Hi friends,
I’ve spent February travelling around the US, talking to founders, investors, policy experts and payers. I’ve learned a lot and it’s been a blast.
In today’s post, I share some of these learnings and some of my epiphanies about what’s happening in mental health in 2025.
We discuss:
The funding environment for MH businesses in 2025
VBC: the reliance on physical healthcare costs, opportunities for smaller startups and why you shouldn’t bite off more VBC risk than you can chew
Impact of the new US administration: the pros and cons
Why I’m increasingly convinced we will have AI therapists
Let’s get into it.
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The funding environment for MH businesses in 2025
TLDR; there is still significant capital available to MH businesses from equity investors, but rounds are smaller, taking longer to close and more dependent on specific milestones, unit economics and growth models.
For the last five years, Mental Health has been the top-funded indication area in healthtech. This remains true today. From generalist funds to health-focused funds, to mental health-specific funds, there is plenty of capital out there looking for a home.
But what these investors are looking for, has changed. They’ve raised their bar and adjusted their investment approach. What are the implications of this?
Priced rounds are taking longer to raise (often more than six months)
Rounds are smaller
Rounds are often tranched and increasingly mileston-based. Some investors are returning to the kinda old-school VC model of tranched investments as they look to reduce risk
Many companies have had to do bridge rounds or down rounds - especially those that raised mega-rounds in the ZIRP era. While this used to be a signal the company was struggling, investors are seeing it as much more normal in 2025
Series A rounds now demand businesses to have significant clarity on unit economics and their growth model. Series A has almost become a growth capital round with investors wanting to see the growth model that will turn their investment into scaled value
So that’s how the investment landscape is changing for mental health businesses, but what does that mean for what founders should be doing?
Know your position. Because it’s taking over six months to close priced rounds, if you start raising with only 3 months of runway left, it’s already too late. Founders need to be more clear than ever on their burn and runway. You need to ensure you’re starting fundraising well in advance of reaching the end of that runway.
Secure the bag. If you have funding options on the table, from equity investors, grants or other non-dilutive funding sources, lock them in now! In the US, we don’t know exactly what will happen to the funding environment with this new administration (more on that below) but it’s likely going to become more difficult to land funds from non-dilutive sources. Lock them in now while you can.
Figure out what milestone you need to hit (ahead of time). By the time you’re raising, it’s far too late to be figuring out what milestones your target investors will want to see in order to invest. You have to get ahead of this by 18-24 months. So think about who you will need to raise from next, approach them now and ask them what milestones and metrics they expect their investments to have met. Once you know this, you can work backwards to ensure you hit those. Now, your strategy shouldn’t be entirely based on satisfying the needs of your next investor, but if you’re going to need to raise again, it’s a very helpful input.
Do a Goldilocks raise. A common question from founders is ‘how much should I raise?”. There’s danger on both sides of this answer.
In the ZIRP era, some startups raised too much money and it hurt them. Overcapitalising your business has downsides; founders and employees can get overly diluted, the associated aggressive growth targets can drive bad strategy, you can become wasteful with spend and it can be hard to raise another round.The only thing worse than being overcapitalised is being undercapitalized. In this scenario, you run out of money and you die. Not good.
So in 2025, how much should founders raise? They should do a Goldilocks round. Calculate how much money you need to hit your milestones over the next 24 months to get to your next funding round (see above). Then, add a buffer on top, say 25%. That’s how much you should raise.Not too much, not too little. Just right!
Do more than increase access. While increasing access to behavioural health care is a theme investors still care about, many are moving past it. They are looking for new interventions that can actually improve outcomes and be built into clinical pathways. What are you doing to actually improve the quality of treatment? What will allow you to be adopted by the system and to charge more than competitors? There is significant headroom here and investors are excited by anyone who can prove they are moving the needle in this space.
There is plenty of capital out there for high-quality startups that can demonstrate clinical outcomes and a clear business model. Just make sure you’re getting ahead of the game with your approach to fundraising.
By the way, if you want a complete list of mental health investors, make sure to check out The Hemingway Report Investor Database.
Three Value-Based Care Insights
VBC is like teenage sex: everyone talks about it, nobody really knows how to do it, everyone thinks everyone else is doing it, so everyone claims they are doing it.
Anyway… I had three key insights about mental health VBC over the last few weeks…
1. The potential of Mental Health VBC relies on physical healthcare cost savings
Where mental healthcare saves the most cost, is by reducing physical health costs. Therefore, if you want to understand your potential as a VBC provider in mental health, you need to understand the physical healthcare costs of the population you serve. If it’s high and your intervention can actually reduce them, then you’ve got a shot. If not, it’s going to be hard.
