Episode 452 of The VentureFizz Podcast features Liam Donohue, Co-Founder and Managing Partner at .406 Ventures.
I’ve had the opportunity to interview other partners at .406 Ventures like Payal Agrawal Divakaran, Kathryn Taylor Reddy, and Graham Brooks… but as .406 Ventures is celebrating a 20 year milestone for the firm, it was only fitting to interview Liam to discuss his career and reflect on the firm’s history and journey.
Over the last two decades, the firm has raised more than $1.3 billion across five core funds and three opportunity funds, along with 100 investments. They’ve backed category-defining winners across cybersecurity, data and AI, and healthcare including iconic names like Carbon Black, CloudHealth, Veracode, Iora Health, and many others.
But what I think helps to truly set .406 apart is that a third of their investments are with repeat .406 founders.
In this episode, we cover:
- Liam’s background story and how he got his career started.
- How he discovered venture capital and ultimately founded Arcadia Partners, and backed early health innovators like HealthDialog.
- The founding story of .406 Ventures and how Ted Williams’ approach to the plate inspired their disciplined investment focus.
- A deep dive into the healthcare industry, plus use cases for AI.
- The Series B funding landscape and why later rounds take on more a national flavor and what investors are expecting for growth metrics.
- Why Boston remains an unmatched epicenter for startups.
- And so much more!
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Transcript
Keith Cline: Liam, thanks so much for joining us.
Liam Donohue: Thanks for having me. Looking forward to chatting.
Keith Cline: I’m excited to talk to you because I’ve had lots of the .406 crowd on my podcast. I had Payal and Kathryn on as combined guests for Episode 210, and then Graham Brooks for Episode 366. So I’m like, finally, I’m getting to Liam!
Liam Donohue: Am I Episode 406 by any chance? That would have been cool; you could have just delayed me.
Keith Cline: You know what? I screwed that up. That would have been ideal. I’m up to around Episode 450, so close enough!
Liam Donohue: That sounds all right—that’s close enough and something to aspire to. Those are tough acts to follow, so I’ll do my best.
Keith Cline: .406 is a great firm. Before we get into your background story and more about investing, I wanted to say congratulations on 20 years. From what I gathered from the publicity you’re doing around 20 years as a firm, that’s 100 investments and $1.3 billion across five core funds and three opportunity funds. Longevity and consistency are so important in VC. I thought it’d be fun to reflect on the firm, look back, and share any funny stories, because venture has changed a lot.
Liam Donohue: Thank you for saying that. It’s been a fun 20 years. It’s hard to believe it’s been that long and that we’ve done all that we have, but it’s exciting to be here, and hopefully the next 20 will be even more exciting.
We have endless funny stories because we tend to have a lot of fun. The early days of fundraising probably provided the most humorous stories, running around the country with Larry and Maria trying to convince people to take a bet on us. That was a humbling experience, but we had good fun doing it.
One of the more memorable ones was pitching an LP group in Cleveland, and my partner Maria was talking at length about how Carnegie Mellon is such a great university that created all this great innovation. I poked her and said, “I think that’s in Pittsburgh.” But we made up for it, and it worked out.
Probably the most historically funny moment was when we spent about nine months talking to investors about what we were trying to build at .406 and raising capital. We had this group, Parish Capital, which was a fund of funds that backed early emerging managers. They had looked at all our data and track record, and they wanted to come to Boston to have dinner with the team. At that time, it was Larry, Maria, Kara Sweeney—our founding associate—and then Sojoon, our founding CFO who happens to be my wife. We all went out to dinner on an October evening after a long week. I think it was Maria’s birthday, so it wasn’t exactly where everyone wanted to be, but we sat down expecting to tell our story again.
It turned out they were there just to see how we interacted. At one point they asked, “What have you learned from each other while going through this fundraising period?” We were trying to figure out a good answer, and you could hear forks hitting plates—nothing was coming to us. Then Sojoon, who hadn’t said much, piped in and said, “Well, Liam says he’s drinking a lot more wine!”
Sojoon is amazing, but she’s a total literalist. What she was referring to was that Maria and Larry had fine taste in wine and I didn’t. I would come back from these trips and say, “Who knew white wine tasted really good and didn’t come out of a box?” But the way it was presented, we thought, “My God, we’re not going to get this done.”
Two weeks later we got a phone call, and they committed as our first institutional investor. We celebrated by buying each other flasks with “.406” on them. That was fun.
