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5 Startup Lessons to Learn From Theranos

The American health tech startup Theranos, one of the fabled unicorns, is disrupting the medical laboratory testing industry. Or at least that’s what it claims. In the last few months however, the wheels have started to come off, or should i say the hooves and horn?

The Wall Street Journal in October of 2015 did an expose on the startup suggesting that many of its claims were nothing more than a farce at best and perhaps even fraudulent. Follow up articles since by them suggest the latter.

Following the WSJ expose, Elizabeth Holmes, the stanford dropout who founded Theranos circa 2003 aged 19, has come out swinging. She claims among other things of a witch hunt by industry incumbents and suggestions of attacks led by paternalistic / phallocentric types that are uncomfortable with her disruption/success. Being a young woman in an older male dominated tech world, many are rooting for the underdog that she is and hence may see no wrong in her steps.

In all of this, the paramount issue of concern is that Elizabeth Holmes’ startup operates in an area that directly affects the quality and duration of human life. Thus one must always keep sight of the need for verifiable truth in the claims of Theranos, particularly around the accuracy and precision of its tests. When these are off, the consequences may be dire. I once received a wrong reading for a high potassium that caused the move of a patient to an Intensive Care Unit at the expense of someone else who was also at death’s door. Thankfully deaths were avoided then but may not always be the case with lab errors*.

What is clear in the Theranos episode so far is that a silicon valley style ‘disruption’ narrative is forcefully trying to be applied in the ultra-traditional industry of health care/ medicine. Many domain experts — myself included — would class this attempt so far as a bumbling disaster.

A few lessons can be learned from the Theranos playbook on how not to approach disrupting a traditional industries such as that of health care. Here are five:

1. Build the right team

Theranos’ board members include eminent people like Henry A. Kissinger and George Shultz, both former U.S secretaries of state. Of the twelve board members, only two went to medical school — and one of those two has not practiced in a long time. Theranos’ COO until recently was a Silicon Valley transplant, having previously exited an e-commerce startup. Fine team, except the domain of medicine is highly technical and specialized and demands skillful navigation. Having credible domain experts such as the eminent cardiologist and researcher Eric Topol, Editor in chief of medscapewould have brought so much more credibility and insightful advice/direction to the startup.

(I’m a big fan of Dr Topol, he authored the book The Creative Destruction of Medicine, essential reading for any health tech founders).

The lesson here: That prominent person you have access to may not be the best advisor or team member. Look more strategically for industry savvy team members and advisors when attempting to break new ground or create new markets.

2. Don’t fall for the hype

I’ve read several commentators deny the existence of a funding bubble in Silicon Valley. This is hard to believe, as a bubble is the only real way to explain Theranos managing to raise close to $1 billion at a current valuation of $9 billion without real repeatable revenues or fully functional devices and tests after 12 years.

Worse still, Theranos is actually subsidizing a lot of its testing done on traditional devices to appear cheaper and woo customers. So not only is their revenue shaky, they are burning large amounts of cash in this crazy idea of growth before profitability. Methinks some bubble bursting (and perhaps head examinations) may be required at certain levels. I’m of course not privy to all the facts, so they must know something I don’t.

The lesson here: Like the drug dealer who should never get high on his own supply, never drink the Kool-aid and think you’ve arrived because of some PR or hype you got. Focus on delivering functional products and revenues and make sure the unit economics add up. Growth can never cure poor unit economics.

3. Convince the industry

Despite all their phenomenal claims at the near impossible, Theranos has not published a single paper in any medical journal of repute for experts to review and lend credence or otherwise to their claims. The only Theranos related scientific publications to be found are op-eds or review articles by doctors condemning the startup’s secrecy. In fact, Theranos is attempting to sideline this portion of their user base. They managed to lobby the state of Arizona to allow individuals get lab testing without the need for a doctor’s note.

This act of publishing is key in many traditional industries, not least medicine. In medicine, no new methods or treatments can ever be accepted until a peer reviewed publication exists to support it and it has done the rounds at multiple academic conferences. Theranos spews out things like IP protection to justify not publishing. All trash really. If it affects human lives, there’s really no IP to protect. Besides technology is so advanced globally that it’s highly unlikely Theranos are on to something that several other well funded researchers, institutes and companies have not happened upon in the past twelve years.

The lesson here: Quit the smoke and mirrors act, and just publish what you have in a manner that your market can have access and buy into it. Get your idea and work out there. The risk that is ostensibly attenuated by secrecy is outweighed by the benefit of openness and feedback from the market.

4. Face criticism squarely

As alluded to previously, Holmes has had to deal with plenty of criticism in a manner that many have judged as rather evasive, including attempts by her to deflect criticism, claiming a witch hunt from industry incumbents. This has lead to further criticism and concerns on the validity of her claims.

Simple lesson here: If you do manage to get some opposition in the disruption process — not uncommon — don’t play the victim or attempt to redirect the narrative. Face the opposition head on and alleviate all doubts and fears by answering queries directly. People, particularly of a traditional variant, are unlikely to trust anything less.

5. Disclose progress truthfully, and manage expectations

Evidence suggest that there have been more than a few cunning tricks (read lies) deployed by the Theranos people. It seems to have caught up with them however, as Walgreens has halted its partnership with them, big pharma companies are distancing themselves, and clients who had started using them are becoming discontent and switching back to their regular lab testing providers.

It turns out the tests Theranos were doing had samples collected via unapproved collecting devices. Furthermore, they had to do tests on the same regular machines used by their competitors because their own machines gave wildly unpredictable results. In fact inspectors to their site never even saw Theranos machines in many cases. Of all the 240 tests listed on the Theranos site, only 1 test: the herpes simplex virus test has been approved to be carried out on its own ‘Edison’ machines by the regulatory agency. It is clear they are trying to do too much, too soon.

The lesson here: If you can do only one thing, do just that well and grow as your tech matures. Don’t claim 240 when you can really only do one. Indeed wasn’t starting at just ‘1’ the recipe for disruption illustrated by Professor Christensen in his classic book, The Innovator’s Dilemma?, drawing on examples in the disk drive and steel mill industries.

On a final note, I doubt Theranos will succeed for much longer, unless it throws away its current playbook and adopts a different route. There is little doubt that a down round and a big shakeup is around the corner at Theranos. Otherwise they will in no time become the poster child for how not to disrupt health care. Hopefully, said shake up happens and it installs more sanity into their processes.

Until then, if a Theranos test result ever comes across my desk it will be automatically placed in the shred pile.

*This anecdote is from my time as an internal medicine physician in Australasia, I’m currently non clinical.

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