Thursday, March 15, 2018

Matt Levine: The Blood Unicorn Theranos Was Just a Fairy Tale (9 footnotes!)

Bloomberg View, March 14:

Founder Elizabeth Holmes spun a beautiful fantasy for investors, not so much for patients. 
It has been pretty obvious for a few years now that Theranos Inc. was a huge fraud. Theranos is a blood-testing startup that developed devices, which it called "TSPUs" and "miniLabs," that were supposed to be able to do a wide range of laboratory tests on a finger-prick blood sample. It seems like Theranos founder Elizabeth Holmes really wanted to build devices that would actually do these things, and thought she could, and tried to. But it didn't work, and Theranos ran out of time: It talked Walgreens into offering Theranos tests at its stores, 1 but "it became clear to Holmes that the miniLab would not be ready" in time for the Walgreens rollout. 
So she went with Plan B: "Theranos never used its miniLab for patient testing in its clinical laboratory," but did a dozen tests on the earlier-generation Theranos TSPU, 50 to 60 more tests on blood-test-analysis devices that it bought from other companies and modified to take finger-prick samples, and "the remaining 100-plus tests it offered" on regular unmodified devices bought from other companies or sent out to third-party laboratories. Meanwhile Theranos and Holmes were going around giving interviews about how revolutionary their technology was, without ever mentioning that it didn't work and they didn't use it. This got them a lot of favorable press and a $9 billion valuation, which went on for a while until the Wall Street Journal's John Carreyrou reported in 2015 that the product didn't work and that Theranos was lying about using it, after which Theranos fairly quickly collapsed. 
But the fact that Theranos was a gigantic fraud doesn't quite mean that it committed fraud. It isn't exactly fraud to go around lying to journalists. 2 People do it all the time! If you decide that you want to be a celebrity, and that the easiest path to fame is by convincing people that you've found a magical new blood test, you can lie about that to your heart's content, and if you fool people then that's their problem, not yours. Undeserved celebrity is a central fact of American life; if it was illegal to lie your way to fame then our politics, for one thing, would be very different. 
It becomes fraud in the legal sense if you use those lies to get money. 3  Theranos, in parallel with being a massive fraud, was also raising a lot of money. I used to refer to it pretty regularly as the Blood Unicorn, Elasmotherium haimatos, because it was a Silicon Valley unicorn with a peak valuation of $9 billion that managed to raise $700 million from investors. If you are going around lying publicly about your technology while also raising hundreds of millions of dollars from investors, that certainly suggests that you were defrauding those investors. But it's not a certainty. Theranos wasn't a public company; it raised all that money in negotiated private fundraising rounds where investors received disclosure documents and had the opportunity to conduct due diligence. Perhaps while it was going around talking up its fake product to the press, it was simultaneously giving investors thorough disclosure documents that made clear exactly where its technology stood and exactly what were the risks to its business. Perhaps the investors knew that the technology wasn't ready yet, but invested in the company anyway because they believed that it would be ready one day, and they were kept sufficiently informed of the actual progress for that to be a reasonable belief. This would be a bit of a strange way to roll -- telling self-flattering lies to the press while giving your investors the unvarnished truth 4 -- but it is not impossible, and it would give Theranos a defense against fraud charges. 
But no, no, that's not what happened at all. Instead the Securities and Exchange Commission today brought fraud charges against Holmes, Theranos and its former president, Sunny Balwani, and its complaint alleges pretty strongly that the investors were just as bamboozled as everybody else. In fact, Theranos made direct use of its positive press to raise money: It "sent investors a binder of background materials," which included "articles and profiles about Theranos, including the 2013 and 2014 articles from The Wall Street Journal, Wired, and Fortune that were written after Holmes provided them with interviews" and that included her misleading claims about the state of Theranos's technology....MORE, so much more.
HT: FT Alphaville's Further Reading post