Keith Cline: Looking back, did you think this was going to be a longstanding firm? There are different strategies: firms with long histories that pass the baton to new leadership—like General Catalyst has done—and other firms that run whatever funds they run and then run their course.
Liam Donohue: Our founding premise was that we wanted to create a franchise that would outlast us and be core to the Boston and New England ecosystem. That manifested in several ways, most notably the name. In those days, all the good trees were taken, all the Roman gods were taken, and a lot of firms were named after their founding partners. We decidedly didn’t want our names on the door. We wanted to create a lasting name. Both Maria and Larry have retired, and I’m the last guy of my generation standing, but we have the next generation in place, which is great.
Keith Cline: You have deep expertise in the healthcare industry, where there is so much opportunity. Before we geek out on healthcare, let’s talk about your background story. Where did you grow up, what were you like as a child, and tell us about Georgetown and Dartmouth?
Liam Donohue: I grew up outside Hartford, Connecticut, in a little town called Wethersfield. I went to Georgetown and studied chemistry. I graduated right when the PC had just launched, and I had taught myself to program a bit. I ended up joining Booz Allen in Philadelphia—which is where you are now—moving to Center City.
I was lucky because I joined an office that had just opened; I was employee number three. Within a year, we had 45 people. Having been there the longest, through sheer luck I was one of the more senior people helping run the office.
As a chemistry major at Georgetown, I had always wanted to study abroad but couldn’t. Part of the reason I joined Booz was that it had international offices; my intent was to convince them to send me to Paris. It turns out it’s hard to go to an established office. So I set up an opportunity in Budapest, Hungary, right after the Berlin Wall had come down and Eastern Europe was opening up. I pitched a pro bono assignment and convinced them to send me over in early 1991. Once on the ground, I wanted to find a way to stay, so I set up our office there. Over three years, I found clients and brought in resources to execute projects.
After that, I was either going to stay out there for a full decade or return to the mothership, which sounded boring. I decided to apply to business school and was lucky enough to get into Tuck at Dartmouth.
Between years, I interned at Salomon Brothers, an investment bank in London. When I returned for my second year, the dean of the school, Colin Blaydon, became a mentor. I had done consulting and banking—the two traditional career paths—and I told him, “I really like the consulting aspect of helping companies and the transactional side of banking, but I also really enjoyed that entrepreneurial work I did in Eastern Europe.” He said, “You should look at venture capital.”
I asked, “What the hell is venture capital?” In the mid-90s, pre-dot-com, there were not a lot of firms and it wasn’t a traditional path. He made a couple of introductions, and I joined Foster Management in Philadelphia after business school, which ran an early venture-meets-buy-and-build strategy. I spent a couple of years there and then left in 1999, right as the dot-com era was accelerating, to start my own fund in Boston called Arcadia Partners. That was the precursor to .406, and the rest is history.
Keith Cline: Arcadia Partners focused on a mix of healthcare and edtech, right?
Liam Donohue: Basically, yes.
Keith Cline: I started my career in tech in 1998 helping startups recruit and hire their teams, which led me to fall in love with startups and VCs. What were some of those portfolio companies?
Liam Donohue: There were two that were super formative. The one most formative to my healthcare trajectory was HealthDialog. If you look back at the lineage of what is now called value-based care, almost all the important fundamentals flow back to what HealthDialog was doing.
That pulled research out of Dartmouth around shared decision-making and treatment pattern variation: understanding populations, identifying when people were facing key medical decisions, and providing patients with the right information in conjunction with their physicians. When you put that in front of a population, patients make much better decisions, which leads to lower costs, better outcomes, and higher satisfaction—the trifecta in healthcare. HealthDialog was the commercial incarnation of that. It was a very successful outcome: we invested at a $10 million pre-money valuation and eventually sold it for $880 million to Bupa, a large British healthcare company.
Keith Cline: How much capital did they raise in total?
Liam Donohue: Oak came in for the biggest round, but I think it was around $150 million in total capital.
Keith Cline: Turning $150 million into over $800 million was an absolute grand slam back then!
Liam Donohue: Everyone talks about how many unicorns you’ve backed. At $875 million in that timeframe, that’s got to count for something close, even if it’s not technically a billion.
