T

he much ballyhooed rise and sudden demise of Theranos is a cautionary tale for anyone interested in investing in early-stage biotechnology companies.

The main lesson is not “Stay on the sidelines.” Instead, it’s invest with your eyes wide open. If we are going tackle major challenges in fighting disease, early-stage investors must continue to invest in breakthrough science and technology startups.

Every day I see how early-stage investing can advance companies founded on a strong scientific discovery or meaningful engineering innovation. The capital provided helps move what would have lingered in the lab more quickly toward commercialization. While early-stage investors — whether they are angel investors or venture capitalists — commit to companies that often carry high technology risk, it’s possible to take steps to understand and mitigate some of that risk. Here are two principles that can guide smarter investments in deep technology: understand the science and the data behind it; and take a disciplined, results-driven approach to funding based on milestones.

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Show me the data

Every science and technology investor should ask, and ask again, the one question that really matters: Where are the data? This is even more important for early-stage investors.

Ask for evidence that the proposed system works, or will work in the future. Sure, the evidence may be sparse and the company may be young, but some evidence must exist or there is no sound basis for the company’s existence. In Silicon Valley, founders are often put on pedestals above the science, and people invest in the founder’s courage, vision, and determination to succeed. But the odds of success become long if there is no scientific proof behind the claims.

Investors need to do a thorough job exploring and verifying the science underpinning the company. You don’t have to be a scientist yourself to successfully do this, you just need to know what to look for.

Talk to experts. Find scientists or entrepreneurs in similar fields and others who understand the subject deeply and who would be willing to help you do the same. Ask questions about whether the technology actually works. I know that might seem obvious, but many investors failed to do that with Theranos.

Ask for published papers. Scientific papers are a great source of information. Since they are often peer reviewed, they’ve already been vetted by experts.

Verify the intellectual property. Looking at filed or granted patents is another way to dig into the viability of a particular “breakthrough.” Patents won’t necessarily tell you that the technology works — only evidence from experimental data will tell you that — but they can at least clarify what intellectual property exists and who owns it.

Tie funding to results

Startup investing tends to be driven by momentum and celebrity. As soon as a startup secures backing from a prominent investor, everybody else wants in, too, even if the data are lagging. That’s a problem, especially if the science has yet to mature.

It’s best to stage investment according to progress, just as a construction loan is subject to meeting project milestones. Specialist life science venture capitalists do a great job of managing these stages because they understand the process, which is based on the scientific method and experimental results. It’s a good idea to understand that process before making investments.

Successful companies typically publish papers, their founders tend to be thought leaders in their fields, and they recruit substantive scientific advisory boards. Although I am not privy to internal processes at Theranos, I do know its employees and advisors didn’t publish many scientific papers. Instead, there was a lot of secrecy around their “innovation” rather than publicly shared progress milestones or published data from tests. Company CEO Elizabeth Holmes may have been a media darling but she can’t be considered a true thought leader by the usual standards. The Theranos board consisted of luminaries, but none of them were poised to provide guidance on either the diagnostic science the company was pursuing, or on growing a life sciences business.

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Venture capitalists typically invest in several rounds, each round comprising a chunk of money that will be used toward meeting specific milestones. Additional funding is unlocked when companies meet these milestones. This didn’t happen in the Theranos case, where investors piled on early, despite several red flags.

Funding biotech and science companies based on milestones instead of hype best serves early-stage investors and the startups they support. This kind of rational approach ensures that we help companies advance as they show real progress toward the promise they are trying to unlock, rather than set them up for failure.

Swati Chaturvedi is the founder and CEO of Propel(x), an online investment platform that brings together investors, startups, and experts to support and invest in breakthrough technologies.

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