In the late 1990s, Elizabeth Holmes was in middle school. Her scandal-beset company Theranos–which promised to use amazing advances in a hybrid scientific field of microfluidics to detect multiple conditions from a single drop of blood–didn’t exist.

But at the University of Washington, bioengineer Paul Yager was using microfluidics to develop paper-based assays that he hoped would detect pathogens with just a nasal swab. And like Holmes did later, he also saw the potential in making these tests directly accessible to patients. He was ahead of his time. Investment dollars and talented post-docs went instead to big labs working on big, traditional testing machinery. And now he worries that his life’s work will suffer collateral damage from Theranos’ abuse of trust. Investors, he says, are already acting cagier towards him. He calls it, “the Theranos crater.”

The crater analogy is apt: Theranos blew up in the middle of the biotech world. Anybody looking to raise capital for their new diagnostic technology will likely have to answer tougher questions from more skeptical investors. And nobody working on point-of-care diagnostics can make a promise like Holmes’ 70-tests-from-one-drop rhetoric. But even without magic blood machines, point-of-care diagnostic investing is looking up. So while Theranos may have made it harder for some researchers to fund their ideas, the company also proved that the biotech market is ripe for point-of-care diagnostics.

John Waldeisen is the CEO and Co-founder of Diassess, a diagnostics start-up that raised an undisclosed but “significant” amount in its Series A last October–right around the time the Wall Street Journal exposed Theranos’ internal struggles to the world. He sees the (now) ex-deals with Walgreens and Safeway as a sign that things aren’t as bad as they seem. “These two huge giants clearly see the opportunity here,” he says. “And you have to believe that Theranos catalyzed that excitement. Now that they’re relinquishing their position, it’s anyone’s game.”

And that game is a long one. Diassess has been around for three years, making quick and easy DNA testing for chemical, forensic, agricultural, and industrial applications. Things like ID’ing oil field bacteria, or running genetic tests on a farmer’s corn crop right there in the row. Diassess has been trying to source as many diagnostic opportunities as possible, even as they continue to develop the real moneymakers: Rapid, cheap point-of-care tests for STIs like chlamydia and HPV.

Compared to Theranos, Diassess is pretty small potatoes. They’ve publicly disclosed having raised only $120,000 so far, not counting the Series A. But they have something that Theranos didn’t: rigorous oversight telling them their tech actually works. That’s because since 2012 they’ve received $2.5 million to develop their products through prestigious grants from the NIH and the NSF. As a condition of the grants, Diassess has been submitting data to the NIH three times a year for the last three years, as they prepare to head into FDA clinical trials. “Submitting yourself and your technology to that level of scrutiny is very useful,” says Waldeisen. “It’s helped us justify our successes to investors and provide firm grounding that the technology is very real.”

Diassess is putting the horse before the cart, but that is no guarantee that the cart will fill with money. According to the Journal’s reporting, Theranos raised the bulk of its money from venture capital firms with little biotech experience. The company was part of a bigger trend, says Andrew Lee, co-founder of StartX Med, Stanford’s medical and biotech incubator. “People have taken money from general tech investors who don’t have much biotech experience but want to play in the biotech landscape,” he says. This kind of reckless investment has Lee and others worried that biotech has been captured by Silicon Valley’s hype cycle. “Tech and software have been getting more and more saturated and so people want to do something more meaningful, deploy in the medical health space to see if they can make a difference. And it’s those people who are wary now that Theranos has gone the way it has.”

That means companies that really want to make a difference have to strike a balance between innovating and overpromising. In practical terms, at one end you have the slow, rigorous federal research grant process; and a fevered Series A funding round at the other. Andrew Ellington, a University of Texas biochemist developing DNA computing systems to diagnose diseases like Zika, SARS, MERS, and Ebola with pregnancy kits and other off-the-shelf products, says playing both ends of the spectrum requires nuanced strategies.

For example, Ellington has also earned NIH funding for his diagnostic research. And while he credits the agency with trying to push the technological edge despite massive budget cuts, he admits that the federal granting process often moves too slowly for real innovation. To make up for it, he has licensed his technologies out to a local company–Paratus Diagnostics–for commercialization. “I grew up in a system that rewards your ability to come up with great ideas over a 20-30 period,” he says. “That’s so different from being able to take a great idea from the lab to market in two to three years. So that disconnect between academia and the corporate world, I try to make it less stark, while still recognizing the cultural barriers.”

Paul Yager, the University of Washington bioengineer who has been working on microfluidics since the 1990s, says he’s had no trouble getting federal money or hard data to show his technology works. It’s been a bit harder for him to find a commercial partner. General Electric showed interest a few years back, but then later got cold feet. Yager’s still trying to see out of the Theranos crater, but he doesn’t blame Silicon Valley. “People want to invest in a big way, make a splash, get their name on the wall,” he says. “But it would be nice to get people who grew up in software development to put things in their portfolio that might not make them a lot of money, and might actually make a difference.”

That’s the thing about craters: Scorched earth leaves a lot of room to grow.

5 Comments

  1. Another_Lurker

    Biotech savvy VCs passed on Theranos. The Theranos debacle actually probably helps those startups with competent leadership and technical skills and knowledge. Theranos had neither. Anyone in the biotechnology field knows ultimately your devices, tests, drugs, etc. most pass muster with regulatory agencies worldwide. These agencies have similar requirements.

  2. Are those on sale now? I need XLT…

  3. ThatsJustHowISeeIt

    They were good for turtleneck sales.

  4. Was everything theranos did no good?

  5. If you’re not selling snake oil, how is it a problem? Ms. Holmes is representative of that portion of the tech crowd who don’t have a real product, but still want a lick of the sweet sweet venture capital. These clowns are here because so much money is available to tech bros who talk a good line but have no viable product; the Valley is a classic boom town. Biotech is the one sector that will still be going strong when the bubble pops and all the Candyville and Instabook clones go under.

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