How To Kill A Unicorn: The cautionary tale of Theranos

A unicorn in startup jargon is an early stage tech company with a $1 billion+ valuation. Theranos is (was?) a Silicon Valley startup and a unicorn, focused on disrupting the enormous market of diagnostic blood testing.

Valuations are funny things. They are critically important to startup CEOs and investors but ultimately, they are subjective shared opinions based on complex models of present and future events. Startup CEOs and venture capital investors try very hard to keep their company’s’ valuations ever-increasing. Negative news or events can start a cascading cycle resulting in the dreaded “down round” of investment and even ejection from the unicorn club.

Theranos was a unicon, but no longer
Killing the unicorn, British Library

Background

CEO Elizabeth Holmes founded Theranos in 2004. As a 19-year old college student, Holmes pitched an idea to her Stanford professor and was advised to start a company. Through family and personal connections, venture capital money poured in, Holmes dropped out of Stanford and Theranos began its mission to change health care.

Theranos CEO Elizabeth Holmes
Theranos CEO Elizabeth Holmes – Inc. cover photo Oct. 2015

“…it doesn’t work…”

Alas, “mistakes were made” and the company and its executive team found itself in hot water with the FDA and the subject of a number of unflattering stories in The Wall Street Journal and elsewhere. The Theranos head of R&D committed suicide and left a note saying “it [the technology] doesn’t work.” Also, the company president recently resigned and CEO Holmes is banned from owning or operating a lab for two years. In addition, Theranos’s commercial partners, Safeway and Walgreen’s, terminated their agreements with the company.

That’s about as bleak a series of events as you can imagine, right? Well as the infomercial goes, wait, there’s more…

Negative reactions continued over the year since the WSJ story broke. In May 2016, Theranos announced that it had voided two years of results from its Edison device. Patients filed a class action lawsuit alleging they were adversely affected by Theranos’s business practices (specifically, faulty blood tests). Recently, the company announced layoffs of 40% of its labor force and closure of testing labs around the country. In October, 2016 Holmes announced that Theranos would shift its strategy toward development and manufacture of small, robotic diagnostic test equipment – a very crowded market.

In June, 2016, Forbes assessed the valuation of Theranos as $800 million and revised the estimated net worth of CEO Holmes from $4.5 billion at the company’s peak valuation (she has a 50% stake in Theranos but it’s all common stock) to zero.

Theranos valuation history
Theranos valuation history (based on public estimates)

What killed the unicorn? There are a number of bad decisions made by Theranos management and its Board of Directors. Here are 10 of the worst that I identified.

Bad Decisions

  1. Stack the Board of Directors with old, politically connected white guys (Henry Kissinger, George Shultz, Bill Frist, Sam Nunn) with little or no startup, technology, or diagnostics savvy.
  2. Create a cult of personality around the CEO. Make sure she appears on popular magazine covers and is interviewed frequently on TV shows.
  3. Create a not-so-subtle emphasis on the similarities between your attractive, young CEO and Steve Jobs: both are college dropouts, both wear a uniform of black turtlenecks, both are “visionary” leaders, both are/were young billionaires (only on paper in the case of Elizabeth Holmes)..
  4. Keep the founder as CEO, no matter if she has zero prior business or medical industry experience. Do not bring in a strong executive team with relevant industry experience to complement the CEO’s energy, vision, and talent.
  5. Hype your technology but shroud its technical details in secrecy. Worse, secretly use competitor’s technology for the vast majority of the tests performed.
  6. Do not conduct randomized clinical studies to demonstrate efficacy vs. industry “gold standard” technologies. Definitely  do not publish in peer-reviewed journals.
  7. Sign agreements with major commercial partners (Walgreens, Safeway) and conduct major PR campaigns announcing the deals before the technology is mature and proven.
  8. Pay no attention to FDA, CLIA, and GLP requirements. Refuse to learn from what happened to other startups that defied or ignored the FDA (see 23andme).
  9. Aggressively promote your muddled, multi-pronged, “disruptive” business model.
  10. Deny and deflect all bad news. Accuse The Wall Street Journal of conducting a witch hunt.

