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- Healthcare investing often has greater scientific complexity than standard tech venture capital.
- Theranos is a well-known example of a risky healthcare bet gone wrong, but some experts say other problematic startups are on the horizon.
- So we asked some of the field’s top VCs, executives, and researchers to tell us what can be done to avoid another healthcare investment gone awry.
- Their advice ranges from basic tips like vetting the science behind a startup’s concept to more creative ideas like encouraging founders to problem-solve during an activity like a hike.
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Healthcare startups make bold promises. Whether it’s new treatments for rare diseases, better ways to screen for cancer, or, as was the case with one well-known startup, easier ways to do blood tests — their daring ideas can either contribute to saving lives or prematurely ending them.
Similarly, healthcare investors make bold bets. In the case of failed blood-testing company Theranos, VCs sank hundreds of millions into a concept that was later shown to lack basic, necessary science.
According to the professional-services firm PwC, $20.3 billion went to healthcare startups in 2018, three times as much as those startups received in 2012.
So what should investors and startup leaders be doing to ensure they steer clear of the next risky healthcare investment gone wrong?
We asked some of the sharpest VCs and startup executives how to avoid another healthcare solution gone sour. Here’s what they told us.
- Racquel Bracken is a vice president at the Silicon Valley venture firm Venrock
- Dan Estes is a partner at Frazier Healthcare Partners
- John Ioannidis is a professor of medicine at Stanford who was an early Theranos whistleblower
- Dylan Morris is a general partner who focuses on bioengineering investments at venture firm CRV
- Wei-Li Shao is the chief commercial officer of digital-health startup Omada Health
Encourage founders to problem-solve
When Bracken considers backing a founder’s hot new healthcare startup, she doesn’t pepper them with a list of yes-or-no questions.
Instead, she poses hypotheticals — open-ended questions that can give her more insight into how a founder thinks, she said. These kinds of queries can also give Bracken insight into how founders will solve problems in the real word, where real people’s lives could one day be on the line.
She might start with something like, "What do you need a doctor for?" or "How do you compensate them?" she explained.
From there, you "start to sort of peel back the onion and see where they take it," she added.
Still, an office or a boardroom isn’t always the best setting for this sort of exercise, she said, because it can be difficult to think through real-world scenarios in those places.
So often times, Bracken takes founders outside the boardroom and goes on hikes or walks with them. Anything that encourages someone to think outside the box and let you "learn how someone sees the world," can be useful, she said.
John Prendergrass, associate director in the healthcare investment group at the venture firm Ben Franklin Technology Partners of Southeastern Pennsylvania, said it’s important to see a startup’s lab or workspace.
"It’s amazing how much more of an honest conversation you can have when you meet the founders at the literal place where the idea was born," he said in a tweet. "So see their lab, show curiosity, learn something new."
And investors should ask lots of questions, he added.
"Don’t be afraid to ask ‘dumb’ questions until you understand what exactly the company is doing," Prendergrass said.
Vet the science behind a startup’s idea
Healthcare investing can seem complex, but it doesn’t have to be. Most important is the matter of distilling the complex science involved in any company’s idea and making sure it’s solid, several VCs said.
To do that, firms don’t necessarily need to have scientists or diagnostics experts within their ranks, the investors said, but if they lack someone internally who can reality-check the science, they should consult with outside experts who can do it for them.
"You need to know what you’re investing in," Morris previously told Business Insider. "Do you need a tech or engineering background? No, but if you don’t have it you’d better find somebody you trust who does and take their perspective seriously."
In an email to Business Insider, Estes wrote that VCs without science backgrounds can sometimes be better suited to evaluate potential investments, because they don’t have the same biases obscuring their judgment.
Make sure they’re publishing research
One way to vet a company’s science is to take a look at the research they’ve published. Theranos notoriously published very little research.
Unfortunately, many healthcare companies — including some with billion-dollar valuations — are failing to publish these days, according to Ioannidis, who authored a recent study on the matter.
Based on an analysis of 18 current and 29 exited unicorns, Ioannidis and his coauthors wrote: "Overwhelmingly, the highest‐valued healthcare startups (unicorns), past or present, contribute minimally to relevant, high‐impact published research."
"Health and biology are a very different beast" from traditional tech companies, Ioannidis told Business Insider. Companies in this realm must prove that they’re safe and that they work — and published research is one of the best ways of doing that, he said.
Shao agreed. "If you’ve got to prove it," he said, "it’s hard to fool people with splash and fizzle."
Figure out what drives a founder
Venture capital investing isn’t merely a financial transaction, VCs told Business Insider. It’s a complex and potentially long-term relationship that involves trust and many hours spent together. "You enter into a bit of a marriage with an entrepreneur," Bracken said.
So before she formalizes that relationship, she first aims to learn what motivates the founder of the company she’s backing.
"We’re always trying to figure out, OK — what drives this person? Is this a high-integrity person?" said Bracken.
The answer, she said, should always be patients.
Above all else, good healthcare entrepreneurs should prioritize keeping patients safe, protecting their privacy, improving their health, and protecting them from harm, Bracken said. When a founder puts company growth and profits above any of these priorities, it’s a sign that they are not worth the investment. "When grow, grow, grow and dollar signs are the bottom line, that’s where people fall into issues," she added.
Estes agreed that everyone’s goal should be improving patient well being. When considering a potential investment, he always tries to understand "the profile of patients who would benefit, what other options they have, how this product would fit in here, and what does the target product profile look like," he said.
Then he works backwards to understand whether the product or technology is likely to serve that patient profile.
Don’t underestimate the importance of networks and experience
Estes is interested in the people behind the product.
He particularly values any previous experience running a healthcare startup. "In all of our successful deals, the No. 1 underlying factor is that the team was exceptional (and very often was a team that we had backed before)," Estes wrote.
But Estes also looks beyond the founding team, to the networks they’ve built around them.
"As much as entrepreneurs can build exceptional teams, boards, and scientific advisory boards with people who are well networked and have biotech ‘wins,’ that’s critical," Estes wrote. In fact, Estes said, he’ll always take a meeting with a company that was referred to him by someone he knows and respects.
See Also:
- We got a look at the slide deck of Bind, a startup that’s raised $70 million to upend the way we pay for healthcare
- We took the two-day, $1,300 ‘biotech for dummies’ class where healthcare executives, HR managers, and investors catch up on science for the first time since high school
- uBiome convinced Silicon Valley that testing poop was worth $600 million. Then the FBI came knocking. Here’s the inside story.
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Source: Business Insider – ebrodwin@businessinsider.com (Erin Brodwin)