Blood Unicorn

A few years back, Elizabeth Holmes topped the list of the wealthiest self-made American women. The blood-testing startup she founded, Theranos, was worth billions. As was Holmes. And then it turned out that the girl-genius’ invention didn’t quite work as claimed, and the value of her company plummeted from $9B to less than one-tenth that amount. The new value of her company was, in fact, just about on the money ($800M vs. $724M) with the amount that had been invested in it by “smart money” hoping that there was a unicorn in all that blood.

For a while there, Holmes was a real golden girl, running around getting all sorts of super press, which helped pump her company’s valuation sky high. She was, it appears, quite an excellent bullshitter. She may well have believed her own BS, but BS she did. But as has been pointed out, there’s nothing illegal about lying to the press. Unfortunately for Holmes, it is illegal to lie to potential investors.

To back up a minute: Theranos had supposedly developed a blood-testing device that was supposed to be able to take a finger prick’s worth of blood and perform hundreds of tests on it. Immediately. This would, of course, revolutionize blood sampling. No more vials taken out of the best vein in your left arm. No more waiting for the blood to be sent out to a lab and wait some more for the results. You could just go into Walgreen’s – where Theranos had a big deal going – and get the job done on the spot.

Too bad it didn’t work.

Which didn’t stop Holmes from pretending it did. She used earlier versions of her product, devices from other companies, and even sent samples out the old-fashioned way to external labs, to fake up an elaborate “show and tell” that was light on the actual “show,” but pretty heavy on the “tell.”

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. (Source: Bloomberg)

That’s when Holmes fell off of her perch on the self-made rich lady list.

But just because the company was a fraud didn’t mean that fraud had been committed.

It becomes fraud in the legal sense if you use those lies to get money. Theranos, in parallel with being a massive fraud, was also raising a lot of money… 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.

Could be that, as Bloomberg writer Matt Levine so wonderfully and facetiously speculates, while Holmes was going around self- and company-aggrandizing, she was making it quite clear to her investors that – heh, heh – the technology behind the talking points wasn’t exactly – heh, heh – what it was supposed to be. Investors would then have a better idea of the risks they were taking. 

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.

Theranos also faked up demos. And forecasted revenues that were orders upon orders of magnitude more than the revenues that were actually realized. I’m quite familiar with those miracle-occurs-here hockey stick forecasts, in which all of a sudden low, sluggish revenues go sky-high the next year. But nothing along the lines of what Theranos tried to pull off: forecasting $100M for one year when in actuality the revenues for that year amounted to $100K. Nobody with one shred of intelligence and/or sanity and/or integrity can be off by that much, no matter how loonily optimistic.

The SEC has weighed in and declared that real, honest to goodness (dishonest to badness?) fraud had taken place.

Theranos and Holmes settled with the SEC without admitting or denying the allegations; Balwani will apparently fight the accusations. Holmes agreed to pay a $500,000 penalty to the SEC, "return" 18.9 million Theranos shares to the company and relinquish her super-voting control, and be barred from serving as a public-company director or officer for 10 years.

$500K seems pretty featherweight, given that the bamboozlement amounted to nearly $800M. Apples and oranges, but Martha Stewart went to prison for 5 months for what amounted to some relatively penny ante insider trading. Like Elizabeth Holmes, Martha Stewart is a pretty blonde. The difference? Martha Stewart was in her sixties when she was issued her orange jumpsuit and sent up the river; Holmes is in her thirties. Hmmmm. Just hmmmm.

Anyway, I really can’t imagine, pretty blonde or not, that Elizabeth Holmes has to worry about “serving as a public-company director or officer for 10 years.” Really, who in their right mind…

Meanwhile, as Levine points out in his article, bad enough that Elizabeth Holmes was defrauding her investors. Theranos was “performing a lot of fake blood tests.”

The Wall Street Journal has reported on the “trail of agonized patients” who got blood-test results from Theranos that turned out to be wrong, and Theranos ultimately “voided” two years of results from its machines because they were not sufficiently accurate.

Bullshitting the press. Defrauding investors. Building a “trail of agonized patients.”

I’m guessing that the next time Elizabeth Holmes decides to become rich and famous, she’s going to have a harder time getting rich or famous. Can’t get blood out of a stone. Or out of a Holmesian unicorn. Sometimes a myth is just a myth.

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Earlier post on Elizabeth Holmes/Theranos.