This year, in lieu of the traditional Best Of Lists, we thought it would be fun to throw our editors into a draft together and have a conversation. One of the biggest topics in tech this year was the ever-expanding bubble in startup valuations, fueled by an ever-expanding pool of increasingly less qualified investors. We brought together our business editor Ben Popper, and our science editor, Liz Lopatto, to discuss what happens when you mix a flood of dumb money eager to invest in anything "disruptive" with life science companies that can actually impact our bodies and health. Here's what we learned in 2015.
Ben Popper: This was the year the tide went out in tech, and we learned who was swimming naked. After five years of ever larger funding rounds, the market threw some cold water on the party. From Dropbox to Square to Snapchat, a lot of "unicorns" failed to live up to their sky-high valuations.
The poster child for this was Theranos, a company which claimed to have invented a revolutionary new technology that could identify diseases with just a pinprick of blood. It achieved a nearly $9 billion valuation and its iconoclastic founder graced numerous magazine covers. The only problem was, its technology and business didn’t stand up to scrutiny.
I wonder Liz, was Theranos just one of many startups whose valuation was way out of whack? Or was this something more specific to life sciences — of trying to find the next Steve Jobs in an industry that’s far more complex?
Liz Lopatto: On the surface everything about Theranos looked good, right? It wasn’t until after The Wall Street Journal dug in that all the irregularities in partnerships, relationships with regulators, and general fuckery began to surface.
Right now, there’s a lot of cheerleading for "disruptive" opportunities among VCs. What many firms seem not to understand is that though there are massive revenue opportunities in health care, "disrupting" patients’ lives can lead to death. "Ask forgiveness, not permission" works fine in software. The medical field doesn’t move as fast as the software industry because moving fast and breaking things is fine for things but not for people. The job of slow-moving bodies like the FDA is to keep companies from harming patients in their quest to get rich.
The thing is, I’m not sure Silicon Valley sees the difference. Ben, I know some pretty smart health care investors and you do too. Where’s all the dumb money coming from?
Ben: I think a lot of what was driving up the bubble in startup valuations was investment from relative newcomers who weren’t very sensitive to price and didn’t look nearly as carefully at the details of the companies they were funding. That's everyone from Bono and Joe Montana to Fidelity, Blackrock, and the government of Singapore. We have been living through an era of pitiful or negative interest rates, which means people with a lot of capital will pay almost any price for the chance to earn a meaningful return.
Negative interest rates make people act crazy
So yeah, that’s my take on where the dumb money came from. The question now is, will it keep flowing. Plenty of experienced venture investors have been sounding the alarm on the tech bubble for a while. And the yawning gap between what companies like Box and Square were worth on the private market, versus their worth now that they’re public, will give late stage investors pause. Plus, the US Federal Reserve has finally decided to raise interest rates, a move that over time will relieve a lot of the pressure which had been flowing into tech.
As the funding environment cools, a lot of companies with unsustainable business models are going to go under. I wonder, how do you think the life sciences will fare? It’s undeniably a slower, riskier investment than the next photo-sharing app. Will VCs keep investing there, as they once did in green tech, out of the hope they might actually do some good in the world while trying to get rich?
Liz: I don’t think all the VC firms that are moving into the space know what they’re doing — so I think you only need a couple of nasty failures to get them to pull back. Take Pathway Genomics, for instance, which was selling a test that was supposed to tell you if you had cancer. I say "supposed to" because it turns out no one — including Pathway Genomics itself — had done any research whatsoever to determine the test actually did what it said it did. The company sold the test directly to patients through a regulatory loophole, and after we wrote about it, the FDA got wind and told them to knock it off. But Pathway had investors: Edelson Technology Partners, Founders Fund, IBM Watson Group. You’ll notice these are not health care firms.
You need to speak FDA
If you’re going to be serious, you need a team of specialists. Someone who trained at oncology is going to have a better sense about cancer-oriented companies. But that’s not all: you need to have someone who’s good at FDA, because most companies are going to need help going through the steps required to legally market drugs, devices, and tests.
A lot of the growth from Silicon Valley seems to be in disease testing. You’ve got 23andMe as the real pioneer here, getting its tests yanked from shelves. Personal genetic testing at that time didn’t explain the limitations of what was happening; like, you’d get a breast cancer risk assessment — but the most important genes for it, the BRCA genes, were left out. But 23andMe did get FDA approval this year, and their new site really nicely explains some of the uncertainty in genetic testing and the limitations of their tests. The FDA stepped in to make the tests safer, and 23andMe is selling a better product now! Imagine if they had sold that product from the very beginning.
I prefer cluelessness to the other option I see. Which is that a bunch of really cynical people saw 23andMe and were like, right, we’ll just sell 'til they make us stop and then we’ll get serious about the real standards. Did I get too dark?
When it comes to venture capital, failure is a feature, not a bug
Ben: Silicon Valley has a libertarian streak exemplified in companies like Uber and Airbnb. Do whatever the customer likes best, worry about the regulations later. Is that more dangerous in the world of blood testing than pushing boundaries around who can drive a taxi or rent out their home to a stranger?
There is a lot of waste and stupidity that comes out of the risk-taking culture in Silicon Valley, but when you look at the impact of public companies created by venture capital, they account for a disproportionate amount of the jobs created and the majority of the money spent on research and development. If I can use a metaphor from the life sciences here, the companies that do succeed act as stem cells for our entire economy, creating entirely new industries as they disrupt the old.
Liz: Well, that’s the thing. This does affect safety; testing influences medical decisions — like what kind of cancer drug you take, or whether you need expensive, invasive tests for, for instance, a liver abnormality. The bar is higher in the medical world because people’s lives literally hang in the balance.
Disruption is more dangerous when it comes to medicine
A lot of life science companies fail. You might have a good idea, but then you have to go through all this expensive testing to characterize the risk-benefit profile for your good idea. If you shirk on the testing, you can really hurt people. And the fact that companies like Alphabet think life extension is a desirable possibility does not fill me with confidence about their other projects. We’re living a lot longer than we used to, but the last years are also way sicker than they used to be; it’s why you see people like Ezekiel Emmanuel writing about how he hopes to die at 75. The singularity is so laughable I don’t even know where to start. It’s like they’re funding fantasy out there.
In terms of life extension, here are the real opportunities: closing the gap between black and white patients, lowering the infant mortality rate, and making sure the very poorest among us have access to adequate care. You can make sure that many people live longer, right now! But none of this is quite as sexy as living forever, even though it’s got a greater payoff for the nation as a whole. So instead of investing in these areas, you’ve got a bunch of old white men who are afraid to die trying to figure out cryonics. They’re being funded by more rich old white men, who don’t face many of these care gaps and perhaps do not even know they exist — or don’t care, because how do you monetize serving the poor?
So to tweak your metaphor: these companies grow rapidly at the expense of the overall health of the nation. That’s not an ordinary stem cell; that’s cancer.
Tech billionaires will keep throwing money at the search for eternal life
Ben: You had to make it personal huh? I mean, what have we white guys ever done to anyone? (Don’t answer that.)
I’m confident 2016 will be full of startups trying to help people find affordable health care and crunch the numbers on how to cure cancer, using the strengths of software and big data inside the life science industry. And in the wake of Theranos, I bet there will be less snake oil and pseudo-science that somehow gets funded. Meanwhile, Larry and Sergei will keep throwing their money at the search for eternal life, but eh, who are we to complain?
Liz: Oh, I intend to complain! Think of the actual good they could be doing with that money instead.