Tech

Silicon Valley's health-tech start-ups need to stop getting in so much trouble

Key Points
  • Theranos, uBiome  and Nurx have all grabbed headlines for all the wrong reasons.
  • Venture firms are eager to find money-making opportunities in the $3.5 trillion U.S. health-care industry.
  • Health-tech companies need to focus more on medical rigor and less on growth. 
The FBI raided uBiome's San Francisco office on April 25

In Silicon Valley, Mark Zuckerberg's declaration that engineers have to "move fast and break things" has been adopted by many start-ups that are trying to shake up the status quo.

But in health care, entrepreneurs are learning the hard way that such an approach can be quite destructive. This is an industry that, above all else, requires trust between companies, patients, practitioners and investors.

Just this month, several reports surfaced about venture-backed consumer health companies taking problematic and perhaps illegal paths to growth. Nurx, a provider of birth control medications that's raised $41 million, was reportedly storing pills in a shoe organizer hanging in the closet. SmartGut test maker uBiome, which has pulled in more than $100 million in venture funding, was raided by the FBI last week for its billing practices. And that's just this month.

Health-tech is a hot space for venture firms, which see a $3.5-trillion industry filled with tons of bloat, inefficiencies and unhappy customers. Advancements in software and artificial intelligence along with new ways for health brands to go directly to consumers have investors believing that there are plenty of opportunities to build big businesses.

As we're finding out, there's a lot that has to change. When lives are on the line, there's little room for growth hacking or the approach of "fake it til you make it." Theranos is everyone's favorite example of that, but Elizabeth Holmes is far from the only bad actor.

Elizabeth Holmes, former CEO of Theranos leaves the Robert F. Peckham courthouse with her attorney after her arraignment in San Jose on June 14th, 2018.
CNBC

"The growth at all costs mindset isn't going to work in this space," said Billy Deitch, an investor at Oak HC/FT, a venture firm that focuses on health. "We have to also make sure the patient outcomes are there, and that we can show results."

The uBiome raid was related to the company's practice of billing customers multiple times without their consent. On Wednesday, uBiome said that its co-CEOs and founders Jessica Richman and Zac Apte were put on "administrative leave" and that the board would launch an independent investigation into the company's handling of users' bills.

Almost every week, there's a new case of Medicare fraud (not always involving start-ups), much of it due to fraudulent billing. But we don't hear about many of them because they don't tend to result in FBI agents knocking down doors of high-profile companies.

Deitch has some recommendations for investors going into the health-tech space. For one, they should pay as much attention to the chief medical officer as the chief revenue officer. And they also have to make clear that key performance indicators aren't solely about sales and user growth.

Medical experts are key

The most sophisticated of the emerging players in the industry are focused on building evidence to support their medical claims before going public with them, a practice that takes a hefty amount of time and investment compared to other industries. Virta Health and Omada Health, which are focused on diabetes, are taking that tactic, as is Big Health, which is working to help people with insomnia.

These start-ups all have medical experts on their teams and in their investor base, so there's a clear understanding that they have to be patient to build successful businesses.

Founders and CEOs have to be different too. Young college dropouts who thrive in some level of reckless abandon aren't so desirable in areas that require medical experience and an ability to empathize with the needs of patients.

"Given that lots of Silicon Valley heritage, especially in last twenty years, has been around consumer and enterprise software, that has set a certain level of generally accepted norms of aggressiveness that people need to understand are not universal," said Othman Laraki, CEO health-tech company Color Genomics.

WATCH: Theranos founder Elizabeth Holmes leaves courthouse after hearing

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Theranos Founder Elizabeth Holmes leaves courthouse after hearing