One interesting example of this is for mental health organisations treating children. In general, children have very low physical healthcare costs. That means there’s just way less opportunity to save payers money. Where you can save costs with children is in adjacent areas like education, housing or in the judicial system, but that gets super complex.
On the flip side, older populations have much higher physical healthcare costs. There is therefore greater opportunity for VBC agreements. This segment is typically underserved by mental health providers, which is both a real shame and a real opportunity. If you have mental health interventions that can help improve the physical health of older people, keeping them out of hospital and residential care, you’ll save real money for payers.
2. The best startup opportunity is to partner with larger providers to enhance their VBC offering
MH startups can get caught in a VBC dilemma. They can’t charge fee-for-service for their product because no relevant codes exist. So they turn their hopes to VBC. They know they can deliver better outcomes when used by patients and even save payers money. Perfect for VBC right? But, they then struggle to land any VBC agreements because they are a small player and their product is only one small part of the broader care model needed to serve payer populations.
So what do you do? Some people might try and build out clinical teams to provide a more comprehensive treatment that their core solution is a part of.
But the better option is to find larger provider organisations who already have VBC agreements with payers and partner with them.
These organisations are already incentivised to improve care and to drive costs down. They have entire clinical teams delivering care and you can plug your solution into that care team, helping the provider org drive to deliver on their VBC agreements.
For example, say you’re Limbic. You’ve got an AI intake and assessment tool that reduces clinician time and improves outcomes. That creates value for payers. By selling their solution to a large provider organisation with existing VBC agreements, Limbic get to focus on their core strength, building clinical-grade technology, and the provider improves their outcomes for the payer, getting paid more. Win-win.
This may seem quite obvious but it’s an option ignored too often by startups who want to do it all instead of finding partners that allow them to more easily integrate into the existing health system.
3. Startups shouldn’t bite off more VBC risk than they can chew
One payer I heard from said they’ve become increasingly aware of the ability (or lack of ability) of mental health businesses to hold value-based risk.
In one case, they said that if they had enforced the full terms of a value-based agreement they had with a MH startup, it would have bankrupted the startup.
Healthcare is all about managing risk. VBC shifts the risk from the payer to the provider. But managing risk is hard, especially when you’re small. So be very careful about the level of risk you take on with any VBC agreements, especially any downside risk for underperformance and ensure you’re able to manage it.
Impact of new US administration: the pros and cons
There’s a huge amount of change happening at the federal level in the US right now with significant impact expected for the mental health market.
On the negative side, we can expect a reduction in federal funding for both innovation and service delivery. Funding organisations like the NIH expect to have their budgets reduced and Medicaid (unfortunately) looks likely to be on the chopping block too. While we still know very little about the specifics, this is not good news for the mental health startup environment and most of the smart people I spoke to advised businesses to diversify their funding sources asap.
On the flip side, many hope that this administration will provide a more business-friendly regulatory environment, helping new innovations, from psychedelics to AI treatments to more easily come to market.
In the next few months, we will know a lot more.
Why I’m increasingly convinced we’ll have AI therapists
A few weeks ago, I wrote about how AI will impact the future of therapy. Since then, I’ve become even more convinced that we'll have AI therapists.
I don’t see any technical reasons why we can’t build compelling AI agents that can offer many of the benefits of human therapists. And we know the demand is there, people are already using AI agents for their mental healthcare. So if we can build it, people want it, and it’s available at a fraction of the cost of human therapy, then its adoption seems inevitable.
Nikhil Krishan recently shared how he thinks about AI opportunities. His framework is to think specifically about what AI is currently good at.
Here’s his list…
Sounds a lot like the kinds of things needed to provide and to improve therapy no? Of course, it’s not a comprehensive list, but it’s extremely well suited to the use case of therapy.
There are a lot of well-capitalised companies building in this space and they have huge incentives to make this work. Over the last few weeks, I’ve tried a lot of their beta products and I have to say, they’re really, really good.
These products still have a long way to go, particularly in demonstrating safety and clinical efficacy. There are a bunch of ethical and regulatory considerations here too. But whether we like it or not, I’m convinced we are going to see AI therapists be widely adopted sooner rather than later.
Next week: Earnings season report
It’s earnings season and all the public mental health companies have been releasing their 2024 results as well as guidance for 2025. In next week’s article, I’ll be diving deep into these results, analysing the data, sharing the most important trends and discussing what that means for the broader mental health market.
If you want to get this deep-dive in your inbox, sign up to become a THR Pro member today.
That’s all for this week. As always, feel free to email me with any questions or comments.
Keep fighting the good fight!
Steve
Founder of The Hemingway Group
P.S. Connect with me on LinkedIn if you haven’t already
P.P.S. If you want to become a THR Pro member, you can learn more here.
