- Theranos, a blood-testing startup that claimed it would revolutionize healthcare by doing away with “big bad needles,” crashed and burned after it was revealed that it lacked concrete science.
- But biotech startups remain hot in Silicon Valley, with nearly a third of the companies from startup hub Y Combinator’s latest class falling into the category.
- So we asked the top investors in the space to tell us what can be done to avoid the pitfalls of Theranos.
- Their answers contain some key lessons.
Few tech companies have crashed and burned in recent years like Theranos, a blood-testing startup that claimed it would revolutionize healthcare by doing away with “big bad needles.”
But money moves fast in Silicon Valley, where the company began — and sometimes it moves too quickly for the ideas behind it to keep pace.
In the case of Theranos, launched over a decade ago by Stanford drop-out Elizabeth Holmes, investors put hundreds of millions in a concept with little-to-no published science to support it. When it was gradually revealed that the advanced technology required for such an idea did not yet exist, the company — and Holmes, who’d amassed a net worth of $4.5 billion after the company was valued at $9 billion — toppled. This week, the company announced in an email to shareholders that it would formally dissolve, the Wall Street Journal reported.
Biotech remains a growing sector for venture capital. Nearly a third of the companies in the latest class of Y Combinator, Silicon Valley’s biggest startup accelerator, are in the biotech sector. Last year, just 8% of startups were biotech-focused. In January, the incubator announced it would be offering a separate track called YC Bio specifically for healthcare and biotech startups.
We asked the leading VCs at some of Silicon Valley’s top venture firms what investors and startups can do to avoid the pitfalls of Theranos. Their answers contain some powerful lessons.
Reality-check the science behind a big idea.
A handful of biotech investors who watched from the sidelines as their peers inked deals with Theranos told Business Insider that the biggest mistake was a failure to vet the science behind the concept.
That doesn’t necessarily mean those firms needed to have scientists or diagnostics experts within their ranks, biotech investors said, but if they didn’t have an internal person to reality-check the science, they should have consulted with outside experts who could do it for them.
“You need to know what you’re investing in,” Dylan Morris, the bioengineering lead at VC firm CRV, said. “Do you need a tech or engineering background? No, but if you don’t have it you’d better find somebody you trust who does and take their perspective seriously.”
All of that due diligence is essential in biotech investing, Benjamin Tseng, a principal at venture firm 1955 Capital, said.
“When you’re looking at these areas where real technology is essential, you have to do your homework,” Tseng said. “You can’t just count on a charismatic CEO who will cobble together some people and say, ‘OK this is going to work.'”
Remember that when it comes to healthcare, lives are at stake.
Certain aspects of venture capital are inherently appealing to biotech startups, like breaking free of the slow pace of academic research. But not everything that applies in tech venture carries over to biotech, some investors warned.
“The framework of ‘move fast and break things’ is not acceptable when we’re thinking about human health,” Francisco Gimenez, the resident data scientist at venture firm 8VC, said.
“You can be Uber and flout the law of taxis because people want what you have so bad that the world will find a way to accommodate you,” he said. “With human health, you can hurt people.”
Racquel Bracken, a vice president at VC firm Venrock, agrees. For her, it was Theranos’ repeated promises of a breakthrough with no concrete follow-up that raised the biggest red flag.
“The sustained promise and no delivery — how that played out with putting patients at risk — that’s a cautionary tale with going too far in applying tech principles to healthcare,” Bracken said.
“There are lives at stake,” she added.
Beware the cult of personality.
With her characteristic black turtleneck — reminiscent of Steve Jobs, who she idolized — and magnetic personality, Elizabeth Holmes managed to secure funding not only from big VC firms but also from established companies like Walgreen’s and respected officials like current Secretary of Defense James Mattis. But none of them ever saw the company’s product. That should be a big warning for biotech investors today, given how much emphasis is still placed on team and personality.
“It’s about being smart as you’re thinking about investing,” CRV’s Morris said, adding that that means “doing a clear-eyed risk assessment — even if you like the team.”
Julie Grant, a partner with venture firm Canaan who leads many biotech and healthcare investments, pointed out that persuasion is a powerful drug, especially when it comes from the founder of an up-and-coming startup that promises to shake up an engrained part of the healthcare system. But that means doing even more due diligence to validate that startup’s claims, she said.
“Even exceptional people can be duped and drawn in by brand,” Grant said.