Takeaways

  1. The medical device/diagnostics industry is not the technology industry. Patients’ health and lives are affected by poor management, decisions, and/or business practices. Consequently, medical technology companies are heavily regulated and conservative regarding innovation. 
  2. If you must have an inexperienced person at the helm of the startup, compensate with a seasoned, accomplished Board of Directors with relevant experience and networks.
  3. Aim to solve one problem at a time. Prioritize. Theranos touted its “Nanotainer” finger stick technology, Edison diagnostic technology, and plans to disrupt healthcare by bringing diagnostic testing directly to patients through grocery and drug stores. That’s a lot of moving parts.
  4. Expect swift and deadly reactions from entrenched competitors (including complaints to the FDA and leaks to the media). Your disruptive business model is their existential threat.
  5. As the saying goes, sunlight is a powerful disinfectant. The first step to success in the medical technology industry is a strong intellectual property portfolio and properly maintained trade secrets that create solutions to real healthcare problems. But that strategy must coexist with a culture of regulatory compliance, stringent adherence to quality standards, and sponsorship/disclosure of peer reviewed randomized clinical studies. It’s a business model that has worked for many successful companies in the industry.

Will Theranos pull out of its nose dive, emerge as a disruptive company in the ultra-competitive medical diagnostics market, and regain its unicorn status? Maybe, but given its track record and penchant for acting more like a Silicon Valley tech startup than a medical technology company, I would not bet on it.

Postscript 12.15.16 The shareholder lawsuits have begun.

References

  1. From $4.5 Billion To Nothing: Forbes Revises Estimated Net Worth Of Theranos Founder Elizabeth Holmes [Forbes]
  2. The wildly hyped $9 billion blood test company that no one really understands [The Washington Post]
  3. An Open Letter From Elizabeth Holmes [Theranos company website]
  4. Theranos Attacks Wall Street Journal (Again) in a Rebuttal You’ll Need a Medical Degree to Understand [recode]
  5. Expecting Data From Theranos, Lab Experts Get New Product [Bloomberg]
  6. At Theranos, Many Strategies and Snags [The Wall Street Journal]
  7. Why the Next Steve Jobs Will Be a Woman [Inc.]
  8. Theranos throws in the towel on clinical labs, officially pivots to devices [Ars Technica]
  9. How Playing the Long Game Made Elizabeth Holmes a Billionaire [Inc.]
  10. Theranos’ Scandal Exposes the Problem With Tech’s Hype Cycle [Wired]
  11. Will Shareholder Lawsuit Trigger Theranos To Return Capital To Shareholders? [Forbes]

  12. Theranos Just Got Slammed With Another Lawsuit [Fortune]

Eko Core, A Digital Upgrade For The Centuries-Old Stethoscope | TechCrunch

Eko Core Digital Stethoscope - product picture
Eko Core Digital Stethoscope

The Eko Core digital stethoscope is a “why didn’t I think of that?” invention.

In a few months, the stethoscope will celebrate its 200th birthday. A medical breakthrough in 1816, it’s still a part of nearly every doctor’s visit today and a symbol of medicine itself.…

Digital Stethoscope

Stripped to its essentials, the Eko Core digital stethoscope is a highly engineered Bluetooth microphone designed to fit medical stethoscopes. The device wirelessly transmits patients’ heart sounds (not EKG) to a smart phone or tablet app.

The Eko Core was invented and commercialized by a team of UC Berkeley engineering graduates (claimed to be the youngest team to secure FDA clearance for a Class II medical device).

What Eko Core did well

In developing and executing its strategy, the Eko Core team did a number of things right:

  • Targeted a huge existing market. Most doctors and many nurses carry and use stethoscopes every day.
  • Recognized and addressed a  nagging clinical problem: It can take years (even decades) to become adept at using a stethoscope to recognize heart sounds.
  • Improved the functionality of the stethoscope by enabling visualization and amplification. Benefit to the user is improved confidence in identification of heart sounds.
  • Made their device a simple, affordable ($199) add-on to the user’s existing stethoscope.
  • Employed a Bluetooth wireless connection to the user’s smart phone or tablet . Data  from the stethoscope is displayed in a custom app.
  • Enabled data sharing via “the cloud” so that users can share typical and atypical heart sounds and learn from each other.
  • Partnered with major EHR suppliers to enable the digital stethoscope data to be entered into the patient’s electronic medical record.
  • Identified the potential for use of the Eko Core to lower healthcare costs by reducing costly referrals to cardiologists for unusual heart sounds.

What Eko Core hasn’t done yet

  • Showed they can be financially successful over time. Medical device sales and marketing is expensive. Manufacturing under FDA, GMP, ISO, etc. regulations can increase costs. Maintaining healthy profit margins on low-priced medical devices can be a challenge.
  • Exhibited a competitive advantage over similar products, Thinklabs for example.
  • Fully protected their intellectual property, although the company did recently file a patent application.
  • Leveraged their technology beyond one-hit wonder status.

