#4 Is VC right for your mental health business?
plus... balancing impact with profit, insights from a mental health investor, a VR-psychedelic cross-over, and all this week's latest mental health news and job openings.
Hi friends,
Here’s a question I get asked by mental health founders…
“Do you think I should raise venture capital?”
It’s an important question.
Mainly because it’s one of the few irreversible decisions you can make as a founder.
Taking venture capital (VC) comes with a lot of benefits and for the last twenty years, it’s been the hot thing to do.
But, it’s not suited to every business.
In fact, it’s not suited to most businesses.
So I wanted to explore exactly what makes a mental health business a good match for VC and what you need to think about before taking investment.
That’s what we get into in today’s post.This week in The Hemingway Report:
- Venture in Mental Health: is VC right for your mental health business?
- Our Mental Health Funding Database: we made a database of all mental health investors and grants. And we’re giving it to you for free.
- The 2024-25 Australian Health Budget: and what it means for Australian mental health
- Enosis Therapeutics: the Melbourne startup developing a VR-integrated psychedelic therapy protocols
- Jobs: open positions at the top mental health businesses
Is VC right for your mental health business?
I’ve spent some time on both sides of the fundraising table.
At LetsGetChecked and Wayflyer we raised hundreds of millions dollars from VCs.
And over the last year, I’ve had the chance to do a bit of work with Tin Alley Ventures, where I’ve been looking specifically at investing in mental health businesses.
So when it comes to whether you should raise VC or not, I’ve got some lessons to share.
But I also wanted to get the perspectives of someone who knows even more than me.
So I reached out Alon Greenspan.
Alon is the Managing Partner at Mind Ventures (a VC dedicated to mental health) and has deep experience as an investor - his thoughts on this topic are super helpful.
In today’s post, I share;
- How to know if you should raise VC funds for your mental health business
- What VCs look for in mental health businesses
- Balancing profit with impact – how investors influence your ability to deliver on your goals
- And Yes! We also compiled a massive database of mental health investors which you can access for free (more on that below)
Alright, quick exercise…
Think about how many businesses are started each year…
Now guess what percentage of those get backed by VCs?
It’s about 1%.
So before we discuss if VC is right for you, realise that the vast majority of businesses do not raise VC. What’s more, many of those businesses are incredibly successful and impactful organisations.
Look at Wikipedia.
It’s used by billions of people, has had a massive impact on individuals and society but never raised a dollar of venture capital.
For the select few businesses who are a good fit for VC, it can be an incredible avenue to accelerate your growth and achieve incredible impact.
So… what mental health businesses are suited to raising VC?
It boils down to three criteria (and you need to hit all three).
TLDR; you actually need the capital, you can deliver venture scale returns and on a personal level, you want the life of a venture backed founder.
Let’s get into each one
1. You need the capital.
If your business needs up-front cash to build an asset which will allow you to generate cash in the future, then you’ve ticked box number one for VC investment.
What sort of a business might need this up-front cash?
(a) One that needs to build a product
Until you have a product you can sell to customers, you won’t be generating any revenue. Duh!
So the cash needed to build that product has to come from somewhere. You might need money to pay software developers, to pay manufacturers or to pay for research that informs what you build.
Now, we must realise the difference between needing money because you need to build a new product vs. needing money because you can’t sell your product.
If you can’t sell your product, it’s either because you haven’t yet found product market fit, or you aren’t good at commercialising.
You need to know which it is. If you haven’t yet found product market fit (PMF), VC money may give you the runway to find it - just realise, there are a lot less pre-PMF investors out there. But if the problem is that you are bad at selling your product, then VC money won’t help you. As the kids say; “that’s a you problem!”.
(b) One that has to get over regulatory hurdles
To get to a point where you can generate revenue, you need to be able to get your product to market. This often requires passing regulatory scrutiny. This is especially true for therapeutics. Conducting the research to get regulatory approval is not cheap, so this is can be good use case for VC money.
(c) One that needs to quickly capture a market.
If you have an existing product with regulatory approval, you may decide it’s a good idea to try to capture the market quickly. This requires investment in sales and marketing as well as scaling your production (if you run a business with non-negligible marginal costs of production, i.e., not pure software).
Just be careful with this one. It’s the easiest one to convince yourself of without hard evidence to support it. Make sure there really is a long term advantage to capturing the market and that you are in a place to do it.
2. You can deliver venture scale returns
Look, this is the big one.
VCs want their money back.
Actually, they usually want 100-1000x of their money back.
This is just a function of the economics of a VC fund. If your organisation does not have the potential and ambition to deliver these kinds of returns, VC won’t be suited to you.
So how can you know if your business might have potential to deliver these kind of outcomes?
Here’s what Alon had to say;
“In the context of mental health, venture capital focuses on efficacy, scale, reach, product engagement, and diverse, high-quality revenue streams. The more investor conviction you can build around these factors, the more likely you are to secure venture funding.”
