Medicaid generally pays a pediatrician less than commercial insurance does, so many pediatricians cap how many Medicaid children they will take, and those families end up using the emergency room as their default.
Most venture firms respond to a problem like that by funding software. Kathryn Reddy's firm funds clinics — and then has to prove to its own investment committee, every time, that a business made of buildings and staff can still return like venture rather than like private equity.
"I think one of the biggest things that we look out for is when a founder doesn't recognize how hard it can be."
Reddy has spent five years at .406 Ventures covering healthcare, and before that sat at The Advisory Board Company asking health system chief executives what their biggest problems were and then either building a product for them or buying a company that already had one. Christian Marquez introduced her as a recent recipient of the National Venture Capital Association's 2026 Rising Star Leadership Award.
The full interview is covered here so you can skip it. 43 minutes of audio, 18 minutes of reading.
Here are the 12 lessons that matter.
👤 Guest: Kathryn Reddy, Principal at .406 Ventures, a Boston firm in its 20th year, where she covers all of the healthcare investing
🎙️ Host: Christian Marquez, founder and CEO of FinStrat Management, which sells CFO-led accounting, finance and reporting services to growing companies
📰 Published: 15 September 2026 on YouTube
🔴 YouTube | 🟣 Apple Podcasts | ⏱️ 43 min | ✅ Time saved: 25 min
Key Takeaways
A pediatric clinic can be profitable on Medicaid if it is paid for keeping children out of the emergency room
Bluebird Kids takes fee for service through the year and shares the savings it delivers to the Medicaid plan
Brick-and-mortar healthcare has produced some of the firm's biggest wins, and still has to be defended internally every time
The argument is made to colleagues who invest only in software, that the return will look like venture and not like private equity
AI scribing is the fastest adoption of a new technology Reddy has seen in healthcare delivery, and it commoditized just as fast
The price has collapsed and some companies now give it away
The answer that ends a pitch is a founder who does not think healthcare services is hard
Health system executives' top three priorities surprisingly often include parking
Not investable, but a reminder of what an executive is actually dealing with day to day
Half of a 20-year-old firm's investing is in healthcare and the other half is cybersecurity, data and AI, because that is what its three founders happened to know
What she screens graduates for is reasoning, not modeling
Bankers who can build a profit and loss statement in their sleep are common; people who can reason through a financing scenario they have never seen are not
1. The Firm and the Mandate
Marquez opened on .406 Ventures itself — the firm, her role and her focus.
"We're actually celebrating our 20th anniversary this year." The firm is based in Boston.
The mandate is split in half and the split is historical. Healthcare is about half of the firm's investment activity; the other half is vertical-agnostic enterprise technology, specifically cybersecurity and data and AI.
Those three areas were the three original co-founders' own specialisms. Reddy said it felt random at the time and, given how the world has since developed, now looks oddly genius.
The team is not split along those lines. They work as one investment team and look for deals sitting at the intersections of the three.
Within healthcare the focus is payer and provider oriented — anything from pure technology to tech-enabled services to companies delivering care themselves, either virtually or through physical sites.
"And series A is our core focus." That means early but not earliest: companies with early signs of product-market fit, perhaps a couple of million dollars in annualized revenue, and a great deal of company building still ahead.
The firm goes earlier where it has a deep thesis, and co-founds or starts a company itself once or twice per fund.
Reddy has been there five years, all of it on healthcare.
2. Why US Outcomes Lag
Marquez framed the problem for listeners who do not follow healthcare: the United States spends near the top of the developed world per head and ranks around tenth on outcomes. He asked how that shapes her diligence.
Her answer is that the average hides the distribution. In some ways, she said, the country has some of the very best healthcare anywhere — if you are at the right hospital and have access to the right care.
"I think the reason why the US falls down the list in so many ways is that access is very uneven." What decides it is what insurance you have, whether you have any, and what care exists near you.
That is where a lot of the firm's money goes. It backs companies trying to reach people who have not historically had access to top-notch care.
Many of those companies set up in what she called care deserts, places that have gone without.
The commercial problem is getting paid for the outcome, not the visit. Reddy said the companies she likes work out new ways of being paid by health insurers for the outcomes they deliver, which is what makes the business sustainable for a venture investor.
Marquez added his own read of where the money goes — end of life as a cohort, socioeconomic factors that push people to the emergency room instead of an outpatient clinic, and simple lack of knowledge about how to avoid chronic or acute illness.
3. The Bluebird Kids Model
Asked whether she invests to fix root causes or opportunistically, Reddy said it is all of the above, and gave a worked example.
