“And I know I’m fakin’ it, I’m not really makin’ it.” –Simon & Garfunkle
I purposefully waited a few weeks after the Elizabeth Holmes verdict before weighing in on the entire Theranos debacle. The reason: I want to distinguish between 3 issues:
1) Outright “fraud”
2) the hustle subculture known as “fake it till you make it”
3) the Venture Capital strategy of buying into the idea of an as yet unproven technology.
We all know about fraud: From Enron to Bernie Madoff to the GFC Fraudclosure, finance has had endless examples. If you do not know what Fraud is you probably cannot afford to pay for internet access to read this, as the fraudsters will have already emptied out your bank account.
“Fake it til you make it” was not about criminality, it was more about an attitude. It was part of ye olde Wall Street (watch the 1987 movie), and manifest as a false bravado that served to hide a green broker’s lack of expertise. There was a distinct pecking order on Wall Street among traders, brokers, bankers, and others in finance; showing a little bit of confidence might at least get you a phone call or a meeting to make your sales pitch.
But I do not believe that showing a little brio is remotely similar to that what took place at Theranos. As was revealed by John Carreyrou in his WSJ reporting and in his book “Bad Blood,” the founders had no expertise, no promising technology, no medical training. Reading the book, it appears the foundation of the entire enterprise was built upon a mix of wishful thinking and self-deception. (See Red Flags Everywhere).
Venture capital seeks to invest in products of tomorrow, services that very often do not exist yet. Skillful VCs have some ideas about where markets and demand might be a few years out, and (cliché alert) they skate to where the puck will be. But it is a very different thing to make a wager about one possible future, which by design is highly likely to fail versus outright fraud. Building out an idea that does not find a market is one thing, but it’s quite different from lying about a medical product that simply cannot do what you claim, never could, and has no basis in reality.
There are endless good ideas out there that might not be financially lucrative to create: Lots of apps and consumer products and software programs and others. The entire biotech space is populated with companies whose new molecules or novel techniques might — if it were to get sufficient funding to run endless tests — cure or even resolve a particular health issue. Or not, we really do not know until we have more development in the lab and much more testing.
That was not what occurred with Holmes. Theranos engaged in fraud, misled investors, and put people’s actual health at risk in pretending their machines did what they could not.
It is not a surprise she got caught; given all the red flags the real surprise is that she got away with it for as long as she did. For that, we need to look to her enablers . . .
The Bad Blood at Theranos (May 30, 2018)
MiB: John Carreyrou author of Bad Blood, on Theranos (July 21, 2018)
Transcript: John Carreyrou on Theranos (July 22, 2018)
Red Flags Everywhere
1. The founder had no medical training, no medical-device experience and no health-care background; nor did the firm’s second-in-command.
2. None of the (original) directors came from the medical-devices or health-care industries.
3. No outside investors were allowed to closely examine the company’s machines; there were no peer reviewed papers covering the medical breakthroughs the company claimed.
4. Secrecy at Theranos was excessive — much more extensive than the usual tech nondisclosure agreements.
5. Staff turnover was extremely high; the chief financial officer left early in the company’s life.
6. Venture capitalists with experience in medical devices, health care or biotech all took a pass on investing in Theranos.
7. Early pilot programs with well-known health-care and medical companies were either not renewed or terminated outright.
8. Promised reports on the proprietary technology’s performance were never delivered, despite repeated promises from the CEO.
9. Threats of litigation against former employees and staff were aggressive and rampant.
10. The board had no control; Holmes held 99 percent of voting shares; the board was stocked with faded stars of yesteryear, many in their 80s and 90s.