And my question to investors in these companies

It’s frustrating when you’re a customer of an expense reporting SaaS startup and the company goes out of business, but it can be devastating if your teletherapist or addiction counselor suddenly disappears because the platform they were employed on has run out of money. This is my biggest concern about the wave of startups in the mental wellness space that are being funded with venture dollars – what happens to the customers of those who fail?

Photo by Matthew Waring on Unsplash

Traditional venture capital models are based on so-called “laws of power”. Basically the idea is that you are supporting risky new ventures, many of which will stumble there along the way, but one or two of the companies you support is such oversized achievements that the investment returns from those companies more than make up for the others.

Venture capital is a great tool for high-growth companies or those that are still in the very early stages of development but want to pursue a high-growth strategy. When a normal small business needs to optimize for unit economics and profitability at the beginning of its life cycle, a venture-backed company seeks a product market adjustment in a large industry and then trades short-term profit-taking for long-term market share with the idea that profits can be extracted later. I will pause for a moment now to emphasize that I don’t think there is anything fundamentally wrong with this compromise, which shouldn’t come as a surprise since I’m a venture capitalist. If you are reading this post because you think that capitalism is a fundamentally broken system or that the company itself is evil, I regret to say that I disagree. However, I will absolutely recognize that companies that implicitly and explicitly borrow capital will incorporate the needs and expectations of that capital into their business planning. And for venture-backed startups, this usually means “winning customers”.

This leads us to the fundamental difference between a small self-funded online therapy practice and one that has cost millions of dollars in seed capital: the latter can acquire larger numbers of patients much faster by using investment funds for both customer acquisition and customer acquisition to subsidize the cost-effectiveness of servicing these customers. That’s what always gives me a little break in this particular area – the scale that is ahead of sustainability

This post is an open question, not a conclusion, as there are many startups trying to grow this market using technology and new approaches. Your success will result in many more people having access to mental wellness and addiction services than may have been possible before. And hopefully the effectiveness of these programs is even greater when software can be used to aid provider matching, behavior modification, and other extensions of what counselors themselves can do with patients. Tragically, unless we have business-minded entrepreneurs who believe there are ways to dramatically improve service and results in these areas, we are not getting anywhere. And if 2020 has taught us anything, it matters how important mental health is to our lives and how many people suffering from loneliness, depression, and anxiety can benefit from proactively taking care of their health beyond medicines.

When a founder introduces me to a company (and please! Hunter@homebrew.co) in this market, I am both excited and conflicted. This is personal to me. I have been in therapy since 2011 and have seen great benefits in my life. I want others to continue to have similar access or as needed, and I know that economics, time and access restrictions make it difficult for many to do so. Startups can help fix these issues, and we’ve seen a number of people solve infrastructure problems for therapists and clients (aka picks and shovels).

Whether you are the platform for the therapy or the software for the therapist, entrepreneurs in this area should have their own version of the Hippocratic Oath. What I would ask investors in these companies is that they share the same values. Be committed to responsible growth and ensure that patients are well cared for. When you look at statistics related to the quality of customer interactions, drug prescribing, etc., you are talking about real people, not just percentages. And perhaps most importantly, plan what will happen if the company is unsuccessful. What does client offboarding look like, how long would it take and how much would it cost? The answer could be that if you fail, you won’t be using the remaining capital on one final growth hack, but instead have the responsibility of moving patients to a new provider. As investors, we have to be very careful if we do not know that vulnerable populations are at risk.

Update: Coincidentally, The Atlantic had published an article today about problems with such a startup.

Notes and more

📦 Things i enjoy

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