From Profitability to Purpose: Evolving Strategies in Venture Funding for Mental Wellness Initiatives

In recent years, we have seen a decline in investments in digital health. This is due to a number of factors, ranging from rising interest rates and regulatory issues to market consolidation (for example, there is a trend towards integrating mental well-being solutions into broader healthcare platforms, reducing individual investments in smaller niche players). On the other hand, according to Healthtech Alpha (backed by Galen Growth), 62% of the funding volume in digital health in Q1 2024 was allocated to specific therapeutic areas. Ventures with a focus on disease-agnostic raised a total of $2.5 Billion, followed by Mental Health raising $579.84 Million. In this post based on the insights from a recent panel discussion on investments in digital mental well-being by DŌBRA, we will dive into the key trends and challenges for venture capital in this vital space.

The Shift in Investment Focus

In the ever-evolving world of venture capital, there has been a significant shift in investment focus over the past few years. Previously, the emphasis was predominantly on growth, often at the expense of profitability. However, recent trends indicate a shift towards a more balanced approach where profitability is increasingly valued alongside growth. This change reflects a growing awareness among investors that sustainable businesses must eventually generate profits.

Leen de Bruyne, Scale-up Entrepreneur and Founding Partner at Living Hope VC, highlights this shift: “Two years ago, you could mention every word when you did fundraising, but not profit. Profit was not cool; it was all about growth. In the last two years, investors became more conscious that companies, at a certain moment, should make money.”

The market dynamics have also changed, with investors now preferring to finance later-stage rounds, which are perceived as less risky. This is partly due to the realization that the days of endless new rounds of funding might be over. As de Bruyne puts it, “You cannot trust anymore that there will be endless new rounds and that a new investor will pour money into the startup for a higher valuation.”

The Impact of Geopolitical Factors

Geopolitical factors have also played a significant role in shaping the fundraising environment. The ongoing war in Ukraine, for instance, has created additional challenges for startups in Central and Eastern Europe.

Vital Laptenok, General Partner at Flyer One Ventures, an early-stage venture capital firm, explains, “Here in Warsaw, part of CEE, we not only have the effects of the global market but also the impact of the war in Ukraine, which negatively affects the fundraising environment.”

Despite these challenges, great founders and high-quality products still manage to attract investment. However, the bar is now much higher than in 2020 and 2021., and the competition among VCs for the best founders is fierce. “The competition among VCs for the best founders is pretty high now because everyone wants to take less risk. Early stages are OK, but I would say Series B or C are easier now. I think it’s the other way around. It’s much harder to fundraise at higher valuations because the probability of exit and high return for later stages is lower than at the early stage. Seed stage is pretty much OK, pre-seed may be more challenging,” Laptenok notes.

Fundraising Challenges and Development Strategies

Fundraising has become more challenging, particularly for early-stage startups without proven income. For B2B startups, the situation is somewhat easier, but B2C startups face significant hurdles in demonstrating financial metrics at the pre-seed stage.

Darya Danilava, Co-Founder & Adviser at Elatra, an online coaching platform for tech companies, reflects on her experience, “From the perspective of a startup founder, it is incredibly difficult to raise without income now. As a founder of a B2B startup, for us, it is easier, but I think for B2C, it is quite tricky to show financial metrics at the pre-seed stage.”

Also, Danilava highlighted several trends this year compared to her prior fundraising experience. “Previously, it was essential to secure the whole round before signing with investors. This year, we got commitments for half the round and had talks with investors who asked for metrics and traction. We realized that having commitments for half the round allowed us to continue working with clients and show progress. This approach now seems acceptable, and we can make multiple extensions to the round. It benefits us as we get better valuations for each extension, making it a win-win situation,» Danilava says.

Nonetheless, opportunities still exist. Vitaly Laptenok suggests that acquiring users has become easier due to reduced competition and less investment money in the market. “You can acquire users much cheaper than it used to be,” he says.

In this challenging environment, having a strong track record and high energy levels are crucial for founders. Alexander Chekan, Chief of Staff at Palta, the health & well-being tech company behind Flo, emphasizes the importance of founder-market fit and genuine passion for the product, stating, “Doing a startup is a multi-year endeavor, and you need perseverance and intrinsic motivation.”

Building Sustainable Businesses

Today we see the focus has shifted towards building sustainable and successful businesses rather than merely aiming for exits. This approach requires startups to meet specific metrics and have the right people on board to raise subsequent rounds of funding.

Vitaly Laptenok explains, “Our goal in our fund is to get seed-stage startups and make them ready for Series A. Understand what exactly you need to have, what metrics, and what people you need to have on board to raise the next round.”

Alex Chekan emphasizes the importance of optimizing for sustainable growth and profitability. “At Palta, we have five different businesses in the group, each at different stages. For our largest business, Flo (a period tracker), we plan an IPO. We optimize for building a sustainable business model, reducing cash burn while growing over 50% year-over-year in the healthcare segment. We aim to grow without relying heavily on external fundraising. Sustainable growth and profitability are preferred options now,” he says.

The Future of Digital Mental Well-being

However, motivating users to engage with mental health and well-being products remains a challenge. Danilava points out, “From a B2B perspective, it’s easy to sell mental health and personal growth products to CEOs and top managers, but they are often too busy to use them. Products may be available to all employees, but only a small percentage use them. We now provide toolkits, education programs, and webinars to increase usage within companies. It’s not enough for the product to be available; it must be used”.

“The problem with mental health products is not knowledge but motivation. Whoever solves this motivation problem will win. Current market leaders have failed to deliver on this promise. You can’t fix mental health with just meditation. Hard things need to be made easier, like Duolingo did for education. Similar innovations are needed in the mental health market,” says Laptenok.

In this case, gamification and AI in mental well-being solutions hold great promise to enhance engagement. As a great example, Chekan named Headapp from Germany: the team is trying to help people overcome anger with game mechanics similar to Duolingo.

AI at the present stage can already do a lot of things, but regarding to mental well-being, Chekan stopped on a few specific options. The first one is personalization (in the past, we had no way to truly personalize the message and deliver it in the right way, at the right moment, using the right tone of voice that touches the intrinsic motivation of a particular user). The second is the facilitation of group discussions. “I am a big believer in creating social pressure and accountability within small groups, and maybe not so small. Now, we can embed the system with a coach, a therapist, or whoever in these small groups, and they will nudge the real people. Because people are accountable to each other, not to the machine, they will comply better and adhere better to the recommendations of these agents,” continues Chekan.

However, the digital-only solutions are not enough. They are scalable and affordable to billions of people—that is true. But it’s not enough to fix some more serious issues. “For instance, there is a war in Ukraine and thousands of people with PTSD, and you’re not going to fix it with just visiting an app, right? So, you need VR, pharmaceutical, and biotech solutions. You need substances like ketamine or shrooms, guided by therapy, but done in a scalable way. We’ll see a lot of innovations in that direction as well,” finalizes Chekan.