Takeaways

The number of medical stethoscope users in the developed world is on the order of several million. Growth rates are slow, with new graduates replacing retirees, etc.  That puts the potential market at around $500-600 million.

Not bad, but once you “pick the low-hanging fruit” and sell to the early adopters and early majority customers, selling more units gets progressively tougher and more costly. And given competition, it’s a race for market share to capture and keep customers.

I think this will be a fun and profitable business for a while. Longer term, I hope Eko Core has a big medical device company lined up as a distribution partner and has an encore product that leverages the same technology and customer base.

Source: The Eko Core Is A Digital Upgrade For The Centuries-Old Stethoscope | TechCrunch

Eko Devices website

3D Printing Parts from McMaster-Carr| Make:

McMaster-Carr Catalog 3D print
McMaster-Carr Catalog

McMaster-Carr, the industrial supply giant (http://www.mcmaster.com/), has been in business since 1901 but the company is fully embracing the digital age. McMaster previously released an iPad app of its massive paper catalog containing over 555,000 items. The company has gone one step further and is now offering 3D printing files of many of its parts.

Engineers and designers unsure about dimensions and compatibility of a particular part now have the option to download and print a 3D printing file of many parts in the McMaster -Carr catalog. The user can then try the printed part for fit before ordering “real” parts. This capability can save makers considerable time and expense.

It’s probably just a matter of time until 3D printing has the capability to duplicate manufactured parts in terms of materials and physical performance. Great to see a company that’s over 100 years old innovating and keeping up technologically with its customers.

Takeaways: If you are developing a new widget or prototyping a novel medical device, check the McMaster-Carr catalog, website, or iPad app if you are looking for readily available parts and you don’t want to wait or pay for custom prototypes. You can even check out a new part without the wait by downloading and 3D printing some parts.

If your company-startup or otherwise-is in a rut, look at McMaster-Carr for inspiration. If a 114 year-old company is still innovating and  differentiating itself via new technologies, your company can, too.

Pro Tip: You Can 3D Print Parts from McMaster-Carr | Make:
Link to Instructables set-by-step instructions

Free Medical Device Launch Checklist – Protect Your Investment

free Medical Device Launch Checklist

So you (or your company) has developed a new medical device. You have invested millions of dollars and substantial time in engineering, obtained regulatory clearances, and set up manufacturing. It’s time to go to market, right? Turn it over to Marketing and Sales and wait for the orders to pour in. Are you sure that all relevant launch activities are being planned and accounted for? Perhaps you should protect your investment in your medical device product with this simple, easy to use, free Medical Device Launch Checklist.

Easy to use, downloadable PDF file: free Medical Device Launch Checklist

The Medical Device Launch Checklist from sanko::strategic consulting is free and easy to use. It contains 64 checkable launch items. Launch items include traditional marketing activities like pricing as well as easy to overlook issues such as expiration dating and localization. The Checklist gives you a brief description of the purpose of each item. It also shows you the department/corporate function with primary responsibility for the item. The file can be saved to monitor launch progress.

Anyone can use the Medical Device Launch Checklist. It is primarily intended for small and medium-size companies that may not have institutional systems and processes to control launch activities. It can also be used by anyone (Product Manager, Marketing Manager, Project Manager, startup CEO, et al) who wants to assure that nothing has been omitted from their launch plan.

You can use the Checklist to guide the development of a launch or marketing plan. The Checklist can also be used as a gateway document to assure that all activities are accounted for and either completed or in progress before authorizing product launch.

To obtain your personal copy of the free Medical Device Launch Checklist, click here and select the link for the free Medical Device Launch Checklist.

Think of it as cheap insurance to protect your multi-million dollar baby.

Image courtesy of arztsamui / FreeDigitalPhotos.net

Crowdfunding ROI: $813 per hour invested

https://www.kickstarter.com/download/kickstarter-badge-funded.png
image via kickstarter.com

We’ve all seen and heard about people and companies with novel ideas getting funded on sites like Kickstarter and Indiegogo. There are many anecdotes of ideas going viral and raising lots of cash. There are also plenty of ideas that either don’t get funded at all or fail to reach their target. A new study reports that in terms of crowdfunding ROI, you can expect to receive about $813 for every hour you invest in a successful crowdfunding project.

It would be helpful to look at crowdfunding at a high level and get some questions answered about this relatively new fundraising alternative. Forbes magazine recently reported on a new report about crowdfunding published by Capital Crowdfund Advisors (CCA). In August 2013, CCA interviewed several hundred organizations in North America, Europe and Africa that had completed successful crowdfunding campaigns.

