Originally published in PE Hub

By Florence Comite, MD

Whether it’s Uber transforming the taxi and limousine business or Airbnb shaking up hospitality, we have become used to upstarts disrupting traditional industries.

So, when Theranos pledged to overhaul phlebotomy a few years ago, few doubted that it would become a Silicon Valley darling.

Theranos offered a better testing service using tiny draws of blood, with clinics conveniently located in supermarkets and drug stores. An adoring media touted founder Elizabeth Holmes as “the next Steve Jobs.”

The company, however, ran into trouble after The Wall Street Journalpublished an investigation that said it found Theranos was operating as little more than a traditional lab. The upshot was Theranos was having difficulty delivering. Its technical ambition exceeded its reach.Most recently, the Journal last month cited anonymous sources who said the company that it was under investigation by health regulators into its labratory and research practices.

Theranos may yet be onto something big. It’s been operating in secrecy, and says it is moving forward as planned. Its goal to disrupt the Quest Diagnostics and Labcorp duopoly is a worthy one, as the companies often charge indiscriminate and unreasonable amounts for lab tests. But it does point to the complexity of healthcare disruption, and the need for seed-stage and venture investors to know how to separate companies with the ability to ride the next wave from those that will wipe out because their research and regulatory hurdles in the healthcare sector.

Theranos isn’t the only startup to get tangled up in regulatory approvals. We saw a similar story when the FDA shut down 23andme.com’s consumer health genetic testing service in 2013.

Bill Gurley, who has made successful bets on such companies as Zillow and Uber as a partner with San Francisco-based Benchmark, last year, said he looked at 100 ideas for investments in healthcare technology and had invested in none.

He noted structural distortions in the sector, such as subsidies, that nullify all ordinary assumptions of how market forces will work.

While it’s clear that technology is going to infiltrate and revolutionize healthcare, it may not be your typical Silicon Valley disruptor that is going to know how to operate in this unique and complex environment. That company will need “med cred,” too.

Investors evaluating healthcare startups should ask four questions:

1. What original data and medical research support the company’s idea?Data and research open a lot of doors in healthcare. Did the company conduct its own peer-reviewed research? Holmes based Theranos on a patent for a faster and cheaper blood test, with a unique approach via a finger stick. That’s a great idea, but is it worthy of a $10 billion company valuation? Were Theranos and investors skipping over considerations of how arduous FDA approvals can be?
2. Do executives have serious experience and any background in medicine?Unlike other industries where an outsider perspective can be transformational, in medicine there is no replacement for medical experience, credentials, and training. It’s exciting to have disrupters. But to succeed these companies must marry the old-fashioned high touch of medical wisdom and experience with futuristic ways of healing a human being. Medicine is more complex than a taxi service. Even having that kind of experience on your board may not be enough, depending on how involved a board is in the day-to-day operations of the company.
3. Do they offer wellness and coaches rather than real medical advice?As a practitioner of precision medicine, I embrace using technology to disrupt our profession, but you need the right balance of bricks versus clicks. Medical advice cannot be dispensed by algorithms (yet). And doctors are harder to scale in a cost-efficient way. Some startups are going the coaching route instead. True medical care requires doctors interacting with patients and hearing what other factors, such as stress, history, diet and sleep, may be at work. This interaction is the je ne sais quoi, the intuition that comes from decades of seeing patients. Advice from coaches and wellness experts is no substitute for the insight of a trained medical professional with expertise. If you are looking for a heavyweight health disruptor, don’t back a lightweight approach.
4. Can they navigate through the often-Byzantine medical structures and healthcare systems? Theranos is not the first Silicon Valley company to get tangled up in FDA approvals. In 2013, the FDA ordered the genetic-testing company 23andMe to stop immediately selling its flagship product, its $99 “Personal Genome Service,” raising concerns about the accuracy of results. As the company started to offer new health-related results, the FDA regulated it as a medical device, and it has taken until now to get clearance for a small fraction of the battery of tests it once offered. What was of greater concern to me as a physician? Imagining an individual sitting alone in their home reading their results with no doctor present to help them interpret the information. A startup that recognizes the deep implications, and knows how to produce results in a regulatory environment probably requires something more than a direct-to-consumer infrastructure. For example, GV(formerly known as Google Ventures) is backing one effort to create a device that would inject large-molecule biologic drugs, which usually require injections, via a pill coated in tiny needles that would instead inject the medicine in the stomach lining, where there is no sensation. This Rani capsule is going to be in tests for at least two years. That’s a long lock-up.

Perhaps central to Theranos’ woes is that building a great a startup requires singular focus.

And that’s part of the difficulty of trying to build a “bricks and clicks” model, something that might be the real solution in healthcare. You probably need to have built up something already in the healthcare field if you want to disrupt it.

That leads me to my final tip. In an industry that likes to talk about unicorns, healthcare startup investment involves finding a special kind of mythical beast: Someone who can manage to be both an insider and a disruptor.

Florence Comite, M.D., an endocrinologist, is the author of “Keep it Up,” a book about precision medicine.

Clarification: 23andMe reached out to us after this guest column was published to say that the FDA ban in 2013 did not impact the full kit and reports, only those with health information