Let’s break down Alon’s framework…
Efficacy. You have to build something that is effective at delivering outcomes. Otherwise, what is anyone actually investing in? It might be a small outcome for a small portion of the population for now. That’s OK. But your thing has to work!
Ability to scale. Your product must have some form of leverage that allows it to grow over time and deliver products to more and more people.
In software, the typical growth rate of a good start up is “Treble-Treble-Double-Double”. That is, tripling revenue each year for the first two years, then doubling revenue each year for the next two years.
Following this growth rate, if you have $1m in year one, you’ll get to $36m by year five. Does your startup have that kind potential? Does the demand exist? And can your product scale to meet it?
Reach. VCs want to see that your product has the potential to impact the lives of vast amounts of people (likely in the millions). A hands-on, service oriented business may be great at delivering outcomes for a small cohort of people in a local area, but it’s unlikely to achieve the reach VCs are interested in.
Product engagement. This is a common downfall with mental health businesses and it’s something I will explore more in future posts. If you are not able to get people using your product and engaging with it to the point that they see outcomes, it will be impossible to create a sustainable business model
Diverse, high-quality revenue streams. Shock, I know, but your business ultimately has to make money. It may not make money now (that’s why you need to bring in external capital), but is there a believable path to making money in the future?
Now we should explore exactly what we mean by high-quality revenue…
Essentially, this is revenue that is repeatable and profitable.
To understand your potential for profitability, look closely at the unit economics of your product.
How much will people pay for it? How much does it cost to deliver the product? And how much does it cost to acquire that customer in the first place? Then, model out how you think this will change over time.
Be conservative with your assumptions and see if your business has the potential to deliver high gross margins. If not, you may never generate enough profit to create the kinds of returns a VC investor needs.
And why is diversity of revenue important? Ultimately this makes your business more robust. Early stage startups are doing well to have one high-quality revenue stream, but if you can show that in the future, there are other revenue streams you want to tap into, that will go down well with VCs.
3. You want the life of a venture backed founder
This is personal. Taking on VC is more than just a business decision.
Once you take VC, you’ve got someone new to report to. They are on your cap table and have influence over the direction of your company.
Because the VC investor will want to achieve large returns on their investment, they will want the company to show evidence of growth. That can easily create pressure for a founder.
I’ve worked closely with two VC backed founders and they both worked their asses off. Of course, there’s exceptions, but most VC backed founders will tell you the same and that they feel the pressure to deliver for their investors.
When you take on VC, you are losing an element of control over your business and have agreed to deliver on the kinds of results that the VC requires. That can put quite a lot of pressure on founders. And this pressure can lead to a lifestyle that you may not want.
Of course, most founders work their asses off anyway, whether they’ve raised VC or not.
But just be aware that you are making a decision that will impact your personal life, the control you have over your business and perhaps the pressure you feel (depending on your personality).
If you meet all three of these criteria, VCs could be a really excellent fit for you.
The story of Spring Health
Let’s bring this to life a little shall we?
Spring Health hit the VC criteria.
They were founded in 2016 by April Koh and Adam Chekroud, and offer a comprehensive EAP that uses a clinically-validated approach to mental health. Their business model focuses on selling to employers and ensuring employee mental health is prioritised.
Before taking on investment, Spring Health was already growing at an exponential rate. They identified a need to develop their technology platform, capture market share and conduct more clinical research to validate their approaches.
It was clear, they needed additional capital.
They also had large scale ambitions and had demonstrated the ability they could achieve them. Before their Series A they had already secured fifty large customers, like Sysco, Gap, and Equinox. And their plans included global expansion and broadening their service offerings, which they were able to achieve by deploying their VC funds.
There is also a clear path to profitability for Spring Health. Their B2B business model provides them with predictable, profitable revenue.
They meet the VC criteria and have been able to achieve massive scale in a short amount of time.
This is why VC is pretty special.
It facilitates ambitious people to build things that no-one else would ever fund.
Without VCs, we’d have no Google, no Moderna, no Nvidia, no Zoom, no Uber.
If you are a truly ambitious founder, your business needs upfront cash to progress, you can generate venture scale returns and you are personally comfortable with having a venture investor on your cap table, then it’s a truly wonderful option to help you achieve your vision.
What founders worry about when it comes to VC
With the founders I chat to, they have one main hesitation about venture capital. They worry they will have to prioritise profit over impact.
Most mental health founders are mission-driven and they worry that the incentives of a VC investor will force them to sacrifice on the quality of their product, the robustness of their evidence base or the quality of outcomes they deliver.
This CAN happen. If you get the wrong investor, one who is not aligned with you on the importance of balancing impact and profit, then this is a real risk.
From Alon…
”Growth is a factor, but only in the context of the other five elements [efficacy, scale, reach, product engagement and high quality revenue]. Both growth and impact are important and should be assessed through a value lens, prioritising incremental value to the business at any given point in time.
Investor conversations should be centred around the two to ensure there is strategic and tactical alignment pre investment to avoid friction.
