Avoiding the next Theranos
This week, I have decided to take a break from my deep tech journey. The reason for this is Theranos. If Theranos doesn’t mean anything to you, I highly recommend reading Bad Blood: Secrets and Lies in a Silicon Valley Startup by John Carreyrou.
Theranos, once the biotech sweetheart of Silicon Valley, was reportedly worth $9bn in 2014 – but this has all come crashing down. The 19-year-old founder Elizabeth Holmes is now being trialled for fraud and faces up to 20 years in prison.
VCs and other investors lost hundreds of millions, but beyond this, innocent employees who committed their careers to Theranos found their stock options worthless.
But how did this happen?! I am not going to claim that there is a secret ingredient to VC investing, but there are a few points that we as a team focus on in order to attempt to manage our risks.
Avoid the Theranos Effect: Let the specialists analyse the technology Yes – I have coined the term the Theranos Effect. In biotechnology, I believe we are at the forefront of technology. The combination of biology, chemistry, computer science and engineering makes this industry unbelievably complex but capable of opening a world of opportunities beyond our imaginations.
How can we effectively identify companies to invest in when they don’t understand the underlying science? The answer is: rely on the specialists. We employ a fantastic team of scientists who analyse pre-clinical results to give us the complete picture of a company and the landscape that the solution is entering. Only with this information are we able to assess competition, substitutes and all of those good things.
In a nut-shell, Theranos created blood tests that simply didn’t work the way they should have. How should we analyse whether something works? Get the specialists to do it and avoid the Theranos Effect.
Focus on the problem rather than the solution
As a team, we love to talk about the problem that a company is looking to solve. We look beyond the size of it (your TAM, SAM, SOM etc.) and think about how the problem applies to basic human needs – always circling back to Maslow’s hierarchy of needs. To put this more simply, we are looking for companies that identify problems that humanity cannot ignore.
Naturally, this leads us to some incredibly interesting debates about:
what problem is ACTUALLY being solved (this is harder than it sounds), and,
what problems we can live with. My colleague Eva goes into the philosophy behind focusing on the problem in this post if you are interested in learning more.
This does not mean that a company that already has a solution and is looking for a problem to solve isn’t going to be a great success. It means that the company needs to find a problem that we can’t survive without solving!
Continuously assess the secondary problems that come from your solution
Secondary problems – another area of debate. A secondary problem is a problem that arises from a chosen solution. For example, a secondary problem of petrol and diesel engines is CO2 emissions. All solutions give rise to secondary problems, therefore identifying which problems we can deal with and which will be showstoppers is an essential part of assessing companies.
Given VC investment horizons can be 10 years or more, it isn’t always easy to know which secondary problems we can live with. One thing we know is that if we ignore all secondary problems the world will be a worse place for humanity, therefore we must do everything we can to limit the secondary problems we bring into the world.