The Theranos Scandal Is Just The Beginning

When Theranos first launched in 2014, it quickly became a media sensation. The headlines practically wrote themselves: Elizabeth Holmes Is America’s Youngest Female Billionaire—And A Dropout! Who wouldn’t love a story about a Stanford dropout who disrupted the staid world of lab testing before her thirtieth birthday?

But a well-documented series of investigations from the Wall Street Journal found some alarming problems with the accuracy of the company’s blood-testing technology and the state of its labs. And now Theranos is facing investigations from both federal agencies and the U.S. Securities and Exchange Commission for potentially misleading investors.

In the wake of this very public fallout, it is tempting to tie up this narrative with a neat bow. If the Internet loves anything more than a “next Steve Jobs” narrative, it’s a witch hunt. Some pundits have pointed the finger at Holmes, once hailed as the Steve Jobs of biotech, for trumping up her company’s technology. Others, like Nick Bilton at Vanity Fair, have labeled the tech press a “secret culprit”. Some say it’s the venture capital community: Shouldn’t Theranos’ investors, which include Larry Ellison’s Tako Ventures and DFJ, have picked up on problems with the technology or its corporate practices before writing Theranos such big checks? After all, the warning signs were there: The original board included plenty of big names, like Henry Kissinger and George Shultz, but very little scientific experience, and the level of secrecy the company maintained was actually pretty atypical for a biotech startup. And then there’s the whole complicated mess that is our regulatory system: The FDA has yet to release its final guidance on how it will regulate the category of tests that includes Theranos.

All these entities are worthy of blame. But after we find our scapegoats, the problem will not be solved. Until we address all the factors that led to Theranos’ rise and its downfall, this will happen again. Launch, hype-cycle, demise. Launch, hype-cycle, demise. Again and again. One the biggest catalysts for this cycle? Dumb money.

Let’s be clear about something: None of the top biotech investors invested in Theranos. Five of the best-regarded biotech firms—Venrock, Third Rock Ventures, Polaris, Deerfield, Versant—either didn’t meet with Theranos at all or passed on the pitch. The Silicon Valley firms with health care practices, like Google Ventures and Bessemer Venture Partners, weren’t swayed, either.

The biotech funding process might be flawed, but it works well enough to smell a very large rat. Unlike consumer-tech investors, many biotech VCs will spend up to $100,000 in legal and advisory fees to vet entrepreneurs for a Series A round or later. That process can take more than a year. The investors would also expect to see the company’s product data and results from peer-reviewed journals, which were totally lacking in Theranos’ case. “It should be expected that all the technical and regulatory answers should be there, or at least buttoned up,” says Steve Kraus, a biotech investor from Bessemer Venture Partners.

The real problem is the availability of so-called dumb money in health care. Health-tech companies have a slew of other options when more seasoned health care investors pass. As I recently reported, VCs from the worlds of consumer and enterprise tech are exploring opportunities in health care. Many have recently started making bets in the space, which has resulted in a slew of health-tech unicorns. (One example is Oscar Health, a health insurance company with an enormous valuation).

The influx of dumb money in health care might seem perfectly harmless: Sometimes we need to throw spaghetti on the wall and see what sticks, right? But in Theranos’ case, the company’s blood-testing technology was intended to be used on real patients to “diagnose hundreds of diseases.” If Theranos had been vetted by a biotech firm, it’s doubtful that the company would have gotten away with not having a peer reviewed study. It was only last month, long after the Theranos controversy exploded, that a team at Mount Sinai published results of a study that compared Theranos’ tests to its competitors, Quest and Labcorp.

Until something significant changes, my prediction is that we’ll see many more Theranos-like scenarios in the future.

What are your thoughts on this whole mess? Share them with me @chrissyfarr at Twitter.