.406 Ventures' newest VP Kathryn Taylor Reddy talks behavioral health, SPACs and digital health funding

Reddy shares her career journey into venture capital and discusses her focus on digital health.
By Laura Lovett
01:58 pm
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Kathryn Taylor Reddy

Kathryn Taylor Reddy, who has recently been named VP of venture firm .406, started her journey into healthcare on a coffee farm in Guatemala.

“I had a pretty nontraditional path to getting where I am. I started out in college much more focused on global health and international development. I spent a couple of summers in college working on development projects on a Guatemalan coffee farm.

“I learned that chronic child malnutrition is a big problem in Guatemala, so I did my senior honor thesis studying the causes of child malnutrition. That was really the very beginning of my interest in healthcare.”

This experience stayed with Redd and after college when was deciding where she wanted to take her career, she knew health would somehow be involved.

“I had initially thought that I wanted to do international development. But there was this whole national conversation in the US about healthcare at that time because the ACA had been passed recently. I realized that we have big problems in the country I was born and raised in, and I wanted to be part of the solution. Not to mention, I thought I could probably be more effective working in the U.S. than in an international setting that I wasn’t as familiar with.”

She got her start in the field working at a pharma consulting firm and a slew of other positions looking at the business side of health. In 2015, she took a position at her first VC firm. Her position at .406 is focused specifically on digital health investments.

“I found that I really enjoyed getting to be broad and deep. As an investor, you get to have your hand in a bunch of different areas across healthcare and really get to see the industry as a whole. But when you make an investment or due diligence on a deal you have to go deep in a particular area and really dive into the complexity.”

Today she’s watching the enterprise space or tech that can be sold directly to payers or providers—a space where .406 has a track record of investing.

“The way I think about it is, healthcare isn’t broken in one big way. It’s broken in lots of very small, complicated ways. So, what really attracted me to the .406 approach is that the team is not afraid of that complexity. 

"We really think about what are the specific problems for specific groups of people, and how do we invest in a company with a founder that understands a particular problem well, has lived and breathed it, and has what we think is the right approach to solving that problem.”

Over the last year there has been an enormous growth in behavioral health. In fact, in 2020, Rock Health reported the digital mental health companies scored a whopping $588 million in the first half of the year alone. Reddy said that she sees this as a space ripe for growth. In particular she said .406 is interested in companies catering to the needs of specific patient populations.

“We are going to continue to be very active in behavioral health. It’s an area that I think is finally getting the attention it deserves. Two examples of our recent investments in behavioral health include Hurdle, which provides culturally responsive care for the Black population, and Equip, which offers virtual, evidence-based eating disorder treatment.

"We will continue to think about which populations are not being served by the current market, even with all of this well-deserved attention that is currently being paid to mental health.”

Investment trends

It isn’t just behavioral health that has been seeing a boom in investor interest within the last year. MobiHealthNews reported $13.8 billion in digital health funding last year, the largest amount on record. There’s no denying that 2020 was an unusual year. Now industry players are looking ahead to the future.

“I see no reason that the pace of the funding will slow down anytime soon. I think that COVID has definitely laid bare a lot of the challenges in our healthcare system, and has also accelerated the transition to telehealth models and made people more comfortable accessing care in different ways. I think those trends will continue. I think we’ll continue to see a number of tech investors and other investors moving into the healthcare space.”

Another major trend we’ve seen in digital health this year is an uptick in SPAC deals. Big names in the digital world, including 23andMe, Hims and Hers, Sharecare, Ro, and Owlet have recently inked SPAC deals.

“It’s definitely kind of the Wild West out there. I think it will just be really interesting to see how it all plays out. The benefit for early-stage investors like us is that SPACs provide another exit opportunity that we can potentially evaluate with our companies.

Reddy cautions that the most important factor in exiting is the teams you decide to partner with.

“But fundamentally, I think it is really important for a company to continue to be thoughtful in terms of who they are partnering with when they are going through any exit or any fundraising process.

"Ultimately, I think whether it is going through an IPO, a traditional acquisition, or going the SPAC route, it’s about making sure that the path aligns with your strategy, and that you are aligned with the people you are partnering with. … Those fundamentals don’t change, even when there is this innovation in terms of fundraising and financing.”

Over the years, Reddy has worked with a number of digital health companies. Her advice to newcomers?

“I think it goes back to being able to articulate the problem you are trying to solve and why you are the right team to solve it. I think the best healthcare entrepreneurs are often the ones who have deep experience in what they are looking to do.

"In healthcare, you see that a lot of successful entrepreneurs are either physician entrepreneurs or have worked in other parts of the industry and really know the problem they are trying to solve. I think that is so important in healthcare given the complexity of this industry.”

 

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