Anne Wojcicki and 23andMe learned a costly lesson in how to deal with federal regulators.

Silicon Valley Learns to Think Inside the Box

Lanhee Chen is a research fellow at the Hoover Institution who also teaches public policy at Stanford University. He was the policy director of Mitt Romney's 2012 presidential campaign.
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Late last year, the Food and Drug Administration decided to take down a rapidly growing Silicon Valley startup called 23andMe Inc., a personal genomics and biotechnology company backed in part by Google Ventures and Russian venture capitalist Yuri Milner. The FDA ordered 23andMe to stop marketing health results from its genetic information product after a lengthy colloquy with the company that (according to the agency) lasted four years and included dozens of meetings, written communications and hundreds of e-mail exchanges.

What was perplexing about the case was the decision by 23andMe to ignore the regulators in the six months before the cease-and-desist order. There were no phone calls, letters or conversations (again, according to the agency) in this period. When the FDA forbade the company from selling its headline product, the reaction was mostly unanimous: It didn't have to be this way.

Having moved to Silicon Valley last year to accept academic appointments at the Hoover Institution and Stanford University after years in and around policy making and politics in Washington, I've observed firsthand the intellectual and cultural differences between Silicon Valley and the nation's capital.

While I wasn't privy to the interactions between 23andMe and the agency, the episode seemed to suggest that some entrepreneurs, venture capitalists and others around Silicon Valley misunderstood a few things about Washington and the regulatory process. With 23andMe's announcement last month that it was moving forward again -- and interacting with the FDA as required -- what lessons have we learned in the eight months since the agency's action against the company?

First, federal regulators, particularly those who work in the civil service, generally proceed from the assumption that they have the authority to reach regulatory "gray spaces." It doesn't matter that entrepreneurs and investors think regulators have no business (or, frankly, the legal authority) to reach the conclusions they reach. In contrast, regulators often believe they can and should be regulating a given set of activities. Thus they will begin to do so, forcing a venture to prove them wrong.

This appears to be the trap that 23andMe fell into. The company repeatedly argued that people had a right to see their own genetic information, free from government interference, even though the FDA has held the position since 2010 that the genetic tests are medical devices and therefore rightfully regulated under the Federal Food, Drug and Cosmetic Act. The FDA's position isn't exactly ironclad, yet it is close enough that significant engagement with the agency was needed to stave off regulatory action against 23andMe.

A contrast to 23andMe is Theranos Inc., a company that has pioneered technology to perform blood tests more quickly and less painfully and intrusively than conventional exams. A recent profile of the company noted that it has employed a "take no chances" approach by seeking FDA approval for every one of its tests. The company isn't obligated to do this, but it may make regulators think twice about moving into the "gray spaces" where Theranos may be operating.

The second lesson is that in Washington, process trumps everything -- a mind-set that is foreign to Silicon Valley. In fact, I've heard a number of entrepreneurs express this sentiment: We don't really care about what policy makers think because we have the better product, or better idea, and at the end of the day, better will always win. This view wrongly assumes that Washington functions on merit alone.

The reality is that federal regulators need to be courted assiduously. Rules must be followed, deadlines must be observed, and relationships carefully cultivated.

In regulated industries as diverse as pharmaceuticals and banking, incumbent companies understand the need to do this. Companies such as Pfizer Inc. and Citigroup Inc. have perfected the art of using Washington as a shield rather than seeing it as an obstacle. Smaller or newer ventures operating in regulated industries should recognize that even a small nod toward the value of process will go a long way.

Finally, you can't always solve a problem in Washington just by throwing more money at it. This is particularly true for early-stage or smaller ventures operating in regulated industries, because they simply don't have the capital to spend engaging regulators in the way that larger or more mature enterprises such as Facebook Inc., Google Inc. and, most recently, Uber Technologies Inc. do.

It's entirely possible that 23andMe learned after four years of fruitless discussion that money doesn't always buy you the outcome you want -- and that is what prompted its executives to stop engaging with the FDA. Thus, they may have decided at some point not to throw good money after bad. Unfortunately for 23andMe, the FDA made the decision to impose a costly penalty for its silence.

Corrects description of FDA order in first paragraph.

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