WHAT'S BEHIND THE CURRENT TECH BUBBLE: THE THERANOS CASE
Theranos is certainly one of the most fascinating Silicon Valley startups. When it first emerged in the mainstream media in 2014 for a brief moment it looked like we are witnessing the next Facebook-like success story. A startup founded by a sole female entrepreneur after dropping out of Stanford poised to disrupt the multibillion medical testing industry. Soon enough the headlines were pouring in. Elizabeth Holmes was "America's Youngest Female Billionaire" before even turning 30 and her company soon had unusually high profile support from people like Henry Kissinger and George Shultz. This would be a nice basis, if you are about to get into politics, but is quite surprising for a small biotech startup, but more on that later...
It would have all been a great example of the disruptive power of the technology industry, only if it was real. As The Wall Street Journal found in highly publicised investigative series the proprietary testing machine Edison had alarming accuracy issues. Things quickly escalated from there. It surfaced that a big portion of the blood tests performed for clients were actually done on conventional testing machines from Siemens and the likes. Several months later Theranos had to void two years worth of testing results and is currently under investigation by several government agencies. To add to the drama the first class action suits have already been filed following the years of voided test results.
It is quite fascinating to watch the story unfold, however the more important question is how nobody spotted the company's issues early enough. Theranos has received hundreds of millions in funding for valuation in the billions in several rounds of VC funding. How is it that all the 'smart' money, as well as early adopters like Walgreens didn`t perform proper due diligence. Well the short answer is ... there was no smart money involved. None of Silicon Valley's top biotech firms and VC funds with big biotech exposure like Venrock, Third Rock Ventures, Polaris, Deerfield, Versant or Google Ventures invested in Theranos. The biotech investment process is quite different from the way investors in the consumer-tech space operate. It is not uncommon for biotech firms to incur up to USD 100 000 in due diligence cost, before they commit to a series A or later funding round. Respectively the lack of mainstreet biotech funding should have been the first warning sign. In addition hereto is the apparent lack of scientific expertize on Theranos board, as well as off-course the extremely secretive behavior of Theranos about it's technology. In a matter of fact as of today the startup hasn't published a single paper in a reputable peer-reviewed scientific journal.
With interest rates at near 0 in most of the developed world it is no wonder that a lot of capital is seeking return in unusual areas like VC. Respectively there is a lot of 'dumb' money around driving valuations of startups artificially high influenced more by hype than healthy due diligence. After the withdrawal of Walgreens the fairy tale of Theranos is now over, but rest assured it will not be the last. In the meantime a movie is already in the pipeline with Jennifer Lawrence in the lead role.