The Theranos wake-up call: You can’t ‘fake it till you make it’ in biotech

Fiona Law, partner and patent attorney at IP law firm Potter Clarkson, reflects on the lessons the Theranos case teaches us about patents, confidence and being a female founder.

Talk in the biotech community has lasered on whether the Theranos case has set the sector back. It was a tale of caution for many investors and it is easy to think that they might be more reluctant to pour money into biotech start-ups.

That is not necessarily the case. Instead, it has sharpened their focus on due diligence.

I get to work with talented biotech founders – many of them women – and like many, I followed the rise and fall of Elizabeth Holmes with great interest. The story is both a warning sign, and a reminder to look carefully at the intangible assets when valuing a company.

Part of my job is preparing founders for pitching to investors. The number one thing I am trying to teach the female founders I work with is to be more confident. This is especially true for specialist sectors like life sciences.

While male founders tend to oversell their company and technology, women are reluctant to shout about their achievements. As a result, they often miss out on crucial investment and this can halt progress in sectors such as femtech, where the companies are predominantly run by women.

A few days ago, in its State of European Tech report, Atomico revealed that a meagre one per cent of overall VC funding went to female-only founding teams this year, a two per cent decrease from 2021. This is a massive problem that the industry needs to address, for example through encouraging more women to enter the ecosystem, both in investor and advisory roles.

The funding problem is also partly linked to women’s tendency to downplay their accomplishments, rather than shouting about them.

I believe that investors also need to look very carefully at how they are framing questions to women founders as opposed to their male counterparts, to ensure gender parity and to allow for the inherent personality differences.

For example, “Don’t you see competitor X as a massive threat to your business?” is more adversarial and negative than simply asking, “What is your strategy for dealing with any threat that competitor X may pose”?

That is one of the reasons why Theranos’ rise was so fascinating. A woman who confidently claimed her company’s blood testing technology would revolutionise the US healthcare system. With her bold strapline and conviction, she was an inspiration to many female founders.

 

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Seeing a female-founded company valued at US$9bn, back in 2015 when Silicon Valley was even more heavily male-dominated, was a breath of fresh air.

However, while many female founders could do with an injection of chutzpah when speaking to investors, Holmes has become the poster child for taking it too far. She may have taken inspiration from Steve Jobs, but what she failed to see is that selling iPhones isn’t the same as selling blood tests.

You can’t “fake it until you make it” in biotech, where people’s health and the regulations that protect them are sacrosanct. A brand and the promise of life-enhancing technology, with an allowance for some major glitches along the way, just doesn’t wash.

You need verifiable data backed up by a defensible and protectable intellectual property strategy which can be a combination of patents, trade secrets and data.

As a patent attorney, it is particularly frustrating to see a case such as Theranos cast doubt on the industry, and on female founders, especially confident ones.  IP due diligence should have revealed serious red flags.

Theranos had granted patents on their devices, which may have given investors a false sense of security, but commercially-focused IP due diligence should have taken into account the regulatory strategy and looked more deeply at the patents, rather than just seeing if they exist.

The lack of regulatory approval and the absence of supporting data in the patent applications should have prompted further investigation. The fact that Holmes also named herself as an inventor on so many patent applications when she was not doing the research should have raised a red flag about her personal integrity.

Although it is a cautionary tale, Theranos’ story actually provides an opportunity to educate founders, and investors, about the importance of having a solid IP strategy and seeking professional advice on how and when to tackle this.

Founders should ensure they’re focused on protecting their intellectual property from the get-go. They should be able to clearly articulate to investors how their patents will map to any regulatory approval and how the data support the invention. Investors should always look beneath the surface of a patent.

As someone at the centre of healthtech innovation, I can assure you investors are still on the lookout for promising start-ups. Now though, they will look far closer at the technology, and indeed intellectual property, underpinning the company’s value. This is no bad thing.

I like to compare the process to selling a car. The allure of polished bodywork and shiny alloy wheels may draw a buyer in, but they’ll want to know what features it has, how smooth the ride will be and what guarantees it comes with. The same rules apply to healthtech founders.

Holmes was something of an isolated case. There are still plenty of founders working on exciting technologies to solve some of our biggest health issues, and it is important we encourage them.

Any innovation within healthtech is fundamentally a positive because it’s propelling the market forward and data-driven services and products stand to have the biggest impact. The data demonstrate true innovation, which is far more likely to earn scientific appeal and investor interest, rather than aesthetics.

It’s never been easy, even less so in the current climate, so let’s not make it harder. We need to make sure confidence is not a dirty word and that female founders get the support they need to ensure it’s well-placed and verifiable.

 

Fiona Law is a partner and patent attorney at the IP law firm Potter Clarkson.