Silicon Valley top biotech investors on learnings from Theranos

Elizabeth
Holmes, founder and CEO of Theranos.
Mike Blake/Reuters

• 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.

Shutterstock

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.