Ultimately, they should complement each other and there should be significant overlap between growth and impact to drive stakeholder returns in the mental health space.”
So before you take money from a VC, make sure they care about impact as much as you do. The best way to do this? Check their track record and reference check them.
I personally believe that an organisation that aligns impact, profit and investors has the best chance of solving our mental health crisis.
I was watching an interview with Bill Ackman recently and he said “if you can find a for-profit solution to a problem, it is more likely to work”.
I agree with him. It has a beautiful way of aligning incentives and facilitates access to capital that gives you resources to achieve massive impact.
Just make sure you’ve got the right investors in your corner!
The Capital/Evidence Loop
Another issue founders tell me about is that they get caught in a capital/evidence loop.
As we mentioned, you have to show that your product is effective. So you need an evidence base to raise capital. But you often need capital to build this evidence base.
I asked Alon about this and here’s what he had to say;
“In the context of VC funding, I suggest founders focus on early, circumstantial evidence and demonstrate their solution’s viability and the team's ability to execute. This will make it easier to build investor conviction and attract the necessary capital to build a more substantial evidence base.”
Do what you can with what you got!
Remember…
Taking an investor onto your cap table is one of the only irreversible decisions in startups.
But for the right business has the potential to be the jet fuel for your organisation, allowing you to achieve massive impact.
Just make sure you give it the thought and critical reasoning it deserves.
P.S. I’m writing a second post on all the non-VC funding options available to mental health businesses. Watch this space!
P.P.S. if you’re interested in how to raise funds for your mental health business, drop me a line and let me know. If there’s enough interest, I’ll write an article on it.
Mental Health Funding Database
We built a database of mental health investors and all the grants available for mental health organisations. Check it out.
Hopefully this saves you a few hours of googling!
Mental Health News
Here’s your roundup of the top news in mental health this week;
- Neurotech device start-up Resonait receives funding from Queensland Government’s Industry Research Project grants to develop a clinical decision support software package for psychiatrists (LinkedIn)
- Mental health insurance claims in the U.S. increased 83% from 2019 to 2023, with virtual mental health services jumping 9500% during the same period (BHBusiness)
- Melbourne-based Neo-Bionica, which manufactures neurotechnology and other medtech devices, receives $5m investment from state-government backed Breakthrough Victoria (Startup Daily).
- In case you missed it, the Australian Federal Government Budget was announced last week. It allocates $589m over 8 years to fund a nationwide, low intensity mental health service., plus $30m to develop 61 free, walk-in Medicare Mental Health Centres (Australian Government). Read my take on what this means for Mental Health in my LinkedIn post.
- Venture capital accounts for $350m in Behavioural Health investment in Q1, the highest it’s been since 2022 (BHBusiness).
- AbbVie and Gilgamesh Pharmaceuticals form a research partnership to develop therapeutics with the advantages of psychedelics without the side effects. (MedCity News)
- CUREator+ Dementia and Cognitive Decline incubator program opens first funding round, in partnership between Brandon BioCatalyst (Brandon Capital), ANDHealth and Dementia Australia (LinkedIn)
Company Spotlight: Enosis Therapeutics
- What they do: Enosis Therapeutics is a medical technology and psychedelic research company that uses virtual reality to improve psychedelic therapy treatment outcomes.
- Headquarters: Melbourne, Australia
- Founders: Agnieszka D. Sekula and Dr. Prashanth Puspanathan
- Founded: 2015
Enosis Therapeutics designs virtual reality scenarios and clinical protocols to be used alongside psychedelic-assisted psychotherapy. All VR scenarios are completely personalised to each individual patient and session, and intended to be used with a therapist. The purpose of Enosis’ VR protocols is to deepen the patients’ psychedelic experiences, anchoring these experiences so they can be easily revisited in future sessions.
The world’s first study applying VR to modulate psychedelic therapy displayed strong positive results. Combining Enosis’ personalized VR scenarios with a guided psychedelic experience generated high levels of acceptance and satisfaction, increased session recall, and reduced anxiety – all critical factors in ensuring effective psychotherapy.
Enosis Therapeutics’ protocols are offered in various clinics, and their self-discovery guided VR scenarios will soon be available on the Meta Quest Store.
Jobs
- Career Development Research Fellow in Cognitive Psychology/Cognitive Neuroscience @ Oxford University for OPM-MEG, a neuroimaging technology (Role description) (More information)
- Healthtech Sales Specialist @ Updoc (LinkedIn)
- Director Commercialisation (Social and Behavioural Sciences) @ UniQuest (Startmate)
- Various @ Headway (Accel)
- Fractional CFO @ Psylo (Swag)
- Vice President/Consultant of Drug Development: Clinical Readiness @ Psylo (LinkedIn)
Hiring for your team? Email me to have your roles included in next week’s email.
Make it this far? Fair play! Reply to this email and let me know what you thought.
That’s all for this week.
Keep fighting the good fight!
Steve Duke
Founder of The Hemingway Group
P.S. feel free to connect with me on LinkedIn
