Investor Q&A Episode 1: Scott Barclay Managing Director at Insight Partners

As part of Summit Health Advisors’ 2023 State of Healthcare Platforms Report, we spoke with leaders who are building and investing in healthcare platforms. In this conversation, Summit Health Advisors’ Seth Joseph spoke with Managing Director at Insight Partners Scott Barclay who has helped build, scale and invest in numerous leading healthcare platforms since 2007. In this Q&A Seth and Scott hit topics such as the importance of network effects experience in healthcare, how first-principles thinking helps when building platform business, and much more.

Seth: Insight Partners has recently invested in several marketplace / platform companies, such as Alma, Rhyme, and Bamboo Health. What is it about network effects in healthcare that is compelling to you?

Scott: At its core, Insight is fundamentally about helping the world’s best software companies find and achieve scale. Software has a marginal cost of virtually zero; healthcare is broken, sclerotic, and excessively expensive. We see a future where software unlocks most of the overly siloed, oligopolistic healthcare markets. So put simply, we are bullish on software in health.

There are many software business models, yet healthcare is a graveyard of good ideas with the wrong model or poor distribution. When solving for informational needs across multiple stakeholders, there is not a more value-creating model than a well-designed two or three-sided network. True network effects are compelling because they drive stakeholder alignment, link product offering to value, and help achieve distribution in a way that is inexpensive and hard to replicate.

Seth: What do you find is commonly misunderstood about network effects and marketplaces in healthcare, and what do founders of these companies need to know as they build and raise capital?

Scott: When it comes to network effects, founders need to find investors who, in addition to significant capital, have true experience in network effects and a tactical playbook. This is one of my core beliefs, and there are few firms who do this successfully in health. It’s also one of the primary reasons I came to lead health at Insight.   

Founders who actually have networks effects and investors who actually understand them are rare. Even more rare are the network effects themselves. Contrary to what some may think, virality does not create network effects, nor does a marketplace necessarily induce them. Network effects create something more special—an inducement to join in and be part of something that is much greater than what existed before, resulting in an economic flywheel that exponentially scales value creation in an aligned way. Honestly, it’s beautiful. For founders, it’s of the utmost importance to scaffold your strategy early and pick true, long-term investing partners that have specific acumen in network effects and significant capital.

Seth: Once the flywheel starts catching, platforms and marketplaces significantly outperform their “pure tech” peers in terms of financial performance and valuation. However, the inverse can be true: for early stage platforms and marketplaces, revenue and unit economics may not look great.

What types of metrics do you use or look for in your early stage portfolio platform/marketplace companies or prospects to determine progress?

Scott: First, we look at the product. Has the company already built software that makes sense for the customer and, when connected to the rest of the network, creates huge customer ROI? Second, we look at value. Does the company understand the values and value to be created for each side of their network? This is critical for identifying, for example, who should be getting paid, and who should be subsidizing. Third, we look for early proofs of network. Most healthcare is local, so you can often see light and very regional network effects before it registers on a national scale. Even when we created e-Prescribing—which is the same everywhere—we proved it in very specific zip codes in Rhode Island first. Finally, Insight actually works with our founders to model the network they think they are going to build. This creates a very network effects-specific set of KPIs, unique to this business, that the company and investors can engage on and discuss.

Seth: What recommendations do you have for founders pitching you network effects-driven opportunities?

Scott: Show us your product, your understanding of the customer needs, and why you think it should be a network. Be able to walk us through your thinking on each point. In turn, we’ll give you our best sense of the opportunities and risks. Insight scores beautifully with founders for being direct, transparent, and when we lean in, trying to leave each founder better off, even if we don’t do business together yet.

Seth: Given that research suggests that platforms and marketplaces can take 5 to 7 years to reach critical mass and truly get the flywheel turning, what guidance do you have for founders just starting out in this capital and funding environment?

Scott: Network effects and platform businesses really require first-principles thinking. Before you start hiring a team, signing customers, and burning capital, you need to have your strategic ideas well thought through. Thinking through a network from the beginning maximizes the chances that you take the right steps, in the right order. This saves time and capital. And to be clear, we will meet with a potential network effects business at any stage, including at inception. We have a proprietary playbook for this.

Seth: What problem(s) in healthcare do you see as ripe for a platform or marketplace to address?

Scott: Insight is already addressing several pain points in healthcare with our portfolio, including prior authorization with Rhyme and durable medical equipment (DME) with Parachute Health. You can expect a lot more from us—we’re only scratching the surface. In the past decade, there have only been a handful of scaled network effects businesses in health, such as Surescripts, Veeva, CoverMyMeds, and Doximity. By 2030, we can expect a greater magnitude of players.

Healthcare is a massive market made up of 100+ large micro-markets. Most of these are oligopolies today, but if you could innovate past them, each of these markets would have at least one network. Near-term, supply chains, GPOs, and data interoperability are just a few examples of markets that are ripe for change. Take transplants, for example. One day, there will be one federally regulated, end-to-end, software optimized transplant network equal to FedEx IT today. Longer-term, we're looking for opportunities like one network for value-based payments or life-science sponsored subsidization of patient tools.