Bluebird Kids is a pediatric primary care provider that opens physical practices in high-Medicaid areas that have historically lacked pediatric care.
The reason those areas lack it is a payment problem. Medicaid generally pays worse than commercial insurance, so a lot of pediatricians limit how many Medicaid children they accept in order to keep a viable business.
The consequence is the emergency room. Families who cannot get an appointment use the ER because they know they will be treated there — expensive for the system, and not good care for the child either.
Bluebird's fix is to sell the saving back to the payer. It goes to the Medicaid plans and offers to save them money: "we can save you money, by providing better access to these kids, keep them out of the emergency room."
The contract has two parts: fee for service through the year, plus a share of the savings delivered to the plan.
On that structure, she said, a practice on Medicaid can be genuinely profitable — provided the company can actually deliver, engage families and change how they use the health system.
What she is looking for is value for every party at once, which is what she said solves the access problem rather than moving it around.
4. Brick-and-Mortar Returns
Marquez put the obvious objection: venture capital has favored software for the subscriptions and the valuations, and physical assets have tended to be corporate venture territory. How does .406 reconcile that with what it owes its limited partners?
Reddy separated the two things cleanly. The firm is attracted to mission-driven entrepreneurs, but describes itself as a financially driven venture firm that promises its investors the same returns as any other.
Every physical healthcare services deal is argued internally. "We basically have to make the case, especially to our colleagues who exclusively focus in tech, that anything we do will have venture returns" — and not a strategic or private-equity return profile.
The track record is on her side. Some of the firm's biggest wins across the portfolio have been in brick-and-mortar healthcare services.
She was straightforward about the drawbacks. The category consumes a lot of capital, and does not always have the inflective growth potential software has.
What makes it work is execution, in three parts: operational excellence, capital efficiency as new sites are opened, and a new economic model wrapped around the care delivery model that produces a stronger margin profile and ramp than a traditional clinic.
The fourth requirement is an exit. She looks for something that will be of strategic value to an acquirer later.
Her proof is a chain of acquisitions. The firm backed Iora Health, which was bought by One Medical, which was bought by Amazon — her example of what happens when a company builds both strong clinical outcomes and a strong consumer brand.
5. How They Source Deals
Marquez asked how much of the deal flow the firm generates itself, given that payers and health systems now run their own venture arms.
At Series A it is network driven. Reddy said sourcing at that stage runs through relationships rather than process.
The health plan venture groups are partners, not competitors. "So, so we do work closely with a lot of the, health plan, kind of venture groups, and we'd really like to co-invest with them." She described the pairing of an institutional fund with a strategic one as a good partnership.
Repeat founders are her favorite source. The firm has been going long enough that entrepreneurs it backed before come back with a second or third company.
The rest is referrals — from founders it has backed and from co-investors.
The underlying argument is reputational. Healthcare venture is a small world, so the firm works at being a good partner around the table in the expectation that people come back to it when they raise again.
6. What Scares Her in a Pitch
Asked how the firm decides whether a founder can operate a physical business rather than write code, Reddy named the disqualifier first.
"I think one of the biggest things that we look out for is when a founder doesn't recognize how hard it can be." What scares her is a founder who does not acknowledge the complexity when questioned about it.
She was careful about what kind of hard she means. It is not the cutting-edge coding her colleagues on the data and AI team look at; it is the number of moving parts.
She listed them. For a new physical site: site selection, culture, physician recruiting, staffing, attracting new patients, and managing the revenue cycle and billing operations so that the company collects on time.
The ideal is a founder who has done it before and done it successfully. Failing that, she wants someone visibly thinking a step or two ahead about the problems coming.
That shows up in two ways: knowing who they need to hire around them, and constantly running hypotheses about the best way to operate.
The behavior she wants after something goes wrong is root-cause thinking — a founder who immediately asks what is actually causing this and how to address it, as a continuous testing cycle.
Marquez said healthcare is one of the few industries he would not advise anyone to enter for the money, given how slowly it moves and, in smaller clinical operations, the weight of protected health information and the cybersecurity questions that come with it.
Reddy agreed, and gave a business reason rather than a moral one. Mission orientation matters because so much of the job is recruiting, and the best healthcare teams she has seen are led by a founder who can explain why they are building what they are building and energize the organization around it.
7. Support From a Lean Firm
Marquez asked how the firm supports its founders and for examples of stepping in.
She began by conceding the constraint. .406 is a lean team, not one of the large firms that funds whole operating functions.
