do with patients. If we don’t have mission-driven entrepreneurs believing there are opportunities to dramatically improve the service and outcomes in these areas then we tragically don’t move forward. And if 2020 taught us anything it’s how important mental health is to our lives and how many more people who suffer from loneliness, depression, anxiety could benefit from proactively engaging around their health beyond pharmaceuticals.

So when a founder pitches me a business (and please do! hunter@homebrew.co) in this market I’m simultaneously excited and conflicted. This is personal for me. Since 2011 I’ve been in therapy and seen great benefits in my life. I want others to have similar access ongoing or as needed and know that it’s difficult for many because of economics, time and access limitations. Startups can help fix these problems and we’ve seen a number who are solving infrastructure problems for therapists and clients (aka picks and shovels).

Whether you’re the platform providing the therapy or the software powering the therapist, entrepreneurs in this area should have their own version of the Hippocratic Oath. What I’d ask the investors in these companies is that they share the same values. Push for responsible growth and make sure patients are well-served. Realize that when you look at stats that involve quality of customer interactions, drug prescriptions, etc you’re talking about real people, not just percentages. And perhaps most essential, have a plan for what happens if the company doesn’t succeed. What does client offboarding look like, how long would it take and how much would it cost? The answer might be that in a failure-case you don’t use the remaining capital for one last growth hack but instead have a responsibility to get patients to a new provider. We, as investors, have to be very careful about unknowing exposing vulnerable populations to venture-risk.

Update: Coincidentally The Atlantic had an article out today about troubles at one such startup.

Notes and More

I’ve historically not been a “New Year’s Resolutions” type of guy, but have found a certain mindfulness in at least taking stock of what’s working well for me and what’s less useful. And then deciding whether it’s the recognition of these that matters or there’s work to be done to change my perspectives and outcomes.

📦 Things I’m Enjoying

Miley Cyrus’ new album Plastic Hearts, Haus’ sampler pack of delicious, low ABV spirits, and OMG these ImmuneSchein Ginger Elixirs are so good — you just mix in some hot water and yum.

🏗 Highlighted Homebrew Portfolio Jobs

Arthur.ai is a software startup making it easier for companies to manage and monitor their AI/ML models. This includes not just observability and explainability but fairness. A great, inclusive culture and team plus a brand new $15m Series A round means it could be your next job. They’re hiring lots of folks across engineering, product, design, marketing, sales and such!