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Secrets and Lies in a Silicon Valley Startup

How venture capitalists rushed to judgement and blind ambition can hurt the public.

The story of Theranos is the Silicon Valley equivalent of the Enron scandal replete with bold claims, high valuations, defrauding of investors and terrible corporate governance. Theranos promised to revolutionize healthcare by painlessly performing hundreds of tests on a single drop of blood.

In 2015, Theranos was a unicorn valued at $9 billion. By 2018, the company shut down and Elizabeth faced a ten-year ban from serving as an officer of a public company. Theranos serves as a cautionary tale of what can go wrong with a ‘fake it till you make it’ approach to building a company.

TOP 20 INSIGHTS

  1. At the age of ten, Elizabeth Holmes was determined to become a billionaire entrepreneur, an ambition her parents strongly encouraged. To achieve this, she dreamt of designing technology that changed the lives of people.
  2. Elizabeth dropped out of Stanford to start Theranos. The vision was to build a portable device that would painlessly perform hundreds of tests on a few drops of blood.
  3. Steve Jobs was a huge inspiration for Elizabeth who called Theranos “the iPod of healthcare.” She began to imitate Jobs in her management style and even in wearing black turtlenecks every day to work. “Like her idol Steve Jobs, she emitted a reality distortion field that forced people to momentarily suspend disbelief.”
  4. Avie Tevanian, a board member, grew suspicious about Theranos. Revenue projections never materialized, documents for deals with pharma giants were not shown and there were consistent product delays. When Avie raised this with the board, Theranos threatened him with lawsuits and forced him to quit.
  5. When the board again received similar complaints, Elizabeth was asked to step down. However, she managed to win the board back, a difficult feat even for seasoned CEO’s. “When you strike at the king, you must kill him.” In this case, the queen survived and the complainant was fired next week.
  6. Toxic Culture: Elizabeth indulged in nepotism by hiring her romantic partner Sunny Balwani as the Executive Vice Chairman, a vaguely defined role with sweeping powers. The Board was not informed about their relationship and the vast scope of Sunny’s role. Elizabeth also hired her brother Christian and his friends, none of whom had any relevant background.
  7. Toxic Culture: Theranos blocked online communication and spied on employee conversations and social media posts. Sunny used a fear and intimidation-based approach harassing employees he disliked. Employees suspected of not being ‘loyal enough’ were fired on some pretense.
  8. Red Flag: Elizabeth managed to convince Pfizer to use Theranos devices in a patient trial. However, the collaboration soon came to an end as the devices had frequent mechanical failures, wireless transmission errors and poor temperature tolerance. There were issues with test results as well.
  9. Turning Point: Theranos landed mega-deals with Walgreens, a massive pharmacy store chain and Safeway, one of America’s largest supermarket chains. Both companies bet big on this collaboration. However, the partnership was marked by Theranos missing deadline after deadline.
  10. Red Flag: Theranos promised its devices could perform 192 different tests while they could barely do a dozen. To meet the Walgreens deadline, Theranos hacked commercially available blood testing devices and used them for testing. The test results had dangerously high error rates.
  11. Turning point: Theranos’s stellar board, the Walgreens and Safeway deals, a potential defense contract and highly inflated revenue projections raised investor expectations. A new fundraising round made Theranos a unicorn, valued at an astonishing $9 billion. Elizabeth, now worth $5 billion, became Silicon Valley royalty.
  12. John Carreyrou, Wall Street Journal journalist and the book’s author, discovered that Theranos’s performed its tests on hacked commercial machines. Doctors shared horror stories of faulty test results creating health scares and needless suffering for many patients. “The way Theranos is operating is like trying to build a bus while you’re driving the bus. Someone is going to get killed.”
  13. Theranos tried to scuttle John’s investigation by sending legal notices and threatening emails to his sources and Wall Street Journal. Elizabeth convinced Rupert Murdoch, the owner of Wall Street Journal, to invest $125 million in Theranos. Using this, she tried to get him to kill John’s story, but Murdoch refused.
  14. John wanted to publish quickly. But the paper’s editor advised patience. He likened investigative journalism to la mattanza, a Sicilian ritual where fishermen with spears would stand in the water for hours. When the fish grew comfortable and carelessly swam close, they would swiftly go for the kill.
  15. Turning Point: The Wall Street Journal carried John’s articles exposing how Theranos ran tests on hacked devices. Subsequent pieces revealed that Walgreens and Safeway had terminated their partnership with Theranos. Throughout all this, Elizabeth played the wronged visionary, claiming false allegations were the price she had to pay for being a pioneer.
  16. An investigation by Centers for Medicare & Medicaid Services (CMS) confirmed that Theranos used hacked devices and test results were highly unreliable. Theranos was forced to void over a million test results paying $4.65 million in reimbursements. What is unimaginable, however, is the damage that could have been caused had Theranos rolled out nationwide.
  17. Investors sued Theranos, Elizabeth and Sunny for deceit. Walgreens filed a lawsuit for violation of basic quality standards and legal requirements. The Securities Exchange Commission charged Theranos with fraud and barred Elizabeth from holding office in public companies for ten years. She was forced to give up voting control and most of her shares in Theranos.
  18. Red Flag: “Hyping your product to get funding while concealing your true progress and hoping that reality will eventually catch up to the hype continues to be tolerated in the tech industry.” However, in healthcare the costs were far higher. Millions of lives were at risk as treatment decisions are made based on lab results.
  19. Culture Alert: Elizabeth knew exactly what she was doing and systematically manipulated people. Her ambition would not admit setbacks. She made disastrous decisions that cost Theranos, the investors and the general public dearly.
  20. The story of Theranos is a cautionary tale. Watch out for similar warning signs in your organization and the companies you work with. Your career or business might be at stake.

