What the Theranos Trial Means for Health & Sci-Tech Startups
The scandal the now-defunct blood-testing company created has caused difficulties for startups navigating that same space.
Not so long ago, Elizabeth Holmes, CEO of the now-defunct blood-testing startup Theranos, was Silicon Valley’s darling. Now, she’s been on trial, facing charges related to wire fraud, misleading investors and more. [Update: On Monday, January 3, the jury reached a verdict, and Holmes was found guilty on four of the 11 federal charges she was facing.
How will that downfall affect other health, tech and science-related startups? Here’s a closer look.
It’s Creating Bigger Challenges for Similar Startups
Startups arguably have a hard enough time gaining the necessary traction. Some leaders of other startups in the blood-testing space said Theranos was like a dark shadow on their operations, or at least forced them to make changes. John Lewis is the founder of Nanostics, which, like Theranos, aims to detect disease signs in small amounts of blood.
“Our initial plan was to go out saying that we can detect disease signatures with a single drop of blood, but that was literally just when Theranos was going down for stating that they could do that when they couldn’t. So in our texts, we said, ‘two drops of blood,’” he told Slate.
Tim Blauwkamp is the cofounder and chief scientific officer of Karius, which provides noninvasive pathogen blood tests. He described similar woes to Slate, saying, “There just got to be this absurd connection between a blood test and fraud.”
He continued, “It was such a visible event, and everybody had made those associations and wanted to double-check that it wasn’t a widespread phenomenon in every blood-testing company.”
It’s Proving the Market’s Viability
At the other end of the spectrum is the argument that Theranos proved there’s a market for similar tech, provided it fulfills its promises.
Teemu Suna founded Nightingale Health, a Finnish startup that raised €8.8 million in a January 2021 funding round and surpassed its initial goal to generate €6-8 million through the effort.
While speaking to Sifted in 2019 about how the Theranos disaster affected other startups, Suna said, “A single bad experience doesn’t tell anything about the industry. That said, no matter what the business proposition is, if one is planning to invest in the biotech or health care (clinical businesses, and not recreational services) [sectors], the underlying science and tech behind the [company] should be scrutinized closely.”
“Investors are not exactly wary of the industry,” he continued. “The potential that Theranos demonstrated is immense, as health care is one of the biggest markets in the world.”
It seems Suna has a point. After all, digital health startup investments for the first half of 2021 were three times what they were for all of 2016. Investors don’t necessarily have to focus on device-based innovations, either. For example, the COVID-19 pandemic caused a surge in companies and providers that used telemedicine to facilitate safer care.
It’s Increased the Need for Reliable Proof
Most people eventually come across startups that fall short, so Theranos was certainly not the first. However, as the company comes into the spotlight again, there is an ongoing need for other startups to show that products, technology and other aspects work as promised and ideally, do so through peer-reviewed research.
A 2019 study of health care companies that reached unicorn status examined 18 current unicorns and 29 exited ones. The research showed that 10 in the first group had no highly cited research papers. The same was true for 12 of the companies in the second category.
The Leeway Offered by Lab-Developed Tests
Some health tests on the market now aren’t necessarily more accurate than what Theranos offered. That’s because they fall into a U.S. Food and Drug Administration (FDA) category called “lab-developed tests.”
One of the worrisome things about that product group is that a genetic test that claimed to screen for cancer could go on the market and advertise to the public with no FDA input.
Ana Rutschman is an assistant professor at the Center for Health Law Studies at Saint Louis University School of Law. While discussing the framework for lab-approved tests with The Verge, she explained how a health-tech company’s assertions might not mean much.
“You can say, ‘I’ve followed every single piece of the regulations,’ and you might well be telling the truth. It’s just that the regulatory framework is so weak that it means virtually nothing,” Rutschman says. “But you’re free to go to a customer and say that.”
Sometimes, the regulator does intervene, as it did when sending a warning letter to Inova Genomics, which sold a blood test it claimed could detect how a person would react to certain medications. The FDA cited the company’s lack of data. However, that action came after people were already buying the relevant products.
Even with all of these ramifications so far, it’s too early to say whether the Theranos scandal will still affect other companies in the space five to 10 years from now.