Lecture, Other
Two-Sided Networks in Healthcare - a Founder's Playbook
a16zVineeta Agarwala, Jay Rughani, Vinita, Arif Nthu, Andrew Adams, Iman Abouzeid, Thomas Closel, Doug Hirsch
- Core Definition: A two-sided network in healthcare connects interconnected transacting parties (typically the "five P's": Pharma/Life Sciences, Pharmacies, Providers, Payers, and Patients) to bridge fragmented data and transaction silos where data traditionally fails to flow freely.
- Network Effect Mechanism: Unlike a company with distinct business units, a two-sided network executes a product valuable to one side that inherently enables value creation for a different side; the execution of one go-to-market motion becomes easier because the other exists, creating a self-reinforcing loop where "one plus one is greater than two."
- Market Tailwinds:
- Data Volume: Approximately 95% of care providers have adopted electronic health records (since the 2009 HITECH Act), with healthcare generating over 35% of the world's data.
- Cloud Infrastructure: A significant portion of healthcare data is now stored in cloud environments (e.g., Google Cloud, AWS) rather than on-premises, improving accessibility and shareability.
- Processing Capabilities: Advances in data infrastructure tools and architectures now allow for rapid transformation and analysis of this digitized health data.
- Foundational Scenarios for Two-Sided Networks: Founders typically pursue this strategy to address:
- Broken data flows where insights are needed but software rails do not exist.
- Market fragmentation making it difficult for users to navigate or transact, requiring a marketplace interface.
- Highly elastic demand where direct monetization would hinder adoption or retention, necessitating an alternative revenue model.
- Go-to-Market Entry Strategies:
- Demand-Side First: Komodo Health started with life sciences medical affairs teams (demand side) to solve a specific niche problem regarding visibility into provider patient journeys.
- Supply-Side First: Headway targeted the scarcest resource—mental health providers (supply side)—to build the foundation of a patient-accessible system.
- Parallel but Constrained: Incredible Health launched on both sides simultaneously but restricted geography (initially the San Francisco Bay Area) to make supply/demand matching manageable.
- Trust as a Prerequisite: Founders emphasized that trust must be the foundation for the first side of the network;
- Oaken built trust by offering subsidized professional services and co-publishing research with hospitals before monetization.
- GoodRx built trust through rigorous patient advocacy, "Zappos-style" customer care, and guaranteeing price accuracy to overcome consumer skepticism.
- Early-Stage Metrics and Pricing:
- Optimization Focus: Early-stage pricing should optimize for customer feedback and engagement rather than near-term economics.
- Qualitative Metrics: Komodo Health utilized "moments of truth" (specific value-driven customer outcomes) and quarterly business reviews (QBRs) to validate product value over simple session tracking.
- Vanity Metric Warning: GoodRx cautioned against relying on aggregate traffic or page rank for head terms (e.g., "Lisinopril") without context, as these can skew bounce rates and misrepresent user intent.
- Scaling the Second Side:
- Repetition of Discovery: Success on the second side requires repeating the product discovery and iteration process used for the first side to achieve product-market fit.
- Product Expansion: Incredible Health expanded from a job matching platform to offering career-long tools (free continuing education, salary estimators, community advice) to increase talent retention and value.
- Simplicity in Pricing: Headway maintained a familiar payment structure (fee-for-service) for providers to avoid the complexity of SaaS fees, allowing them to grow 400% in the previous year.
- Network Alignment and Defense:
- Neutrality: Incredible Health rejects employer exclusivity requests, maintaining neutrality to maximize opportunities for talent, which ultimately serves the network's mission.
- Distribution Channels: Komodo Health leveraged professional service providers and consultants as "system integrators" to handle the "last mile" of customer delivery.
- Continuous Innovation: GoodRx established "mini-sprint teams" to launch new products and features with low risk to maintain product surface area and market relevance.
- Investment Evaluation Framework (a16z):
- First Side Assessment: Evaluate adoption, engagement, retention (3/6/12 month curves), efficiency (decreasing CAC), and data access capabilities.
- Second Side Assessment: Look for qualitative use cases enabled only by the first side, evidence of network reinforcement, and long-term defensibility against disintermediation or margin compression.
- Defensibility Check: Analyze the business's ability to prevent constituents from transacting directly (disintermediation) and protect margins as market share evolves.