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A Breakthrough for Equity Crowdfunding.

The rules for equity crowdfunding, whereby an entrepreneur can raise money by selling a piece of his or her company for cash, changed in May. It’s been a hot topic since then. And to address this nascent and still as of yet largely misunderstood category of startup finance, the organizers of the Nashville-based startup conference, 3686 South, gathered a group of all-star experts to discuss these new rule changes.

Rules went into effect in May such that anyone with the cash and interest can invest in startups through equity crowdfunding. Prior to the rule change, only accredited investors could participate in equity crowdfunding.

5.5

“What this has done is really allowed for more pools of money to be available to entrepreneurs, so that’s the really big news about all of this,” says Geri Stengel, founder and president of Ventureneer, a digital media and market research company that, among other issues, specializes in crowdfunding. “Only about 1 percent of all small businesses will raise venture capital. Only about 3 to 4 percent will raise angel investment,” says Stengel, who is sitting far left on the couch.Equity crowdfunding is expected to provide a fundraising alternative for ventures such as yoga studios, restaurants or other various main street businesses.

Stengel is joined on stage by Doug Ellenoff, a corporate and securities attorney with a specialty in business transactions and corporate financing who has been actively involved in working with federal government agencies as the rules are being rewritten, and Pelli Wang (on the right end of the couch), the venture director at SeedInvest, a leading equity crowdfunding platform and early-stage VC fund.

To be sure, equity crowdfunding is not going to steamroll over other sorts of startup financing. “It’s not intended to replace venture capital. If you can get venture capital, God bless you. That’s wonderful, that means you are in a rarified group of profiled companies that are exciting to the VCs,” Ellenoff says. “But for many other thousands of entrepreneurs that have started up, they are only looking to find a few hundred thousand dollars, Title III (the provision of the law referring to equity crowdfunding) is a wonderful opportunity.

Equity crowdfunding also gives a lot more individuals in the U.S. access to startup investing.  “For most of the last 80 years, venture as an asset class has been really difficult for the average investor to get in, unless you are a high net worth individual, unless you get the deal flow, you are part of an angel group or you invest into VCs, you just didn’t have access into this asset class,” Wang says. “It’s a great way to get into an asset class that previously was barred.”

To watch the full panel – https://www.entrepreneur.com/video/277605.  Article written by Cat Clifford of Entrepreneur Magazine, who acted as panel moderator.