Does the equity crowdsourcing model provide a viable solution to the limitations of expert opinion?

This piece is written by Jerry Harrison, Co-Founder & CEO of Redcrow, an equity crowdfunding portal focused specifically on funding innovative healthcare startups.

The recent court decisions about Theranos made me consider the ways that investors make decisions about investments and whether the process that we have assembled at RedCrow might have provided added caution to the inherent risks.  In the case of Theranos, I believe that later capital followed well-respected early investors with the expectation that those earlier investors’ vetting process would have revealed any weaknesses in the claims that Theranos was asserting.  The addition of the political heavy weights: George Schultz, Henry Kissinger, Sam Nunn, Secretary of Defense Jim Mattis, and William Perry gave the company a seemingly unimpeachable seal of approval.

The confidence in Theranos’ assertions began to unravel when George Schultz’ grandson, Tyler Schultz, who worked at the company contacted Elizabeth Holmes about his concerns that “Theranos had doctored research and ignored failed quality-control checks.” 1 (This quote comes from John Carryeou’s fascinating Wall Street Journal expose on November 18, 2016, which gives a great timeline of how the company rose so far and then fell.) I recommend reading Mr. Carryou’s article but for my purpose, it is the failure of expert opinion to properly expose the risk, which is essential and not the details of where the failure took place.

There have been many other spectacular and expensive failures of expert opinion in the last few years:  the misreading of the Iraq’s intent and progress on building a nuclear arsenal by almost all the intelligence operations of the NATO alliance cost trillions of dollars and many thousands of lives as well as the conviction that real estate prices would perpetually rise, which was the fundamental assumption which proved to be wrong and provoked the financial crisis of 2008.  Though there were of course many other examples of sloppy and casual analysis, which made the crisis even worse.

So what can be added to the advice of experts to make predicting success more accurate?  At RedCrow we believe that the combination of expert advice combined with crowd sourcing will lead to better outcomes.  The principle of crowd sourcing is that asking for advice from the eventual consumers or users of a product will help guide the process.  The company, Garageband, I cofounded in the ‘90’s took this approach with popular music. The televisions shows American Idol and The Voice have used this model to not only have successful shows, but also to help launch many successful careers.

While thinking about the companies that would be raising funds on the RedCrow site, it was apparent that there was a unique opportunity with medical startups, for the very same group who would be informed, early investors were the ideal group to ask for commentary on the science and market applicability of the inventions: i.e. doctors, nurses and hospital administrators.  Furthermore, these same doctors were the very inventors of the new products or, as they has become known, doctorpreneurs. This group would know if an invention made sense in their practices, their hospitals, their operating room, for their patients. Finally, these investors are “investing in wh at they know.” They are the first expert to weigh in with their opinion and intuition that they have spent a lifetime developing; they have spent the “10,000 hours” developing this knowledge.

To return to Theranos, how would this dispersed and expanded network have cautioned investors.  The first way would be skepticism about the difficulty of running many tests on a very small sample of blood.  There will of course be times where new inventions do upset conventional wisdom, but if one saw a great deal of skepticism, it would prompt investors to ask for more independent testing of the science.  But later in the cycle there was a new opportunity for verification: when Theranos claimed that it’s tests were being used in the field by the military in Afghanistan. Here just the commentary from a medic or helicopter pilot who actually was stationed in Afghanistan could have set off the alarm bells, for at RedCrow we want the opinions of the entire chain of people who will be using a given product, from the doctors, nurses, therapists, and finally to the patients who will be using these products to have healthier and more productive lives.