Theranos News

Just a brief update on the ongoing Theranos story. Hopefully in a week or so I'll actually have the time to write something substantial on this again. 

First, Walgreens is suing Theranos for $140 million. Walgreens was the company that had the deal with Theranos to use their Edison blood testing for patients in their stores, and this deal was one of the key reasons Theranos were taken seriously. This is a major blow, and along with the investor lawsuit for near $100 million, and the eight class action lawsuits they have, puts them at good odds of all the money in the bank disappearing in settlements and legal fees. 

Then, Tim Draper, one of the original VCs to invest in Theranos, continues to defend Elizabeth Holmes and starts playing both the victim and sexism cards on her behalf. It's somewhat ridiculous at this stage, and I don't know if it signifies desperation, denial, or delusion.

Finally, another fantastic piece by John Carryrou on the whistleblower on Theranos - the 26 year old grandson of former Secretary of State (and Theranos Board Member) George Schultz. To summarise, he worked at the company and began to question the effectiveness, legality, and safety of what they were doing, reported his concerns up the chain within Theranos, got a beatdown from the COO, left, went to the authorities to inform them, and met with intense intimidation from the Theranos legal team. 

And what was his reward for his good behaviour? $400,000 of legal bills and lost contact with his grandfather. It makes clear that any excuses that the youth of a founder/CEO excuses them from understanding the ethical and legal consequences of their actions are nonsense, and that whether the person in charge is 19, 39, or 99, they are capable of knowing right from wrong. More importantly, though, is that this article should make clear the answer the question "Why are so few people whistleblowers?"

Quick Updates: Theranos and Energous

Annoyingly busy and unable to post in detail until later, however two key stories in the press in the last 24 hours. First up, Theranos, where a current investor is now suing the company. Partner Fund Management LP (PFM), who invested $96 million in Theranos in Feb 2014 claim that:

“Through a series of lies, material misstatements, and omissions, the defendants engaged in securities fraud and other violations by fraudulently inducing PFM to invest and maintain its investment in the company,”

Further

Elizabeth Holmes and a former executive deceived the hedge fund by claiming it had developed “proprietary technologies that worked,” and was close to getting regulatory approvals.

Who could have imagined a startup where the founder claims working proprietary technology, and vastly exaggerate its capabilities, when they have no such thing? Theranos, of course, plan to vigorously defend against the lawsuit.

Finally it seems someone in the VC community is acting on the best interests of their Limited Partners and looking to get their money out. It seems PFM, like me, don't believe Theranos' recent redirection has a chance of producing results and that they have better odds of recovering their investment through a lawsuit. It's a damning indictment of Theranos' plans, as looked at in purely monetary terms, PFM view the value they could ever gain as significantly less than the initial investment - lawsuits cost money and there's a less than certain chance of recovery. Essentially, they've calculated the costs of suing and chance of proving fraud are sufficient that compared to the expected value of the company it's better to sue.

Of course there's a potential cost to not suing too - it could be that the LP's are questioning PFM and there's a chance they'll sue PFM itself for not doing their due diligence in selecting the companies in which to invest. Better to prove that they were defrauded than bamboozled perhaps?

I'm trying to think of when this has ever happened before in this manner, certainly I'll be looking to see if PFM is just the first to rush for the exit to beat the stampede.

I'm hoping this is the beginning of a change where VCs take more responsibility for the companies they invest in, and as I've written in the past, they act to end the incentive for startups to act in unethical and illegal ways. Perhaps Boards of Directors will begin to take notice too?

Secondly, Energous. An interesting article on Seeking Alpha, where the author has looked through SEC documents detailing the CTO's share sales and found some interesting activity that they claim shows he's divesting his stock as much as possible. I've only read through it briefly, but will give some more commentary later on this, very damning if they are what they're reported to be.