Will Theranos' Example Lead To Tighter Scrutiny Around All Tech Startups?

For a company that was positioning itself as the Apple of health tech, certain key fundamentals were drastically off the mark.

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Theranos founder Elizabeth Holmes had all the credentials of what it took to be a global changemaker. At 19, she had dropped out of Stanford University. And her pharmaceutical device called the Edison was touted as being capable of testing for numerous illnesses with a single drop of blood rather than a full vial.

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The machine would save money for patients and doctors, and potentially provide early diagnoses for over 200 conditions at locations as convenient as grocery stores and neighbourhood pharmacies. Early investors included Rupert Murdoch of Sun Media, Larry Ellison of Oracle, the Walton family of Walmart fame, and even two high ranking government officials: former US Secretary of Education Betsy DeVos and former US Secretary of State Henry Kissinger.

Holmes also seemed highly inspired by Apple founder Steve Jobs. She often wore a similar black turtleneck, called her device the iPod of healthcare and used the same marketing agency as Apple to design slick marketing material. Thenaros enjoyed a solid bull run for the next 12 years or so, even winning the US Food and Drug Administration's (FDA) approval.

When did trouble begin to show?

By 2014, Theranos had raised a total of $400 million, giving the company a valuation of $9 billion. This was its zenith and its founder was recognised by Forbes as being among the world's youngest billionaires.

But only a year later, in 2015, the company first came under scrutiny by the Journal of the American Medical Association for failing to publish any peer reviewed research. More trouble followed in 2016 and 2017. In March 2018, the company and its founders were accused of securities fraud by the US Securities and Exchange Commission. And by September of that year, Theranos was dissolved.

Stayzilla's fall from grace in India

A similar chain of events was also observed at failed Indian homestay aggregator Stayzilla. It had positioned itself as an Airbnb equivalent for the domestic market. Founded in 2005, it was an early innovator that had made a presence well before India's digital transformation. Much like Theranos, it enjoyed an extended period of over a decade when its operations seemed to be on relatively firm ground.

At its peak, Stayzilla was valued at $123 million and it boasted 50,000 listings across 900 Indian cities and towns. But following closure of its operations, its founders were slapped with fraud charges. Coincidentally, similar charges were also levelled against Theranos' founder and former chief operating officer.

Common to Theranos and Stayzilla were their revenue projections. The former company had over optimistic growth targets that prompted whistle-blowers to alert the board about it. In Stayzilla's case, there was stiff competition being posed by established online travel aggregators and the company was staring at massive cash burn volumes.

Eventually, in February 2017, StayZilla announced they were shutting operations. But this was not long after their forecasts had enabled them to receive a Series C funding round. This event then led to creditors taking aggressive steps to recover unpaid dues.

Efforts from US and Indian regulators

Theranos exploited a regulatory loophole. According to a 1976 law, if tests were "designed and used" in a single laboratory, then that particular laboratory was free to market its tests without the FDA's approval. Following the Theranos debacle, lawmakers drafted "A bill to amend the Federal Food, Drug, and Cosmetic Act to provide for the regulation of in vitro clinical tests, and for other purposes."

Interestingly, despite being presented to Congress on three occasions–most recently in June 2021–the bill is yet to be enacted into law. Theranos-like medical tests can, therefore, still be performed. As a result, US patients are still at risk of receiving incorrect diagnoses simply because the test was performed within the four walls of one laboratory.

One positive development, however, is the appointment of Dr. Robert Califf as the FDA's chief. The cardiologist did hold this position earlier too during the Barack Obama administration, following which he served a stint at Google Health. According to a recent article in The Economist, "The industry hopes that on his watch the agency will finally adopt long-delayed standards for digital-health software."

Meanwhile, Thriva is a US-based health-tech startup that has fully disclosed the scope of its blood tests. The company said its blood tests only shared "insights' and that these should not be considered a final diagnosis.

In the case of India too, startup failure events have not evoked any major changes in existing frameworks yet. The most recent changes pertaining to the general startup ecosystem were announced in 2019. These were specific to taxation and investments.

From a strictly health-tech standpoint, there were regulations framed in 2020 that governed tele-health aggregators. Termed the Telemedicine Practice Guidelines, it outlined basic regulations such as making it mandatory for online consultations to strictly take place with a registered medical practitioner. It prohibited artificial intelligence or machine learning based interfaces from offering medical advice or prescribing medication.

Going forward

Following the pandemic's onset, the health-tech space has seen dizzying growth. To put things into perspective, Alphabet, Amazon, Apple, Meta and Microsoft have invested a cumulative $3.6 billion into health startups in 2021. The bulk of recipients were companies that manufactured devices or collated medical data.

Amid this scenario, regulatory loopholes must be re-examined. In health-tech particularly, the FDA must perform closer inspections to avoid loopholes going unnoticed. Periodic reviews may be necessary too since going by Theranos' example, it took over a decade for glaring shortcomings to be noticed. More importantly, regardless of where a founder may have graduated or "dropped-out" from, the same due diligence processes must apply.

The mantra of "faking it till one makes it" requires a collective denouncement by stalwarts from all sectors. From both an ethical and sustainable standpoint, this is not an approach that must be romanticised or encouraged.

At the time of writing, Holmes was acquitted of four charges, while a decision is still pending on several more. For a company that enjoyed a meteoric rise, its founders are staring at possibly 20 years of jail time and a nearly $3 million in fines. Holmes has been indicted along with Theranos' former chief operating officer Ramesh Balwani.