How Theranos Duped Wall Street

| October 15, 2017

We live in a world where promises are never modest. The best example is “Go big or go home,” a long-standing phrase in the technology world which indicates that conservative actions don’t lead to huge rewards.

But there’s another phrase that you should be aware of when you ingest your daily dose of media. It’s something you can picture Sam Elliott (you know him as the cowboy narrator in The Big Lebowski) saying as he takes a knowing pull on his beer. That phrase is “All Hat and No Cattle,” which is a description of someone who is all talk and no substance, or a company that can’t back up its hype.

We see echoes of hats and cattle in every press release. Breathless descriptions of innovative, world-changing and market-leading companies dominate each announcement, sometimes bleeding into the actual news reports.

For the less discerning, that’s deceiving. Worse, when such hype is believed by the company founders, it can spell trouble for you as an investor and those you hope to help through impact investing. Look no further than a company called Theranos for a classic example of what can go wrong when big dreams and good intentions meet reality.

Theranos was a health-tech company run by the striking Elizabeth Holmes, a tall blonde who favored turtleneck sweaters to create a Steve Jobs-like image. Theranos promised no less than a healthcare revolution, delivering blood tests with a pain-free solution at a cost less than half the Medicare reimbursement rate.

The company boasted a stunning collection of big names on its board. Former Secretary of State Henry Kissinger, former Secretary of Defense Bill Perry, former Secretary of State George Schultz, and ex-senators Sam Nunn and Bill Frist, the latter a surgeon. Plus, the board included honchos from Wells Fargo and Bechtel, among others.

Surely, we all thought, these wise men lending their good name and time to the product meant that prosperity was just around the corner.

There were other backers, of course. Renowned venture capitalists Tim Draper and Steve Jurvetson put their money into Theranos, part of an army of investors that eventually grew $700 million strong. Marc Andreeseen of Netscape fame called Holmes the next Steve Jobs. There followed a flood of TV interviews, magazine covers, and speaking engagements at high-profile events for Holmes, who was a PR person’s dream – a striking female entrepreneur whose baritone voice and driven focus promised to change the world.

Yet no one stopped to ask some fundamental questions of Theranos, like how they achieved a technological breakthrough that had eluded the best minds of generations past. Perhaps that reluctance can be ascribed to company policy – Theranos had a notoriously spooky corporate culture, requiring an iron-clad cone of silence from its workers. It also kept things in strict silos, often telling new recruits that their duties would only be explained after their hire, not before.

Thus, no one was quite sure how they were going to achieve what they promised. But all the hoopla seemed reassuring.


Finally, the truth emerged. A scathing Wall Street Journal investigative story spelled it out: Theranos technology that was going to “change the world” didn’t really work (or even exist, in some cases), and it relied on competitor equipment to achieve the few results it could muster.

Things unraveled from there. The Wall Street Journal went on to write more than two dozen articles about problems at the company. Walgreens ended its deal with Theranos for a series of Wellness Centers. The Food and Drug Administration banned the company from using its Edison device, which purportedly did blood work analysis based on a single drop. The centers for Medicare and Medicaid Services banned Holmes from owning or running a medical lab for two years (currently under appeal). Then there were civil and criminal investigations and class-action fraud lawsuits.

Forbes added insult to injury. In 2015, she was on their list of the wealthiest Americans with a net worth of $4.5 billion. Last year, Forbes said she was worth 0.0 – that’s nothing-point-nothing, as in, no money at all. While no one expects companies to be completely open – after all, the competition is always listening –  it’s a sign of good faith when they commit to providing information that helps you make a solid judgment on their effectiveness. It establishes a level of trust that what they claim is backed by evidence. We all want to know if our products are produced by workers slaving away under harsh conditions. We all need to know if our food contains GMO content.

A shining example of openness is outerwear company Patagonia. It takes a proactive approach, providing illumination through its “Footprint Chronicles,” a series of videos that show how each product in their online catalog is created. When a customer clicks on an item, they can see the textile mills and factories used to create the item and can view information about the general supply chain.  The company also invites feedback from its customers on how it can improve if there’s fault to be found in the processes of any product. Beyond a company’s willingness to disclose, how can the investor cut through the clutter of information and misinformation? Theranos, it appears now, may have been an out-and-out fraud, based on the reports and government actions. Just like Enron, the energy giant that used shifting accounting to mask its faults, Theranos moved its shell pieces around so fast that the average investor had to rely on others to validate its claims. It took one brave person to stand up and actually look for evidence to knock down the entire house of cards.

The moral of the story is to be cautious. When you’re considering an impact investment, it’s easy to believe the hype. But a cold, hard eye on what someone actually does rather than what they promise to do is needed, particularly with technology.

Theranos promised to deliver a breakthrough on something that seemed clinically impossible.  To question that would have required a quick study on the prior methodologies of blood testing. It would also require some skepticism and some proof – something that the tightly controlled Theranos refused to provide beyond its claims.

There’s an old axiom of journalism that applies to real-world investing: If your mother says she loves you, check it out. That means asking some tough questions, and refusing to settle for vague answers. Your money and attention are precious commodities. They need to be rationed with care.