Keith Cline: The unicorn obsession has gotten out of hand. Even in today’s terms, if founders raise $100 million and exit for $800 million, that’s life-changing for everyone involved and a great return for the VC firm and LPs. Founders get caught up thinking, “If I don’t raise at a billion-dollar valuation, I’ve failed,” when the pressure of that valuation changes the entire expectation of the outcome.
Liam Donohue: The founders I’ve always found most interesting don’t care about that. They care about the problem they are dying to solve, and building a great company is an incidental outcome of solving a big problem. Too many entrepreneurs focus on the slope of the valuation curve rather than what problem they’re solving. That’s a byproduct of so much money coming into the space and the institutionalization of entrepreneurship.
Keith Cline: What was the other portfolio company?
Liam Donohue: Business Intelligence Advisors (BIA), which was also Boston-based. I had made an investment that didn’t work out, but through it, I met four guys from the CIA whose expertise was non-coercive interrogation. They were skilled at getting into conversational settings, asking tough questions without angering the counterparty, and using a behavioral methodology to detect deception in responses.
As an investor talking to founders, you’re always trying to figure out where they are hand-wavy versus where there is substance. One of my big LPs was a family-run hedge fund. In the late ’90s, Reg FD had just come out, so public companies began doing open earnings calls with prepared statements and Q&A. We asked our CIA guys to listen to those Q&As to see if they detected deception.
One of them called me up and said, “I just listened to the Ford earnings call. They talked about this thing called EBITDA—is that important?” I said, “Yes, it’s kind of important. Did anything come out of it?” He said, “Yes, they’re lying their asses off about it.”
I knew right then we had something. BIA commercialized that methodology to work with elite hedge funds, analyzing earnings calls to give a strong signal around management’s certainty and truthfulness. It’s still part of our Fund I portfolio—it still exists today! We’ve taken that valuable question-and-answer dataset and trained AI models on it to do some cool things.
Keith Cline: Building a company isn’t a two-year sprint; it’s a 10-year journey or longer. VentureFizz has been around for 16 years, and I’m still figuring things out! The media portrays these rare overnight successes, but they are exceptionally rare.
How did .406 Ventures come together?
Liam Donohue: We raised Arcadia in 1999—a great time to raise money, but not the best time to deploy it. When the music stopped in 2001, we had a portfolio of companies that needed hands-on help. Our LPs were mostly family offices, and we weren’t going to let anything slide. I rolled up my sleeves; I even stepped in as CEO of BIA for a period, which proved I was a terrible CEO.
In that context, I worked with Larry Begley, a proven operator who grew up on the finance side. We sat on a couple of boards together and enjoyed collaborating. I saw the immense value of someone with real operating background who had sat on the other side of the table, compared to purely transactional venture investors.
Around 2005, Larry walked into my office with Maria Cirino. Maria had just sold Guardent, an early cybersecurity company backed by NEA, Charles River, and Sequoia, to Verisign. She was getting recruited by VC firms, but she felt they were populated by people who hadn’t built companies and just wanted her on the periphery. She asked Larry, “Should we start our own fund with operators at the center?” Larry said, “That sounds cool, but what do we know about starting a venture fund? Let’s talk to Liam.”
We sat down, and the chemistry was instant magic. Post-dot-com, many prominent Boston firms had moved west or grown large and shifted to later stages, leaving a real gap in early-stage Series A financing. We wanted to keep our fund size disciplined, focus on the region, and invest only in areas we knew deeply as operators or investors: healthcare, cybersecurity, and tech infrastructure (which has evolved into data and AI).
Keith Cline: I remember Guardent, and I also remember the company Maria and Larry were part of before that: iCube. That was one of my first customer visits in tech recruiting, helping them hire professional services people to migrate systems. Razorfish acquired them, and their founder famously went on 60 Minutes right before the dot-com crash!
Tell us about the naming of .406 Ventures.
Liam Donohue: Our founding associate, Kara Sweeney (now Kara Egan), led the search. All the trees and Roman gods were taken, and we didn’t want our names on the door. We told her to come back after the weekend with ideas that met four criteria: Boston flavor, a metaphor for investing, high in the alphabet (Maria’s brilliant addition), and a domain name available for eight bucks.
She came back with a list, and one of them was “.406.” Growing up in Hartford—the DMZ between Yankees and Red Sox territory where only the Whalers mattered—I asked, “What is this .406 thing?”