Here are some of the most relevant questions asked by CCA and reported by Forbes:

  1. Does crowdfunding increase sales?
  2. Does crowdfunding create jobs?
  3. Does crowdfunding help attract follow-on investment?

First of all, yes, crowdfunding does have a positive effect on sales. The effect was modest when considering all three crowdfunding modes: rewards, debt, and equity. (Yes, you can now raise equity with crowdfunding. Be sure to speak to a savvy attorney first!) The sales increase for the equity crowdfunding mode was dramatic: an average of 341% increase in quarterly sales after the successful campaign.

Crowdfunding was shown to have only a small positive effect on job creation with 39% of those surveyed hiring an average of 2.2 new employees and an additional 48% planning to increase hiring by an unspecified amount.

As for helping to attract new investors, it appears that successful crowdfunding has positive effects: 28% of those surveyed completed rounds of traditional investment with angels or venture capitalists within three months of the conclusion of their campaigns and 43% more were in talks with institutional investors.

How much was raised in a typical crowdfunding project? From the Forbes article:

In this report’s sampling, the average raised across all methods was $107,810 (with a mean of $40,300, as some results were exceptionally large). For an equity raise, the average was even higher, producing the U.S. equivalent of $178,790. In the process, firms sold between 5% and 50% of their companies, with an average of 15%.

Kickstarter even publishes its latest stats on projects and funding. Projects on Kickstarter have raised $985 million to date for 133,565 projects from 5,648,063 individual backers. This is microfunding on a major scale.

Read more: New Report: The ROI Of Crowdfunding – Forbes.

Takeaways: Fundraising for early stage medical device companies continues to be challenging. Federal government grant money has been shrinking and more companies than ever are competing for the same pot of cash. Angel investors and venture capital firms have become more risk-averse as have the strategic investment activities of the large medical device companies. Crowdfunding, while no panacea, may be an another funding option for early stage medical device companies.

Keep in mind that you will probably not be able to launch your medical device using just the proceeds from a crowdfunding campaign. Medical device commercialization is costly. Crowdfunding proceeds should be earmarked for a specific purpose such as building an early prototype or conducting an important test In other words, reduce risk so you can attract follow-on investment from more conservative investors.

While Kickstarter specifically prohibits medical products, other crowdfunding websites are more open. Here is a very cool (and useful) road map from Inc. Magazine that identifies the ideal crowdfunding site for your Big Idea. Not mentioned by Inc. but nonetheless specific to medical devices and medical technology, Medstartr is another crowdfunding site to investigate and consider.

10 Principles of 3D Printing

3D printed bionic ear
image via American Chemical Society publications

Last week I attended an event, “From Trinkets to Body Parts: 3D Printing – Transforming Sci-Fi Fantasy Into Reality” sponsored by the Seattle MIT Enterprise Forum. The keynote speaker was Hod Lipson, PhD, Professor of Engineering at Cornell University. Prof. Lipson gave an informative and entertaining talk centered around his 10 principles of 3D printing.

There was also a panel of 3D printing industry experts and lots of Q&A with the large audience. It seems that there is much interest in 3D printing – a not-so-new technology whose time has come?

Prof. Lipson identified 10 key principles of 3D printing in his talk:

  1. Complexity is free
  2. Variety is free
  3. No assembly required
  4. Zero lead time
  5. Zero constraints
  6. Zero skill manufacturing
  7. Compact, portable manufacturing
  8. Less waste by-product
  9. Infinite shades of materials
  10. Precise repeatability

Here is my take on the 10 principles:

1. It’s as easy to 3D print a complicated piece as it is to 3D print a simple piece.
2. Every piece that you print can be different without increasing cost or cycle time.
3. The assembly process can be part of the printing process, e.g., a bicycle chain has been 3D printed.
4. Because there is no tooling and no setup, the only lead time is the time required to start the printer and send the digital file.
5. You can fabricate things using 3D printing that could not be made any other way.
6. Since there are no precision assembly tasks, printer operators do not require specialized skills.
7. 3D printers are relatively small, portable, and inexpensive compared to injection molding machines, milling machines, punch presses, and foundries.
8. The 3D printing process does not generate waste material. Neither does modern injection molding, but processes that remove material such as milling do generate considerable waste.
9. Not only can you combine colors in infinite shades, but you can combine materials to create unique mechanical properties.
10. Within the tolerance limits of the printer (0.1 mm for commercial grade printers), every piece printed is exactly like every other piece printed.