What it does instead is frequency. The firm stays in close touch, often speaking to founders every couple of weeks to understand their top problems.
Sometimes that is just being a sounding board, particularly on who to recruit into the organization.
Where she thinks the firm adds the most is introductions to people who have hit the problem before. "So we just love to make those connections whether it's across our portfolio or with others."
The second network is commercial. The firm deliberately maintains relationships at top health systems and health plans so it can introduce portfolio companies to potential customers, and she treats business development introductions as a core part of the job.
Marquez tied that to a recurring theme on his show: as intelligence becomes ubiquitous, the premium shifts to who you know — which matters more in an industry with sales cycles as long as healthcare's.
8. AI Scribing, Fast Then Free
Asked to look ahead, Reddy started with artificial intelligence and one specific product.
"I think it's really incredible the pace of adoption." The example is AI scribing — software that writes up a clinical encounter — and how quickly health systems bought it.
She called it the fastest uptake of any new technology she has seen on the healthcare delivery side, against an industry whose sales cycles she had just described as slow.
The business consequence arrived just as fast. The category commoditized, the cost of it collapsed as many companies launched competing products, and some are now offering it free.
Her reading is that the conditions, not the technology, are the rare part. When the motivations and a new technology line up, healthcare can move very quickly — but that combination does not come along often, and this one was close to a no-brainer for the industry to adopt.
The wider frame she gave for the industry is that progress and regression run at the same time. "I think it always feels like there's three steps being taken forward at the same time. There's three steps taken back, right?"
9. Where the Portfolio Sits
Marquez asked whether the portfolio leans toward preventative care or treatment.
Reddy rejected the framing rather than picking a side. The portfolio is weighted to companies that deliver care, which means treatment, and to companies selling core technology into health systems and payers.
She described that second group as the enabling operating system for the industry, rather than a bet on prevention or on treatment.
10. From Coffee to Venture
Asked about her career, Reddy described what she called a pretty non-traditional path.
She started on global health and international development, spending college summers on a coffee farm in Guatemala running sustainable development projects.
The Affordable Care Act changed her plan. Passed around that time, it convinced her there were enough problems to solve in US healthcare, where she knew the context and spoke the language, that she could be more effective at home.
She switched into healthcare consulting before her senior year and joined Putnam Associates, a life sciences consulting firm, working with the largest pharmaceutical companies.
That taught her she was more interested in the payer and provider side, so she moved to The Advisory Board Company in Washington — publicly traded then, and now, she said, owned by United Healthcare.
The job there was essentially venture scouting inside a company. She talked to health system chief executives, worked out their top problems, and then either specified a product to build internally or went out to acquire a company that met the need. She called it a really good training ground for venture.
Asked what stuck with her from those conversations, she named something nobody funds. "one thing that is not really an investable idea but comes up surprisingly often is parking."
The point she drew from it is about grounding. Executives do have the big care-delivery questions on their minds, but they are also dealing with whether patients can physically get to the hospital without being annoyed.
Marquez extended it to people who do not drive at all and still have to be seen, and wondered aloud whether health systems have asked Uber for subsidized transport apps.
The rest of the path: an investment associate role at Excel Venture Management, Harvard Business School, a brief stint in later-stage investing at a firm she named as Brook Private Equity, where the fund's investor base was entirely Taft-Hartley union plans and the mandate was healthcare problems specific to unions, and then .406 Ventures five years ago.
She had known the firm before business school. Healthcare venture in Boston is small enough that she had met the team in her first venture job, and she said it was always where she wanted to end up.
Geography: she grew up in Houston, went to Tufts for the New England small-university experience, stayed in Boston for most of her adult life, and moved to Austin about three years ago.
11. Advice for Aspiring VCs
Marquez asked what she would tell people trying to get a first venture job now.
She qualified it first, saying the pace of change with AI makes her wonder whether what worked for her still applies.
"I think the way I thought about kind of my early career development was just really skill building, right?" Consulting was not where she wanted a career, but it was a training ground.
Her argument for banking or consulting out of undergraduate is unglamorous: start somewhere that knows how to train recent graduates, and take a couple of years of it.
What she screens for when hiring is not technical. People out of banking who can build a profit and loss statement in their sleep are common; what she rates is curiosity and knowing how to think.
Her test is a cap table and a financing scenario. Can the candidate reason through the connections and find a creative route through something they have never done before?
The reason it matters is that the work is not repeatable. Every deal is slightly different, and situations come up that have to be reasoned through rather than looked up.
On the MBA she was mild. She would do it again and has no regrets, but she is not an MBA purist and said it is a big investment of time and money that is not for everybody.
