I review Bad Blood: Secrets and Lies in a Silicon Valley Startup by John Carreyrou (Knopf). It tells the story of Theranos, led by the charming and attractive Elizabeth Holmes, which developed the Edison, a machine they claimed could run hundreds of laboratory test on a single drop of blood from a finger stick. At its height, the company was valued at $9B. But alas, the technology never existed, and Holmes is now under criminal indictment. This will go down in the Madoff class of scams.
RMD comment: When I was in med school in the mid-70s, “low blood” was a term for anemia. “High blood” was high blood pressure. “Bad blood” was syphilis. After reading this book, you’ll see that “Bad Blood” was the perfect choice for the title.
When she was 9 or 10, a relative asked Holmes what she wanted to do when she grew up. “I want to be a billionaire” she replied instantly. When she played Monopoly, when she was ahead, they played to the end. When she lost, she stormed out of the room.
RMD comment: OK so far. Nothing wrong with being aggressive, or wanting to make a lot of money. One of my mother’s favorite stories was when I was 3 or 4, I said that when I grew up I wanted to own the money tree. The trick is how you get there.
She dropped out of Stanford at age 19 to start the company Real-Time Cures, which quickly changed its name in 2004 to Theranos, a combination of “therapy” and “diagnose”. Her initial idea was a skin patch that could draw tiny amounts of blood and diagnose and treat medical conditions, then transmit the results to your doctor. This bordered on science fiction. Her focus then changed to the Edison machine.
RMD comment: When JFK took office in 1961, he pledged we would put a man on the moon before the end of the decade. We did. When Nixon was president, we would win the war on cancer. More than 4 decades later, despite amazing progress, we haven’t. What’s the difference? We already had the technology to put a man on the moon, it was just getting it done. We still don’t have the technology to beat cancer, and Theranos never had the technology to run hundreds of test on one drop of blood.
From the beginning, there was high employee turnover, both among the rank and file and among executives. “I don’t care” said Holmes. “We can change people in and out. The company is all that matters”.
RMD comment: Not a way to get and keep the best, honest, hard-working employees.
Holmes would present increasingly rosy revenue projections that never materialized. A board member asked to see the contracts. “Copies weren’t readily available”. There were repeated delays with the product rollout, with the explanation(s) for what needed to be fixed constantly changing.
RMD comment: This is the standard shuck and jive of a hustle. You were told this, but it’s that. You want to see that? Sorry. Mistakes happen all the time, but the cause is usually obvious. When someone purposefully lies to me, I’m done with them. “Fool me once, shame on you. Fool me twice, shame on me”.
By early 2008, several employees had voiced concerns to board members (3 seasoned businessmen and one scientist) that they were being misled about the finances of the company and the state of the technology. At an emergency board meeting, a consensus was reached to remove Holmes as CEO. She was called in, and over the next 2 hours, the 24 year old convinced them to change their minds.
RMD comment: Scamsters have one thing in common: they are persuasive. How else could they hoodwink otherwise intelligent people? It takes a strong, independent mind to see through and stand up to such people. Watch the 1931 Dracula movie. Only Van Helsing can resist Dracula’s gaze and near-hypnotic power.
The employees who complained to the board were canned within 2 weeks.
By 2013, the Board of Directors included 90+ year old former Sect. of State George Schultz, Gen. (now Sect. of Defense) James Mattis, 90+ year old former Sect. of State Henry Kissinger, former Sect of Defense Wm. Perry, former Sen. Sam Nunn (D-GA), and Ret. Admiral Gary Roughead.
RMD comment; all men (yes, all men) of the highest character and achievement. And that’s why they were on the Board: awesome names, glitz, and political connections, but little acumen for this company.
If I were running a high-tech medical instrument company, I would have people from business, health care, tech and finance on the Board. Ex: Medtronic (MDT). The Board includes an MD, a PhD president of an engineering school, 5 businessmen, 2 financiers, the retired CEO of J&J, and an ex-governor who started out as a healthcare CEO.
I have nothing but the highest respect for those who serve in the military, but consider this as it relates to being on the Board of a large company. The Board of MDT meets 6 times a year for 2 days, for which they receive approx. $300K, about one-half in cash, one-half in stock. This is a significant amount of money, but is actually only a fraction of what these Board members receive in their full-time position. Compare this to a general: $300K is 50% more than they made in their best year.
There are many more points worthy of discussion. I’ll finish this up in an Interim Bulletin and in next weekend’s regular Newsletter. I suggest you read this book for yourself. It’s worthy of your time.
In both editions of The Physician’s Guide to Investing: A Practical Approach to Building Wealth, I profile Peter Lynch of Fidelity Magellan fame (see One Up on Wall Street, Beating the Street, and Learn to Earn). Lynch was great at evaluating the fundamentals of a company and recognizing trends, but he would also watch for older companies when they broke out to a new high. On Friday, Proctor and Gamble (PG, see chart) reported their best quarter in 5 years and was up almost 9% for the week.
RMD comment: don’t anticipate. It’s usually best to wait for the breakout.
I received some comments regarding the scooters.
1) A banker noted a student could do particularly well charging scooters if they lived in a dorm or fraternity, where they didn’t have to pay directly for the electricity.
RMD comment: I thought of that but didn’t include it.
2) Scooters enthusiasts are similar to skateboarders of 10 years ago, with the tattoos, pierced ears, and funny clothes. That said, I’m constantly aggravated by cyclists. They desire the same space as motorists, but move slower than farm equipment. When the streets aren’t to their liking, they take to the sidewalks, and expect the same rights as pedestrians.