Prof. Lipson is also the author of a new book, Fabricated: the New World of 3D Printing.

There are drawbacks and limitations to 3D printing, of course. High volume production is better suited economically for injection molding. Surface finish can be rough, requiring secondary processing, although efforts are ongoing to improve surface finish and textures. Pieces may not have isotropic physical and mechanical properties.

Prof. Lipson identified an incredible range of materials that have been used as the raw material in 3D printing: plastic, of course, sand, concrete, various types of food, paper, steel and other metals, and even living cells.

Some products that have been 3D printed: a working gun, clothing, shoes, furniture, aircraft parts, artwork, food (might be what astronauts eat on their way to Mars and beyond), a working loudspeaker, batteries and electrical circuits, and body parts.

And here are some examples of 3D printing in healthcare and medical devices. Some are in research, some in active development, and others are commercially available:

  • Invisalign braces – custom made for each patient
  • Knee meniscus
  • Heart valve
  • Ear prosthetic
  • Organs – liver, kidney, heart

3D printing of human body parts and organs is also called “bioprinting” in this 2013 New York Times article, “At the Printer, Living Tissue”. The article is pessimistic about near term prospects for 3D printed organs, although it notes that there is much research and development being conducted. Others in technology think that breakthroughs are imminent: Functional 3D Printed Organs by 2014 > ENGINEERING.com. There is a startup bioprinting company, Organovo, developing an artificial liver. The liver in its first incarnation will be suitable for drug development and testing, not for human implantation. A research team at Princeton created a functional 3D printed ear, again, not suitable for implantation: Researchers create world’s first 3D-printed bionic organ | ExtremeTech.

Takeaways: 3D printing is becoming widely known and commercially acceptable. In the medical field, it can be used for rapid prototyping and even for fabrication of low volume production parts. As the “10 principles” indicate, you can save time and money in your medical device development projects by using 3D printing.

Renal Denervation – the next big bust?

Oops! Road SignOn November 1, I wrote a blog post about what seemed like an exciting new therapeutic market for medical devices, renal denervation to treat hypertension and lower high blood pressure:

Renal Denervation – the next big thing?

Fast forward to the present. Just 11 weeks later, it appears that this hot new market is in trouble.

First, this negative news from Medtronic:

Medtronic’s Hypertension Study Fails Taking Analysts By Surprise | MDDI Medical Device and Diagnostic Industry News Products and Suppliers.

The failure occurred in a large, randomized study being conducted at 87 medical centers in the U.S.

And then the company statement:

Medtronic CEO: Failure of Hypertension Clinical Trial Not An Execution Issue | MDDI Medical Device and Diagnostic Industry News Products and Suppliers

followed by competitive reaction from St. Jude Medical:

St. Jude’s CEO is still betting on renal denervation, despite Medtronic’s setback – FierceMedicalDevices.

Most recently, Covidien has decided to exit the market. Covidien spent $60 million to acquire Maya Medical and additional millions on clinical studies. They stated that the market in the European Union was developing too slowly and that they would be taking a $20 million writedown on their assets:

Covidien Pulls Out of OneShot Renal Denervation Program Citing Slow Market Development | MDDI Medical Device and Diagnostic Industry News Products and Suppliers.

Medtronic famously spent $800 million to purchase Silicon Valley startup Ardian. Early clinical results were promising but when Medtronic tried to scale up the clinical studies for FDA approval, the results were disappointing. The company is in full “reboot” mode and is planning to convene a blue ribbon panel of experts to determine what went wrong and what to do now. I think I would have my resume updated and on the street if I were involved in this unpleasant set of circumstances.

Yet to be heard from are two other renal denervation market competitors: Boston Scientific, which spent $425 million to acquire Vessix in late 2012, and VC-funded startup Kona Medical which is developing a noninvasive ultrasound-based technology.

Takeaways: There is enormous pressure on medical device companies these days to identify, enter, and dominate new markets. Unproven therapies and technologies will always engender risk. Since most innovation is done at startups now, it will be interesting to see how risk mitigation occurs in future acquisitions or if there were any mitigations included in the Medtronic or Covidien deals.

If you are a startup executive or founder, you can look forward to more stringent diligence and a longer wait before investment or acquisition by strategic partners. There may also be more contingencies requiring technical and clinical milestones to be achieved before milestone payments are made. Make sure you have a good general counsel attorney and CFO. You are going to need them.