#11 Why mental health companies die
The five reasons mental health companies die and what you can do to avoid them
Hi friends,
This week’s post is a little late. I’ve been in Italy for the last week where the pasta is much better than the WiFi - I’m not complaining.
In between espressos and gelato, I’ve been reading a lot. And I came across a wonderful post from Halle Tecco about why healthcare startups fail.
It got me thinking… what were the equivalent reasons why mental health startups fail.
Why do so many promising companies die?
What are the most common killers?
What can we learn from them?
And ultimately, can we avoid them?
That’s what we get into in this week’s edition of The Hemingway Report
Why mental health companies die
The graveyard of mental health startups is populated with once promising companies. These companies had built impressive products, many had gained regulatory approval and more still had raised venture capital.
The probability of success for any startup is low. But that doesn’t mean that we can’t try to learn from past mistakes and on the margin, increase the chances that your startup might succeed.
If the ghosts of the companies in the mental health graveyard could talk, what would they tell us?
Why did they die? What killed them and could it have been avoided?
While I’m no medium… what I can do is analyse these companies and the market forces at play in mental health.
From this, I’ve defined the five primary reasons that mental health startups fail and what you can do to avoid them.
1. Business Model Failure
Let’s not overcomplicate this.
Most Mental Health startups die because they fail to build a commercially successful business.
They just can’t figure out a way to make more money than they spend each year. And while raising outside capital can cover operating losses for a time, it eventually runs out and the business shuts down.
The mistake many founders make is thinking that building a great product is enough to be successful. It’s not.
It’s necessary, yes, but it is not sufficient.
To succeed, you must wrap that solution in an effective business model that allows you to deliver your product to customers while making more money than you spend each year.
Saying stuff like “effective business model” is the kind of McKinsey jargon that I wouldn’t blame you for slagging me about, but when we define it in practical terms, we can understand exactly what it is and why it’s so desperately needed for mental health startups.
I like to define it using the three elements that we see in successful business models.
- You know who your customer is and what they value
- You can deliver this value to them
- You can do so at an appropriate cost
You need all three to win.
But unfortunately, most mental health startups fail to achieve that trifecta.
Look at Akili. For most of their existence, they thought Health Insurers were their customer. But they couldn’t deliver value to them and definitely couldn’t do it at an appropriate cost. They pivoted their business model, choosing consumers as their customer and launching a DTC offering. But again, they could not deliver enough value to these customers at a low enough cost. As a result, they couldn’t make enough money and they went bust.
So how can you avoid these failures and build a successful business model.
1. Make sure you actually have one. Do you have clear answers to the three components of a successful business model? Are they coherent? They may be hypotheses for now but you need to define them and build your company strategy around your proposed business model.
2. Use it to drive alignment in your business. Great business models deliver value by creating alignment across your entire organisation. It becomes the hymn sheet from which everyone sings, producing a harmonious and powerful tune. When I was travelling to Italy earlier this week I took a Ryanair flight and couldn’t help thinking about how beautiful their business model is. This extract from an HBR article describes it well…
In the early 1990s, Ryanair from a traditional business model to a low-cost one. The Irish airline eliminated all frills, cut costs, and slashed prices to unheard-of levels. The choices the company made included offering low fares, flying out of only secondary airports, catering to only one class of passenger, charging for all additional services, serving no meals, making only short-haul flights, and utilizing a standardized fleet of Boeing 737s. It also chose to use a nonunionized workforce, offer high-powered incentives to employees, operate out of a lean headquarters, and so on. The consequences of those choices were high volumes, low variable and fixed costs, a reputation for reasonable fares, and an aggressive management team, to name a few. The result is a business model that enables Ryanair to offer a decent level of service at a low cost without radically lowering customers’ willingness to pay for its tickets.
Ryanair know exactly who their customer is and how to deliver value to them. They’ve built all of their culture, processes and resources around delivering this value at a low cost, a cost so low that they can still let me fly to Italy for €30 and make a profit!
3. Innovate on your business model like you innovate on product. It is not enough to innovate on product, you must innovate on your business model too. Many of the biggest companies have triumphed not because their product was radically better than competitors, but because they developed a new business model that disrupted their industry and allowed them to deliver value to their customers at appropriate costs.
The first Salesforce products were very similar to their competitors. But unlike competitors, they charged for it as a subscription and delivered it over the internet. SpaceX, Google and Netflix are more examples of massive business model innovation.
