Theranos Business Model
Healthcare is, was and will always be a Rage within the StartUp community! It should be ofcourse, because of the large portion of the population that can’t even afford bare minimum medicare, Healthcare is a big issue and problem, that if solved, will become a Decacorn (a Ten Billion USD+ valued startup). Let’s get to see Theranos Business Model which was up until now a secret.
One such Decacorn StartUp is “Theranos” which has been a part of negative media for many reasons, be it the hideously vague ways of measuring 100s of parameters from just “One Drop of Blood” or its Mis-Representation of facts and figures to investors in the famed IPO of Theranos or the even the Accuracy of the Results or for the founder – Elizabeth Holmes! Theranos Business Model has a secret sauce to it which many look upon to, here it is.
Please Note, this is one of those business model examples, which people consider disruptive on account of the business belonging to a never ending market – health tech.
[Update: Oct’2016: Theranos has discontinued this business model as of now and has fired 400 employees and now wants to get into the business of self test kits.]
Elizabeth Holmes and Sunny Balwani (Left May 2016).
Theranos raised $6.9 million by 2004, the first $1 million wad done by Tim Draper of Draper Fisher Jurvetson (DFJ).
They raised $16 million in two rounds of initial fundraising & $28.5 million in a third round in 2006.
In 2010, Theranos raised $45 million from a single unnamed investor.
Total funding of more than $400 million. Investors included ATA Ventures, Tako Ventures, Continental Properties Inc., and Larry Ellison.
As of the latest IPO Buzz, Theranos Business Model has propelled it and is valued at $9.2 Billion (As per the SEC Filings, Lizzie is anyways in Trouble and under SEC Investigation for Policy Abuse or some sh*t like that – People are claiming this is the biggest Fraud that PE industry has seen happen with them – hahaha, Seems they have not heard what happened at IndiaHomes). Theranos in Value is only to StemCentrx (Cancer Stem Cell Cure StartUp). The beauty to note here is Lizzie has just raised under 500 million USD and reached a staggering valuation of 9+ Billion and has kept more than 40% of the company with her, Simply Legendary!
[Update: As of July 2016, the valuation of Theranos was slashed by 90% by all of their investors, and Elizabeth Holme’s Networth was marked down from 4.5$ Billion to ZERO. This was on Account of a Fradulent Practice that Theranos was following.]
Theranos Business Model
Before knowing what’s the secret of Theranos Business Model, we must first know what it does and how it does it
(Hint: how it does it is the secret, so read carefully)
What does Theranos Do: Theranos business model primarily lies in the tech or nano tech that they have developed for preventive check ups. Theranos is a Health Tech Company, which builds Hardware, Software and the Technology to analyze blood and other bio samples for various tests prescribed by Doctors, for hundreds of tests, just from a single drop of blood. It is called as Prick Report (Prick your finger, get a drop of blood and analyze for all major tests there are).
One thing to note here is that not only the tests that are prescribed by the doctors are done here, but since the tests are accessible and easy (available everywhere) people generally get it done on their own will for small tests that they want to keep track of because Theranos makes Healthcare easy and affordable. Theranos’ innovation actually ensures that clinical lab testing is done faster, cheaper, and better than the existing chains.
Theranos Business Model is well something that is faster, cheaper and better and will actually disrupt the industry. Well Theranos has, in many ways, disrupted the healthtech market, and that is the reason she has been under fire from the media, the health industry and diagnostics chain nexus (mafia) who have claimed that the tests done by Theranos are ineffective etc etc. All this is because she is bringing the average spend on Health Tests by the consumer down, the mafia will not make money as much as they used to.
Theranos’ Market Development Strategy
Holmes has put together a board of directors that is as a leading magazine described “what may be, in terms of public service, the most illustrious board in U.S. corporate history.” The board members are a retd. Navy admiral, a Marine Corps General Guy, former US Senators, Wells Fargo Ex-CEO and two former secretaries of state. This was done so that she has control over the Drug Trials that her technology was put through by the FDA.
How does Theranos Manage to do so many tests with limited amount of Blood Sample?
Well from my understanding, I have seen this exact same thing happening with Chemistry – Acidity Tests and Alakalinity Tests (I’m a Chemistry Masters 🙂 ). What really happens is that if you want to test out the Acidity of the Sample given to you, you will not need the entire Jar to do it – You will get a small portion of the product, you dilute it with Water or any other thing that does not alter its base properties, you note down how much did you dilute the sample.
For e.g. if you had 10 ml of sample and you need atleast 100 ml to test it out, you simply add 90 ml of water, so the properties and components would be diluted in the ratio of 1:10 (10ml out of total 100 ml). I think it works in a similar way with Blood Samples as well.
This is what Lizzie says about her company: “We can perform hundreds of tests, from standard to sophisticated, from a pinprick and tiny sample of blood, and we have performed more than 70 tests from a single tiny sample”.
How does Theranos Make Money
Now that we know how Theranos works lets get on to business. It is pretty simple, you analyze blood samples for patients and get money out of it, how to make money out of it is pretty simple, you mark up the MRP over your testing and distribution cost and bam! you’ve made your money.
Theranos Business Model is marking the price up to 100% of its cost. The typical mark up on blood tests is 66% (yes, 2/3rds). So if the Test costs you 300$ – You make 200$ as operating margin (Pre Tax and Interest).
Theranos has a distribution model in place (yes, unheard for a diagnostics company). There is someone called as “WalGreens” (Big Box Store) where there is a corner pharmacy which sells medicines, and since Theranos’ tests are tech enabled, they need just a chair in that pharmacy to collect samples and give out tests. These WalGreens act as collection centers (avoid real estate costs).
[Update: As of July 2016, WalGreens have Terminated this Partnership on account of Fradulent practices by Theranos]
Theranos has been conducting tests for GSK and Pfizer and several hospitals (Hospitals send out complex test blood samples out of their own labs).
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So via these collection centers, Theranos makes money and shares a certain percentage of the revenue with them.
How Theranos can Make Money?
Theranos Business Model can be tweaked to also make money via licensing their technology to larger chains, hospitals (capture the lab and share a cut with the hospital), sell franchisees to collect samples and do an 20:80 with them. Their Business Model Example is one such example which can thrive on unsettling biggies in the industry and making it big.
This is it Guys! :-).
Disclaimer: The understanding of the Theranos Business Model is of the Author’s himself, neither any investor, banker or VC (local or global) or qualified consultants or the company have confirmed or explained the same to the author and the descriptions, stats, facts and figures, if used, are either obtained through secondary web research or interrogation of relevant search professionals or other resources on the web. Please use your own discretion to use this info when required and by continuing to read, you agree to indemnify the author & Unicornomy from the entire liability arising out of using this info on your own