Earlier this month, Zenefits joined Theranos and 23andMe on the list of Silicon Valley startups to run afoul of regulators. Some commentators refer to the situation at large as Silicon Valley’s Waterloo. The headline is certainly catchy – especially for someone who likes to think of himself as an amateur historian – but it misses the overall point.
First, some background. Theranos and 23andMe came under fire for failing to comply with Food and Drug Administration (FDA) requests for information about the efficacy of their blood and personal genome testing, respectively. Theranos also faces scrutiny for not explaining the science behind its proprietary testing technology – and for having to use existing technology when its own systems weren’t working.
Zenefits, an online health insurance broker, is in deeper trouble. Under the direction of co-founder and CEO Patrick Conrad, the company wrote a macro that let sales staff bypass 52 hours of mandatory training required by California law and, under penalty of perjury, sign their state insurance broker licenses. Conrad resigned, those who wrote the macro were terminated, and the company has agreed to cooperate with state officials. Oh, and new CEO David Sacks had to tell employees to stop having sex in the stairwells.
Getting back to the metaphor, these three startups and countless others instead are hitting a figurative Great Wall of China rather than facing defeat at Waterloo (and risking a life of exile in Elba). There are two reasons for this.
First, most healthcare startups trace their origins to a single problem that a single patient (the founder) encounters in his or her singular journey through the healthcare system. Elizabeth Holmes didn’t like big needles that drew a lot of blood for simple lab analysis, so she founded Theranos on the premise that a single drop of blood could be used for complex lab analysis.
It’s a great idea. So are the vast majority of the apps and devices to emerge from the Bay Area, New York City, Greater Boston, the Research Triangle, and everywhere else that innovation is happening. Unfortunately, there’s a step in between coming up with an idea and changing the world.
That’s where the second reason comes into play. Innovation is all about breaking the rules. Healthcare is clamoring for something, anything that will make it easier and cheaper to buy insurance, test blood, or study genes – or book an appointment, find a doctor, refill a prescription, get a referral, talk to a medical professional, read test results, etc.
However, breaking the rules is one thing. Breaking regulations is another. As a kindergartner, you can color outside the lines – but you can’t break your crayons, rip up the coloring book, run out of the classroom, and play on the monkey bars without expecting to get into trouble. As a healthcare startup, you can color outside the lines of genetic testing, blood testing, and buying insurance – but you can’t flout the regulations of the industry you intend to disrupt without expecting to get into trouble.
23andMe, Theranos, and Zenefits broke the rules and the regulations – and they’re paying the price. Zenefits may never recover. Theranos is trying to. 23andMe very well might, having learned that cooperating with the FDA works a lot better than defying it (and by focusing on ancestry first and health second).
The three firms are not emblematic of healthcare startups – or, for that matter, of egomaniacal emperors hell-bent on conquering Europe. All in all, Silicon Valley is starting to grow up and understand that healthcare is nearly impossible to disrupt from the outside. Reaching consumers is important, but provider partners mean much more for the long-term viability of startups. Sure, there are long sales cycles and skeptical stakeholders, but healthcare organizations increasingly see the value in partnering with emerging firms who have a bright idea about how to break the rules – while staying within the regulations – and improve care quality.
The next time a healthcare startup feels like it faces its own personal Waterloo, it should step back, realize it’s only facing a Great Wall, and search in earnest for a like-minded partner for guidance.
After all, once you get to the end of the Great Wall of China, all you need to do to get to the other side is swim around it.
 If you’d like, I’d be happy to loan you a copy of my graduate thesis, “Great Britain’s First Common Market Application: The Commonwealth, the United States, and Charles de Gaulle.” The next person to read it will be the fifth; the first three were my thesis advisers, and the fourth was my father (or so he says).