She explained Ted Williams, the Boston Red Sox, and his book The Science of Hitting. The core thesis is that while there is a broad strike zone, you have sweet spots, and as a batter, you should only swing at pitches in your sweet spot. Even if it’s called a strike, you take it if it’s outside your zone. For venture, that’s a perfect metaphor and a great way to pass on an exceptional entrepreneur who falls outside our focus.
The dot put us at the very top of alphabetical directories like the NVCA, and the URL was available.
The funny downside was having our firm named after a Red Sox legend, printing the stationery, and then hopping on a train into Yankee territory to raise money! Moneyball had also just come out. The head of the UNC endowment asked me, “Is batting average the appropriate metaphor for venture, or should it be slugging percentage?” I had no idea what slugging percentage was, but thankfully Larry was there to back me up!
Keith Cline: Is Seed and Series A the sweet spot .406 focuses on?
Liam Donohue: That is our core sweet spot. Nomenclature shifts, but we typically lead rounds with a $4 million to $8 million check.
Keith Cline: Looking through your portfolio of success stories, there are incredible names: Carbon Black, CloudHealth, Corvus, Iora Health, Memento, MineralTree, and Veracode.
Liam Donohue: I would add AbleTo, which was arguably the most successful virtual behavioral health outcome; Optum acquired them, and our current venture partner, Trip Hofer, was the CEO. We have many in the current portfolio we’re excited about, but that’s a great list.
Keith Cline: There are far more VC firms today than when you started 20 years ago. How do you differentiate from the pack?
Liam Donohue: In Silicon Valley, you throw a rock and hit a Series A investor; in Boston, it’s still far less crowded, especially within our specializations. Though we are based here, we invest nationally.
Our differentiation comes from our founding DNA: we want to be the first call when an entrepreneur has a problem, not just when they have good news. We are not tourists in our spaces; we only invest where we have deep domain expertise.
To support that, we built three Executive Councils consisting of C-level executives at Fortune 500 companies who are the enterprise buyers in healthcare, cybersecurity, and data/AI. They help us vet technologies, highlight urgent pain points, introduce founders to early lighthouse customers, and provide board talent.
What I’m most proud of is that one-third of our investments are with repeat founders, which validates that our partnership is genuinely helpful.
Keith Cline: How does an entrepreneur build conviction with you to the point where you issue a term sheet?
Liam Donohue: It’s idiosyncratic, but the common thread is a founder who has lived the problem and possesses a deep, authentic understanding of what they are solving. They must be targeting a massive market, venture capital must be the right vehicle for their ambitions, and the chemistry has to be right. When someone is driven to solve a big, meaningful problem with a great insight, that’s magic.
Keith Cline: Let’s discuss healthcare. You once pointed out that healthcare has a history of helping people when they are sick rather than keeping them healthy. What areas within healthcare excite you most?
Liam Donohue: Our system is inversely designed to treat acute illness rather than maintain wellness. As a country, we will go bankrupt unless we shift to managing population health. You have to understand who is tracking toward high-cost interventions and intervene early to keep them out of expensive hospital settings. That lowers costs, improves long-term outcomes, and raises satisfaction.
That requires longitudinal data and patient engagement. We see this in infrastructure companies like Redox, which moves data seamlessly in and out of electronic health records, and Abacus Insights, which unifies disparate data silos for health plans to understand patient risk holistically.
We also back models that shift risk to providers, giving them financial incentives to keep patients healthy. That was Iora Health, and it’s what WelbeHealth does so effectively for frail seniors—the most expensive patient population in the world. Welbe reduces costs while extending patient lifespans by two to three times with a higher quality of life. When done right in healthcare, doing the right thing saves money.
Keith Cline: Healthcare is full of data, making it a prime candidate for AI. What are you seeing across AI in healthcare?
Liam Donohue: There is an unfortunate use of AI in healthcare: feeding the billing arms race between payers and providers. AI is exceptionally good at finding ways to bill more for the exact same patient encounter, driving up system costs with no clinical benefit. It’s lucrative, but we don’t invest in that.
Where AI is transformative is synthesizing a patient’s full medical and social context to determine what interventions will actually work. AI enables longitudinal engagement—delivering timely nudges, collecting patient data, and providing clinicians with contextual insights so they can direct their focus where it matters most.
We are skeptical of AI replacing clinicians to “deliver care” directly; we believe AI will be infused to augment physicians and nurse practitioners so they can operate at the top of their licenses.
