All Access

Health Tech Deals

Health Tech Deals Alerts

Alert

Standard

Health Tech Deals Thought Bubble

Thought Bubble

mustard

BFD Expert Voices - Health Tech Deals

BFD Expert Voices

Some venture capitalists pay adults to start companies for teens. Youth-focused behavioral health investor Hopelab puts young people to work at those startups. 

The strategy means the firm's portfolio companies can compete with the likes of TikTok and Instagram to help young people thrive, Hopelab head of investments Erin Sietstra tells Erin.

Why it matters: Soaring rates of mental health disorders among adolescents have created a market for youth-focused behavioral health startups that could fetch as much as $26 billion by 2027, per a recent report from venture firm Telosity.

Driving the news: Venture investments in youth-centered mental health companies have exploded in recent years, rising from $59 million in 2018 to $871 million in 2021, per Telosity.

As recently as July 2020, when Sietstra joined Hopelab, employers and health plans weren't interested in mental health services for young people. 

"Fast forward to now," Sietstra tells Erin, "and employers are saying 'Yeah, we do need solutions for young people because that’s what our customers are asking for.'"

It "feels like this large and sudden wave in investment," Sietstra adds.

Flashback: Hopelab this month poured $1.5 million into five startups offering services for youth-focused mental health care: Brave Health, Caraway, InStride, MindRight and Violet. 

Other startups in the company's portfolio include eating disorder treatment company Equip, school-focused telehealth provider Hazel and teletherapy company Huddle.

How it works: At each of its companies, Hopelab puts young people in the driver's seat, helping create, design and develop products and services that teens actually want to use.

Portfolio company Caraway, for example, interviewed dozens of young people representing a variety of races, gender identities and sexual orientations before launching publicly, CEO Lori Evans Bernstein previously told Axios.

The company eventually hired nearly a dozen Gen Z staff across its product and campus engagement segments.

What they're saying: "You’re going to meet someone's needs better when you’re hearing from the users themselves," Sietstra says. 

"If we’re thinking about engagement as key for efficacy, then you’re really going to need to understand what it takes to capture and keep a young person’s attention," she adds.

Yes, and: Shortages of trained, representative and affordable mental health providers have made one-on-one therapy inaccessible to many young people, but especially those from underrepresented groups. (As of 2019, 88% of counselors identified as white.)

Those constraints have led Hopelab to invest in more creative solutions to mental health support, such as those that use coaches and peer groups.

Sietstra views such tools as particularly helpful "if you’re not in a situation where you can get a provider who’s comfortable and equipped to understand your identity or talk about things that might be stigmatized in your community or a big rite of passage in your community."

What's next: Hopelab's latest collaboration effort, Youthlab, pays people ages 13 to 24 to help shape digital product design and participate in research collaborations. 

"We're trying to reduce barriers for companies to bring youth into their development process," Sietstra says.

1 big thing: Hopelab wants teens building

Animated gif of loading screen with a brain

Cabinet Health, a startup selling a range of medications in reusable and compostable packaging, raised $17 million in combined debt and equity funding, CEO Achal Patel tells our colleague Megan Hernbroth.

Why it's the BFD: Digital pharmacies have struggled to prove their edge over powerful incumbents. Cabinet's sustainability angle could be an attractive business strategy to investors who might otherwise pass during a tough market.

Deal details: Global Impact Fund led the round, which worked out to roughly half equity funding and half debt financing, Patel tells Megan. 

Natureza and Unreasonable Group participated in the round. 

Patel declined to disclose Cabinet's valuation.

How it works: Cabinet sells five categories of over-the-counter medication and supplements — cold and flu drugs, pain relief, sleep aids, allergy relief and digestive aids — in glass containers meant to replace single-use plastic bottles, Megan writes.

Patel says it was a difficult fundraising process and took a "few months" to finalize, but climate and sustainability investors helped seal the round.

The intrigue: Cabinet has plans to expand into prescription medication delivery, per the Q&A section of its website, Erin notes.

Reality check: As a tech-enabled service, digital pharmacy can be a financially tricky place to operate. Why?

Digital pharmacies' tech is their main asset, but it doesn't fundamentally transform pharmacies' core medication-dispensing business.

"Competing to dispense low-priced generic prescriptions will not provide above-market profits to compensate for VC funding," writes Drug Channels Institute CEO Adam Fein.

Some digital pharmacy darlings, such as Ro and Thirty Madison, have combined their tech with telehealth — or even in-person services — betting that convenient provider access will give them an edge on powerful rivals such as CVS and Walgreens.

