Disruption is a word that gets thrown around annoyingly often in Silicon Valley, and more often than not, it's used imprecisely.
In the original sense, as coined by Clayton Christensen, a disruptive product either creates a new market or undermines an existing one, typically with an offering that's inferior to existing products but cheap enough to be attractive anyway. Think of the no-frills Japanese cars of the 1970s. Or an Airbnb listing for a foldout couch.
Although she's as fond of the word as any of her peers, Theranos founder Elizabeth Holmes has never presented her company as that kind of classic low-end disrupter. Her technology was supposedly an improvement on conventional blood-testing methods, requiring only a drop or two from a fingertip prick rather than a needle jabbed into a vein. By making blood tests faster and less painful, she promised to reduce the cost of an individual test while increasing the size of the overall market for lab tests. What's not to like?
It turned out, however, that Theranos was more of a classic disrupter than it cared to admit.
In the past six months, it's become increasingly clear the startup had been overhyping the accuracy of the tests performed by its proprietary Edison devices and misrepresenting the extent of their use. In other words, Theranos was indeed peddling an inferior low-end product, only without positioning it that way.
Now, regulators at the Centers for Medicare and Medicaid Services want to put a stop to that by revoking the company's federal license and banning its top two executives, Holmes and president Sunny Balwani, from running any kind of lab for two years. Nothing that CMS has not yet taken definitive action, a Theranos spokeswoman says the prospect of any kind of sanctions being imposed is "very, very hypothetical," and that Holmes's role at Theranos would be largely unaffected, even in the worst case scenario. Theranos would also have a chance to appeal any sanctions imposed. Even so, there's an increasingly real chance the biotech startup and its $9 billion valuation could end up in the biohazard bin.
Would-be disrupters typically look for opportunities in industries where structural factors--unions, monopolies, regulatory red tape--make for large, easily exploited inefficiencies. Superficially, health care looks like one of those vulnerable industries.
The problem is the same regulations that make health care ripe for disruption also make it hostile territory for disrupters. A company like Uber can take on the taxi industry, flying under the radar at first, operating in jurisdictions where the law is unclear, adding consumer protections and other concessions to the powers that be on an as-needed basis. The worst that happens is the company gets kicked out of a market for a few months, until consumers petition to let it back in.
Health care doesn't work like that. The agencies that regulate it have real teeth, and nothing happens in an ad hoc way. There's no such thing as an "open beta" to work out the bugs, because a bug in a new drug or medical device means people die. That's true in blood testing, too: Among the problems with Theranos's technology was a faulty test used to determine the proper dosage of blood thinners to give a patient. CMS said patients prescribed blood thinners based on their Theranos results were in "immediate jeopardy."
Because the costs of bringing new products to market are so high, health care investors are conservative about who they'll back. When I interviewed the young founders of Emerald Therapeutics last year, they told me one biotech VC they pitched flatly told them, "We don't hire CEOs under 50." When I surveyed the bumper crop of startups inspired by the Affordable Care Act, I found almost all of them, even the "non-medicals," had a co-founder, board member, or key adviser with a deep background in medicine or public health.
"In health care, you really have to find the hyperexpert, because it is so complex," Honor founder Seth Sternberg told me.
When Holmes founded Theranos, she was a 19-year-old Stanford dropout. Balwani has an MBA and training in computer science. Theranos's board of directors is famously full of people with experience in government and the military but only two outside directors have any background in medicine or science. (And one of them is former Tennessee senator Bill Frist.)
There's a reason almost no other health care startup's leadership looks like this. Pairing huge amounts of capital with minimal experience may be a great recipe for innovation in social media apps and on-demand services. But in health care, a little knowledge is a dangerous thing.