If you want to learn more about business model innovation, read Clayton Christensen - I’d specifically recommend “The Innovator's Prescription: A Disruptive Solution for Healthcare”. One interesting point he makes is that you must think about how your business model fits into the system of other business models in your industry.
The success or failure of a company’s business model depends largely on how it interacts with models of other players in the industry.
Unfortunately, there aren’t many proven business model templates we can choose from for a mental health startup (like B2B software companies can choose SAAS). And so we must think from first principles about our customers, what they value and how we can deliver that to them. That thinking may deliver innovative business models that will allow you avoid the failures of many startups that have come before you.
2. Go-To-Market Meltdown
I’ve spent a lot of time analysing some of the biggest failures of mental health startups (specifically Akili and Pear Therapeutics). When I read their 10k’s there is always one line that makes their cause of death become instantly clear.
They spend an obscene amount on Sales and General Admin costs.
These companies spent tens of millions of dollars every year to try and market and sell their products, all for minimal returns.
It’s this incineration of cash that led to their demise. In their final years of operation, Akili spent over 2,700% of revenue on SG&A. For Pear, it was almost 760%. As a reference, the median SG&A spend as percentage of revenue for public European healthcare companies is 30% (source).
Talkspace are doing slightly better, in 2022 spending 92% of revenue on SG&A and reducing this right down to 47% in 2023.
This low ROI SG&A spend is often a downstream symptom of a poor business model. But it is often a failure of their Go-To-Market strategy as well.
Go-To-Market is all about having a clear strategy to profitably acquire, charge and retain customers over time. And until you have a way to do all three, you should be very careful about how much you invest in sales and marketing.
Why do Mental Health startups get this wrong?
While some companies have strong commercial talent, I just don’t think many GTM teams at mental health startups are as experienced as other industries like SAAS.
At Wayflyer (the fintech startup I worked at), we had a massive Revenue Organisation full of exceptional people. People who had been working in GTM roles for many years, at massively successful companies, with similar dynamics, where they learned their trade and brought all of that experience and talent into our little startup. I just don’t think we are at that point in mental health yet. We need to attract more top commercial talent to our industry and as a collective, focus on building their capabilities.
However, what makes Go To Market meltdowns fatal, is the over investment in sales and marketing before you have a proven GTM model.
It’s OK to take time to figure out your GTM. It’s hard and you’ll need to experiment. But do not start pouring money into it until you have confidence that the investment will deliver profitable customers and revenue to your business.
Pear and Akili knew what their numbers looked like for their customer acquisition, retention and associated revenue. They had a GTM Machine that took $100 and turned it into $4 (for Pear) and $13 (for Akili). If I owned a machine like that, I wouldn’t pour tens of millions of dollars into it.
Fix your GTM machine before you start investing in it.
3. Clinical outcomes that don’t move the needle
I see a lot of startup pitch-decks. Many of these companies have built cool technology or an interesting new treatment approach. But many of them just don’t deliver meaningful clinical outcomes to patients.
It kinda shocks me to be honest, but it’s true.
Come on people. This is healthcare, your first and most important job is to make people better.
So why is this happening? Why are so many mental health companies not delivering better clinical outcomes?
First, we have to recognise that overall, mental health treatment is incredibly difficult. When we compare mental health to other disease categories, we see that we are just not that good at understanding and treating mental disorders.
We see this in the data for the efficacy of the main treatments for mental disorders.
Meta-analyses reveal that common psychotherapies for depression yield only small effect sizes, with a standardized mean difference (SMD) of just 0.31 (NCBI).
The same research showed that pharmacotherapy for depressive disorders reported an SMD of only 0.30 when compared to treatment as usual. This data is consistent across many disorders and treatments.
Relapse rates are also high with many studies showing significant decreases in SMD in the months and years following treatment.
We just aren’t that good at treating mental disorders.
Yes we need to do things like increase access to treatment and reduce the costs of care, but above all, we need to massively improve the efficacy of these treatments.
If your startup fails to deliver meaningful clinical outcomes, in the long term, it will fail to deliver commercial outcomes.
The second challenge here is proving that your treatment actually delivers these outcomes. Of course, clinical trials are difficult, time consuming and expensive. But they are absolutely necessary for long term success.
The final challenge is in translating effective treatments from research and clinical trials into real-world practice. There are a bunch of challenges for startups here including patient adherence, disparities in provider training, delivering treatment to different patient populations and the complexities of co-morbid conditions.
One critical part of a successful business model is to deliver value to your customers and patients (see above) and the core value you can deliver as a mental health startup is to make people better. Many of the mental health startups who fail, just don’t move the needle enough on clinical outcomes. This means they deliver little value for patients, for their customers and then as a result, to their shareholders.
