
Sustaining Investment in Brain Health: The Dangers of Information Asymmetry
Information asymmetry occurs when one party has more or better information than the other party. Asymmetry and fraud will sour investor interest in the field.
COMMENTARY
Elizabeth Holmes of the blood testing company Theranos, who is being tried for 12 charges of wire fraud and conspiracy to commit wire fraud, serves as a sobering reminder of the importance of due diligence.1 Theranos’s many esteemed investors were not unscrupulous, just unaware. Holmes’s case is one of information asymmetry, in which 1 party has information that the other does not. Holmes knew she was selling snake oil; her investors did not.
This asymmetry creates an imbalance of power and can lead to negative results, spanning from poor decision making on the part of the less informed party, all the way to providing an opportunity for exploitation and unethical behavior (
The opportunity for information asymmetry to lead to fraud is particularly alarming. According to
We believe that brain health technologies will add monumental value to human society in the coming decades. However, if entrepreneurs and investors are not on the same page, information asymmetry could impede development of the brain health technology company space.
Information Overload
The problem of information asymmetry is exacerbated by ever-growing information overload. In 1971, before the advent of the internet and social media, the prominent Nobel Prize winning economist
The problem of information overload is particularly acute in brain health technology investing. There has been a
The effect of such information overload is to amplify information asymmetry. Sunstein, in
Insufficient Due Diligence
Because of the immense complexity of neuroscience, it is particularly vulnerable to such asymmetry. Complex neuroscience principles, technology, and
As a result, investors and customers are arguably more reliant on views of others and are consequently vulnerable. Who do nontechnical investors turn to when evaluating a neuroscience company? In some cases, they may consult experts in the field. Often, however, they may simply trust the due diligence of earlier investors. Current capital markets and funds (private equity and venture capital) have so much money that free riding is increasingly common. Large firms count on the due diligence of smaller funds (or early-stage investors), who in turn count on the reputation of the big firms. Thus, mistakes and oversights from early investors might not always be rectified in future investment rounds.
Moreover, the rapidity of the current market environment maximizes asymmetries. Building a trusting and robust relationship with founders over time used to be the usual way for an investor to gain access to reliable and accurate information. Over time, investors observe consistencies and inconsistencies in narratives and presented factors and data. However, deals are closed so quickly and fear of missing out is widespread among investors, therefore effective diligence cannot be completed.
Overzealous Marketing
The relationship between marketing and the product is another source of information asymmetry. Overemphasis on marketing without product development—a staple of the Silicon Valley “fake it till you make it” mentality—may distract from an unvalidated or poorly validated product. In some cases, as with Theranos, “the emperor has no clothes,” and the product is nonfunctional. Of course, when communications to customers and investors paints a rosier picture than the truth of product development, this leads to further information asymmetry. From a product-market fit perspective, there are many novel market segments and a rapidly evolving brain health landscape. Only select people may understand these product-market fit dynamics, enabling information asymmetry to arise between key stakeholders.
Entrepreneurs may have a monopoly of knowledge over the different market activities and thus spin or even withhold relevant and accurate information.
In particular, market activities are often overplayed by entrepreneurs. It is important for investors to discern the difference between conversations in the market, unpaid pilots, paid pilots, commercial contracts, and revenue from commercial contracts. However, entrepreneurs often inaccurately portray these activities in conversations with investors (eg, claim unpaid or one-off pilots as commercial contracts). Entrepreneurs may have a monopoly of knowledge over the different market activities and thus spin or even withhold relevant and accurate information.
The disconnect between revenue and valuation may also present information asymmetry between founders and employees. Potential employees without a comprehensive understanding of startups may not understand how a brain health technology company may be worth millions or billions of dollars, and yet have minimal or no revenue. Entrepreneurs also may charismatically explain inaccurate revenue projects and withhold information from potential employees. Subsequently, potential employees may accept jobs and take on more risk than they would otherwise feel comfortable with if they comprehensively understood the current state of the startup.
Cognitive Biases
Finally, we would be remiss not to mention that cognitive biases may worsen information asymmetries. For instance,
Looking Ahead
Action is required to mitigate information asymmetry in brain health companies, or else brain health technology could suffer. For one, the field should encourage more advertising of failures and accurate analysis of how they could have been avoided. Additionally, to mitigate cognitive biases like overconfidence, training in
To work toward addressing the current global brain health challenges, continued investment and interest is needed in the brain health space. We cannot afford to turn a blind eye to problems stemming from information asymmetry. As with the case of
Ms Smith is a director at the PRODEO Institute, an Atlantic Fellow in Brain Health Equity at the Global Brain Health Institute (GBHI) at the University of California, San Francisco (UCSF) and a Thiel Fellow at Stanford University. Mr Heinemeyer is cofounder of the PRODEO Institute and CEO of PRODEO. Dr Wolfe is a Senior Clinical Advisor for Cohen Veterans Bioscience’s Trauma Research Programs. She serves as Strategic Advisor co-leading CVB’s Suicide Strategy Initiative. Mr Asher is an undergraduate studying neuroscience at Dartmouth College. Dr Abbott is a corporate attorney, a professor of law at University of Surrey and an adjunct professor with the UCLA David Geffen School of Medicine. Dr Hynes isa senior advisor to the Organisation for Economic Co-Operation and Development (OECD) Secretary General, head of the New Approaches to Economic Challenges Unit (NAEC), and co-lead of the OECD-PRODEO Institute Neuroscience-inspired Policy Initiative (NIPI).Dr Aragam is Chief Commercial Officer with Stanford University’s Brainstorm Lab and adjunct faculty with the Massachusetts General Hospital, affiliated with Harvard University. Dr Fu is a technologist, venture capitalist and an adjunct professor in engineering at Stanford University. Mr Veron is venture capitalist, founder and managing partner at Newfund Capital. Dr Berk is Alfred Deakin Professor of Psychiatry at Deakin University and director of IMPACT at Deakin University (Institute for Mental and Physical Health and Clinical Translation). Ms Chen is a venture capitalist and an adjunct faculty member at UC Berkeley and Singularity University. Dr Lyons is a venture capitalist, managing director at Newline Ventures and Adjunct Professor in Management Science & Engineering and Civil & Environmental Engineering, Stanford University. Mr Ellsworth is an undergraduate studying computer science at Stanford University. Dr Eyre is cofounder of the PRODEO Institute, colead of the OECD NIPI, and holds adjuncts roles with IMPACT at Deakin University, GBHI at UCSF and Baylor College of Medicine.
References
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