Keith Cline: We need to keep the human in the loop. I don’t want to receive medical care from an AI bot!
What general advice would you give founders building startups in healthcare?
Liam Donohue: Founders are magical partly because they don’t always listen to advice!
Because everyone has personal experiences with healthcare and education, people assume they understand the industries. They see something broken—like why hospitals still use fax machines—and assume everyone in the industry missed something obvious. There are complex structural, regulatory, and reimbursement reasons behind those inefficiencies.
Founders need humility and respect for the ecosystem’s guardrails while pushing boundaries to innovate. Either live the problem yourself, or surround yourself with experienced advisors who keep you from making the same mistakes others have made.
Keith Cline: What is the market like for Series B and follow-on rounds, and does Boston have the capital base to support later-stage rounds?
Liam Donohue: Venture physics dictates that as check sizes grow, the market becomes national. It makes sense for large funds in New York or San Francisco to fly to Boston when deploying larger sums. While Seed and Series A often have a regional flavor, Series B and beyond is a national market, so Boston companies face no disadvantage.
A few years ago, the digital health market faced a crisis where funds had to triage broken portfolios, creating a funding gap. That has largely cleared out. Today, the market feels healthy and normalized.
Revenue expectations for a Series B generally sit around $10 million ARR with strong growth, though in AI you sometimes see requirements of $20 million growing at 200%. It always depends on the business model.
One interesting note: an LP of ours, a major hospital system, mentioned their CFOs are no longer signing software contracts longer than one year because technology is evolving so rapidly. That makes enterprise sales and customer retention even more critical.
Keith Cline: What is your take on the Boston tech ecosystem today?
Liam Donohue: I’ve been a believer for 25 years that Boston is the hidden gem of the country, and it is as vibrant as ever. We have world-class research institutions, brilliant technical talent, massive enterprise buyers in financial services and healthcare, and a healthy financing landscape from seed to national growth firms.
Our flywheel of successful exits recycling into new startups has improved significantly over the past 20 years. While we aren’t built for consumer AI, Boston is the absolute center of gravity for enterprise health, cybersecurity, and data infrastructure. Optum, Humana, and Aetna have major hubs here, and the data infrastructure powering modern healthcare lives in this ecosystem.
Keith Cline: There are some fun facts about your team on the .406 website. First: your name is Liam Donohue, but you are only one-eighth Irish!
Liam Donohue: It’s even worse: my full name is Liam Sean Donohue!
I was born in the late ’60s. My mom thought Sean Connery was cool. My dad was William Jr., and they wanted to call me William III, but they found Liam as the Gaelic form of William. My dad’s ego wouldn’t let Sean be the first name, so I became Liam Sean Donohue.
Then they realized my initials were L.S.D.! In the late ’60s, their thesis was that by the time I was an adult, no one would know what LSD was. They were a bit wrong on that!
My wife was born in Seoul, Korea, so she is Sojoon Donohue, and our kids are one-sixteenth Irish!
Keith Cline: The other fun fact: you can shower, shave, and get dressed in under three minutes! That seems impossible.
Liam Donohue: It’s entirely possible when you have my hairline! On Zoom calls, I’ll occasionally text a colleague, tell them to time me, turn off my camera, and be back fully showered, shaved, and dressed in three minutes. It’s still doable!
Keith Cline: Do you have a book or podcast recommendation for entrepreneurs?
Liam Donohue: Besides The VentureFizz Podcast, of course, one of my favorite books is Willa Cather’s My Ántonia, which I read in ninth grade. It’s about a man who grows up on the Nebraska frontier, moves to the city to become a successful lawyer, and returns to reflect on his youth and the community that shaped him.
Living in the Boston tech bubble, we operate in rare air. The real world and the people we serve—especially in healthcare—live very different lives. That book grounds me in humility and reminds me that we are often not the end user, so we must build solutions that truly serve the broader community.
Keith Cline: What do you like to do for fun outside of work?
Liam Donohue: I’ve gotten obsessed with mountain biking. I did it when I was younger, and while it may not be the wisest thing to pick back up later in life, I really enjoy it. A few scrapes here and there, but I’ve survived!
Keith Cline: Liam, thanks so much for walking us through your background, the work you’re doing at .406, and congratulations again on 20 years!
Liam Donohue: Thank you so much, Keith. It’s been real fun talking to you