Erin's big question:  Will a value-prop like Cabinet's sustainability play — or expansion from niche, cash-pay areas into broader chronic disease management — be enough for startups to disrupt the existing pharmacy landscape?

2. The BFD: Cabinet full of $17M

A photo of Cabinets various medication packages

As health care's credit default risk rises, private equity owns 90% of companies rated B3 negative and lower, according to a Moody's report this week.

Why it matters: LBO activity is stymied by the rising cost of debt, making refinancing increasingly difficult — especially for sponsor-backed health care companies loaded with leverage. 

By the numbers: Moody's has downgraded 25 health care companies to B3 negative or lower.

The sector now represents 16% of the companies with that rating, compared with fewer than 4% in 2015.

About 80% of health care companies in North America are speculative-grade, compared with about 73% in 2015.

Flashback: During the COVID-19 pandemic, myriad sponsor-backed health care providers breached or defaulted on debt covenants, after sustaining severe profit cuts during nationwide shutdowns.

Since January 2020, 13 health care companies have defaulted, citing high leverage and underwhelming operating performance, Moody's writes.

Zoom in: Moody's list of health care companies with a probability of default rating of B3-PD or lower includes: 

Publicly traded primary care player Cano Health (also backed by InTandem), which has been bandied by the market as a takeover target for Humana or CVS.

Shore Capital-backed Midwest Veterinary Partners (dba Mission Veterinary Partners), which was weighing a sale last year.

Publicly traded physician staffing giant Envision Healthcare, carrying the largest debt load among those on the list with $7.9 billion. (Not helped by its exposure to the labor crisis.) 

Between the lines: Moody's senior credit analyst Jean-Yves Coupin tells Axios that dealmaking pre-2020 was characterized by highly leveraged buyouts and aggressive capital structures with no room for material deterioration. 

The pandemic has given way to a labor shortage and wage inflation, supply chain pressures and rising interest rates — all of which have poked holes in those bullish strategies, he says. 

What they're watching: The contractual debt maturities for the companies on the list accelerate dramatically in 2024 and 2025.

"It's really in '25, when you have close to $12 billion of debt coming due, and term loans, and also some bonds," Coupin says. "And these are transactions that were put in place four to five years ago."

What's next: Distressed exchanges, naturally. With companies and investors anxious to avoid bankruptcy, Moody's predicts more debt conversions to payment-in-kind obligations, debt-to-equity conversions or debt extensions. 

💭 Claire's thought bubble: This also translates to more opportunities for distressed advisors — and cheap acquisitions for well-capitalized, well-positioned buyers.

3. Health care's default risk rises

Illustration of a gloved hand holding a scalpel over a hundred dollar bill

MasterControl, a Salt Lake City-based developer of life science quality and manufacturing software, has raised $150m in Series A funds led by Sixth Street Growth at a $1.3 billion valuation. https://axios.link/3VZgERl

Synchron, a New York-based developer of an endovascular brain-computer interface, has raised $75m in Series C funding led by Arch Venture Partners and joined by Gates Frontier, Bezos Expeditions, Reliance Digital Health Limited, Greenoaks, Alumni Ventures, Moore Strategic Ventures, Project X and insiders Khosla Ventures, NeuroTechnology Investors, METIS, Forepont Capital Partners, ID8 Investments, Shanda Group and University of Melbourne. https://www.synchron.com/ 

4. Deals o' the day

Centene has named former EVP of health care enterprises Ken Fasola president, former CTO Jim Murray COO, former COO Brent Layton senior advisor to the CEO, former EVP of markets Dave Thomas CEO of markets and Medicaid, Alice Chen chief health officer and Brian LeClaire CIO.

Tomorrow Health has named former Splice VP and head of people Heidi Nicoll VP of talent management. 

Virta Health named former Kaia Health chief financial officer Manu Diwakar its CFO.

5. It's Personnel

👩‍⚕️ Situational awareness: Sens. Tammy Duckworth (D-Ill.) and Patty Murray (D-Wash.) are introducing legislation today to outline a federal right to fertility treatments, in the belief that restrictions on abortion could apply to assisted reproductive tech, our colleague Oriana Gonzalez writes.

🚨 Save the date: The Axios BFD lands in San Francisco on May 10, 2023.

✅ Thanks for reading, and extra thanks to newsletter editor George Moriarty and copy editor Brad Bonhall. Please ask your friends and colleagues to sign up.

December 15, 2022

1 big thing: Hopelab wants teens building