4. Adoption: an over-reliance on “should”
In her post on health-tech failures, Halle calls out adoption as a core reason why health tech companies fail.
Usually, a startup’s biggest threat isn't a direct competitor, or even the incumbents. It's the inertia of 'how things have always been done'. Change can be scary, especially when it feels like a threat to our livelihoods. Employees are usually inclined to favor the familiar, and new technologies or processes can be perceived as a disruption to their flow— or worse, their replacement.
This is also true for mental health startups. Changing behaviours is incredibly difficult and due to the complexity of the mental health system, you often need to change the behaviours of multiple groups of people.
There is a very dangerous word that founders use when it comes to adoption…
“Should”.
As Christensen notes…
The Graveyard of failed products and services is populated by things that people should have wanted - if only they could have been convinced those things were good for them.
I should eat more vegetables. I should turn off my phone two hours before bed. I should have at least one night this week where I don’t eat gelato…
Instead of thinking about what people should do, focus instead on what they are already trying to do and then how your product can help them achieve that.
To quote Christensen again…
The home-run products in the marketing hall-of-fame, are concepts that helped people more affordably, effortlessly, swiftly and effectively do what they had already been trying to get done.
Adoption is challenging, but many of the best and most promising mental health companies I see (from larger ones like Big Health to smaller ones like Tacklit) are hyper focused on adoption. They think deeply about it and more importantly, invest in it.
If you have a clear strategy for driving adoption across clinicians, patients and customers (one that doesn’t include the word should) you give yourself the best chance of staying out of the mental health graveyard.
5. Timing
None of us like to admit it but luck, and more specifically timing, often play a large role in determining whether the companies we build live or die. There are multiple timelines that will play a role in the fortune of your business (like the level of sophistication of certain technologies and capital market dynamics) but perhaps the most important is the product adoption timeline.
Every new offering goes through a product adoption curve - you can read more about this here. Customers have varying levels of openness to new technologies and so a market tends to adopt new offerings in sequential segments. When a new technology is first introduced, it is usually just the “innovators” who adopt it. Because only a small percentage of any market are innovators, the market size at this point is very small. As more segments adopt the new offering, the market grows.
While it is difficult to predict the best time and place to start your business on this curve, what we do know is that if you are in very early stages (Innovators of Early Adopters) the chance of success are low.
Your market of potential customers is small and sales and marketing is hard. To make sales you have to educate the market on your new offering which takes a lot of time and money.
This was one of the biggest challenges for Pear and Akili. There are no companies that have gone before you from whom you can learn, so your left to make all the mistakes for yourself.
Now, if you can succeed, the returns are huge. If you are the business to create the category, then you define the category and become the de-facto choice for customers. However it is often the second or third generation of companies in a space who end up being the most successful. They can learn from the mistakes of the category forerunners, and piggy-back on the work they have done to drive awareness and build the category.
Google was not the first search engine nor Facebook the first social media site.
At Wayflyer, there was another company, Clearbanc, who were the first movers and created the entire category of revenue based finance. They were the category leaders and were hard to compete with… until they weren’t.
As a second mover, we had the advantage of avoiding the mistakes they had made and benefiting from the work they had done to create the market - we didn’t have to explain why Revenue Based Finance was a good option for customers, we just had to explain why we were better than Clearbanc.
There are benefits to being second!
Outside of these five reasons, there are a lot of dumb ways for mental health startups to die.
Fraud (hi Done), privacy violations (hello Cerebral) and failure to comply with healthcare regulations also kill a lot of mental health startups. I just hope the readers of this publication don’t need guidance on how to avoid such failures…
Building a successful startup is a bloody hard task. And doing so in mental health is even tougher. While you have to get many things right to stay alive, it unfortunately only takes one bad mistake for the name of your startup to end up etched on a tombstone.
But I know the readers of this publication aren’t discouraged by such facts.
They do this because they want to create impact. They want to help people get better, to live mentally healthier lives and they believe a for-profit organisation is the best way to do this at scale.
Your determination is what gives you a fighting chance.
But it is your ability to think critically about the strategy for your business, defining you business model, your GTM approach and delivering meaningful clinical outcomes, that will turn the odds in your favour!
That’s all for this week.
If you liked this post, share it with a friend. If you’ve got your own thoughts, let me know, I’d love to hear what you’re thinking.
Keep fighting the good fight!
Steve
Founder of The Hemingway Group
P.S. feel free to connect with me on LinkedIn