12. Optimism, People, Vaccines
The last stretch covered career lessons, what she took from Guatemala, transparency in healthcare, and a closing hypothetical.
Her advice to her younger self is that it will work out. She said it is easy to treat each career decision as carrying enormous weight; her counter is that nothing is permanent, that decisions get made on the information available, and that a wrong one still leads somewhere.
The questions she actually asks herself are three. "Will I be working on a problem that's genuinely interesting to me? Will I be learning things that I'm really excited to learn about?" The third is whether the people will be good to work with.
Marquez offered a line he had read on X and could not attribute: be delusionally optimistic. He said he recognizes it in founders.
Reddy agreed and added the part she underwrites. Optimism supplies the motivation to start; what the firm wants to back is people with full confidence in their ability to get past the roadblocks they meet.
Marquez's theory of where confidence comes from is specialization — devoting yourself to a domain creates it intrinsically.
The Guatemala lesson is a failure story. The projects funded a computer center and coffee training for a community of around forty families, former combatants in the Guatemalan civil war. The person running the computer center was not trusted or liked, so it fell into disrepair.
"So, yeah, so much of it just comes back to the people and understanding kind of exactly what motivates people." She applies it directly to clinic businesses, where the question is whether the providers and staff being recruited are aligned on how care should be delivered.
On price and outcome transparency she sees real progress and real gaming. Government pushes toward value-based care are about aligning incentives, but she said any exact system invites players to game it through risk adjustment and coding, alongside the honest route of delivering better care at lower cost.
"So, I think like anything, it's fits and starts."
Asked what she would press on Robert F. Kennedy Jr. over dinner, she picked vaccines. She said she hates to be too political, but that some things are known to work, are evidence based, and need clear political messaging and aligned incentives.
Her frustration is the reversal. Where a consensus exists and the country then steps backwards, it reaches her portfolio: Bluebird Kids is focused on children getting the care and the vaccines they need, and now operates in an environment with "all of a sudden controversy around things that shouldn't be controversial."
Marquez said his wife is a hospice nurse and his eldest daughter had just finished a stint in Vanderbilt's pediatric intensive care unit, and that both see the positive effect of vaccines on children first hand.
Bonus Insights
The split at .406 Ventures is not a strategy document, it is three people's résumés. Healthcare, cybersecurity, and data and AI were the three founders' own fields, and Reddy said the combination only looks deliberate in hindsight.
The firm starts companies itself once or twice a fund, which sits oddly beside a stated Series A focus and is the clearest sign of how thesis-driven the healthcare side is.
Reddy would not separate prevention from treatment, which is a quiet answer to a question the industry asks constantly.
Marquez's interview style is to build the frame first and then hand it over — he set out the spending-versus-outcomes gap, the fee-for-service to pay-for-performance shift and the structural argument about integrated systems before asking Reddy for her view.
The show's recurring theme, by the host's own account, is what AI does to business, and he used it twice: once to argue that networks gain value as intelligence gets cheap, and once to set up the forward-looking question.
Neither of them put a number on anything in the second half. The career and industry material carries almost no figures, which is worth knowing before anyone goes looking for a valuation in it.
Reddy's bottom line is that healthcare services can produce venture returns when the payment model is redesigned alongside the care model — and that the thing most likely to lose her is a founder who talks about the clinical idea without showing they know how hard the operating job underneath it is.
Products, Companies & Tools Mentioned
.406 Ventures (Reddy's firm; Boston-based, 20 years old, half its activity in healthcare and half in cybersecurity, data and AI, with Series A as its core stage)
Bluebird Kids (Pediatric primary care in high-Medicaid areas, paid fee for service plus a share of the savings it delivers to Medicaid plans by keeping children out of the emergency room)
Iora Health, One Medical and Amazon (Her example of a strategic exit chain: .406 backed Iora, One Medical bought it, Amazon bought One Medical)
The Advisory Board Company (Where she asked health system chief executives what their problems were and then built or bought the answer; publicly traded then, and she says now owned by United Healthcare)
Putnam Associates (The life sciences consulting firm where she started, working with the largest pharmaceutical companies)
Excel Venture Management (Her first venture job, as a pre-MBA investment associate)
FinStrat Management (Marquez's firm, which sells CFO-led accounting, finance and reporting services)
National Venture Capital Association (Named Reddy to its 2026 Rising Star Leadership Award, which is how the host introduced her)
Uber (Marquez's speculation that health systems have asked it for a subsidized app to get patients to appointments)
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