A truism among early-stage investors is that “you don’t invest in technologies, you invest in people”. The idea is that a smart, resourceful team will find a way to succeed, even if their technology crashes hard on the rocks of reality. Great leaders, the thinking goes, will always find a way forward.
That’s not a bad mantra for investing. After a few years at my first biotech company (NeXagen), it became clear that we were still many years away from creating a revenue-generating product. This prospect made our principal investors (Warburg-Pincus) very unhappy. Our CEO, Pat Mahaffy, engineered a merger with a product-stage company (Vestar, another W-P investee). The combined company (NeXstar) was sold a couple of years later to Gilead for $550M, making Warburg much happier.
Pat hated the unpredictability of R&D and vowed never again to take the risks required to develop a technology. Rather than search for new drugs, which is risky and expensive, his plan was to repurpose old ones. Given his track record, he had no trouble raising cash for Pharmion, the new venture. Pharmion repurposed thalidomide (yes, the birth-defect drug) as a cancer treatment, and the company was sold to Celgene for $2.9B in 2007. Those who bet on Mahaffy won big.
The concept of investing in people, rather than technology, is sound. The difficulty lies in reliably determining just who you should invest in.
Theranos’ investors were happy to let Holmes keep control of the company because without her, there was no company. Theranos/Holmes never demonstrated a compelling proof-of-concept of their technology, at least not one that would have withstood cursory due diligence; they never even came up with a coherent explanation of how it could work. Anyone who invested was investing strictly on their judgement that Holmes was a star, and would eventually succeed. I’m sure she convinced many investors to see a younger version of themselves in her. Her lack of a track record, in this case, was an asset–it enabled projection and wish-casting on to a blank and mysterious slate.
We can all snicker now about the naivety of supposed grown-ups throwing money at a young, unproven college dropout. We know how that turned out. But even investing in certified top-notch CEOs with a string of successes to their credit is no sure thing.
After Pharmion, Pat Mahaffy had no trouble raising funds for his next venture, Clovis Oncology. Investors begged for the opportunity to give him their money. He was a repeat superstar, the closest thing to a sure thing. But Clovis stumbled repeatedly, and Pat was found by the SEC to have misled investors about the efficacy of its lung cancer drug candidate, resulting in a $20M fine.
Despite its superstar CEO – one who really had delivered the goods – Clovis has gone basically nowhere, and lied to its investors to boot. There is just no sure and certain formula for investing in biotech—it’s all a crapshoot.