Whooops...

Hey, have I mentioned to you a company called Theranos at any point recently? Well, it seems after vigorously defending their product from the awful, nasty, vindictive press, and those "disgruntled former employees with an axe to grind", demanding things like "proof" and "evidence" of accuracy of their tests, that there might have been something to those allegations after all.

"Theranos Inc. has told federal health regulators that the company voided two years of results from its Edison blood-testing devices, according to a person familiar with the matter...

The company has told the Centers for Medicare and Medicaid Services that it has issued tens of thousands of corrected blood-test reports to doctors and patients, voiding some results and revising others, according to the person familiar with the matter.

That means some patients received erroneous results that might have thrown off health decisions made with their doctors."

In summary - they've issued an "Ooops. Our bad."

I'm really shocked to hear all this, because so many people who know CEO Elizabeth Holmes so well, characterized the "attacks" in the press as unfair and unfounded.

Dick Kovacevich, the former Wells Fargo CEO and current Theranos board member, defended the embattled lab testing start-up's boss Elizabeth Holmes on Wednesday.

"I think there will be some information coming out soon that will show that indeed there was misinformation that was put out in the public domain," he told CNBC's "Squawk on the Street," adding what has happened to her is "unfair."

So let me summarise again, since this is so incredible: A company with a reported private valuation of $9 billion just said that their only product, which has been used to diagnose conditions and inform treatments for patients, doesn't work, and that all those accusations that were vehemently denied for months (see Big Lie - basically, "Keep lying in the face of all evidence and eventually people will believe you") are looking to be true.

That the company is abandoning the "Big Lie" means it's game-over. Someone has looked at the data and said "Yeah, it doesn't work" and the threat of actual jail-time means they aren't going to cover it up anymore. All those heavy-handed legal threats to intimidate people into being quiet aren't going to cut it anymore, as people are way more scared of the Feds than they are of Theranos' legal team.

Having worked in FDA governed medical fields, on and off, for nearly 20 years, I'm just stunned that anyone would even think about faking the results on anything that informs patient diagnoses or treatment. Apart from the obvious ethical issues, it's just stupid - you will be found out eventually, they will come after you.  This isn't like a software package where you can just push an update to v1.1 and keep improving it and fixing bugs - it has to be right first time.

The FDA are there for a reason. Sure, regulation is a giant pain, and they can be too bureaucratic and slow, but they are there to protect lives and health from people who would risk you and your family's health to make a quick buck. Safety takes precedence over speed for a reason. This mentality of "we can fix it later, it doesn't matter, just get it out there" has moved from software apps to healthcare. It needs to stop now. This is more than just a "canary in a coalmine", this is "twenty miners trapped in cavein". How long until the "village falls into sink-hole"?

As for Theranos - let me put this simply:

People's health and lives were directly impacted by this. Someone is going to jail.

Theranos 101 - One Tiny Drop Changes Everything

Theranos and Elizabeth Holmes have been discussed multiple times on this blog, and for those not familiar with them I thought I'd give a very quick summary of them and the controversy surrounding them.

Elizabeth Holmes was a chemical engineering student at Stanford when she dropped out at age 19 to start the company - the goal was to create accurate medical tests based on drops of blood rather than vials, so it can be from just a finger prick and not a full vial draw. If it can be achieved, it's a great simplification of the whole blood testing process, and the company hoped it would spur an increase in the number of tests given how easy it would be.

This is not an easy task, and there were significant questions over the ability to accurately do testing on small drops of blood - the drop itself may be so small that even with a perfect test the result may not be accurate or reproducible - but it's a worthy goal for research.

They received some initial seed funding from a regular VC and over the next 12 years developed tests for over 200 conditions, and inked a deal with Walgreens to use the tests in-store, with the PR machine claiming that a revolution in blood testing was coming. By mid-2015 they had raised nearly $700 million which valued the company at around $9 billion, with Elizabeth Holmes as the youngest self-made billionaire. (Note Theranos is a private company so it can be hard to gauge exactly the funds raised, this article estimates $750m)

Holmes was front and center with the company, synonymous with Theranos, and painted as a role model for others. To be compared to Elizabeth Holmes was a great compliment, and entrepreneurs everywhere vied to be 'the next Holmes' - such as this up-and-comer:

@DeanZ_Kellogg @ubeam @theranos @msuster @OurCrowd wow, what a compliment! Thank you so much!

— Meredith Perry (@meredithperry) June 24, 2015

It was something of an odd company, with a non-medical board full of former Senators, Admirals, Generals, Secretaries of State and Defense - but not a single person capable of understanding the technology - and going against the grain of almost all biomedical companies never published peer-reviewed results on their tests, simply instead saying (in effect) "trust us".

Now, there had been rumblings from inside the biotech community for sometime that something was not right at Theranos, but the press loved their story of the self-made founder/CEO, and everything was going wonderfully until October 2015 (Fun Fact: Same day I left uBeam!) and the Wall Street Journal released a bombshell story questioning the accuracy of these tests and whether Holmes had been exaggerating the capabilities of the tests. Wired released an article raising the questions that "exposes a deeper problem with the way Silicon Valley tries to spin hype into startup gold."

Startling among these revelations was that Theranos weren't even using their own technology for the tests, but standard off-the-shelf equipment other companies use, as their equipment gave highly variable results.

This was soon followed by other more detailed analysis by the press, along with apologies for prior poor reporting, but more importantly the FDA got involved and stated only one of their many tests was approved (a Herpes test, which is a simple yes/no), and then Centers for Medicare and Medicaid Services wrote to Theranos stating its tests "pose immediate jeopardy to patient health and safety." 

This Business Insider article gives a great timeline of events for Theranos. It has made Elizabeth Holmes, who rode the publicity all the way up and took more of the spotlight than the Company itself, a household name beyond just Silicon Valley and for all the worst reasons. She even has her own parody Twitter account 'NotLizHolmes'

It's been a rollercoaster of negative press for them since then, with damage control from Theranos in the forms of expressing surprise and lack of knowledge, of claiming that data on their tests will be released for public assessment (not happened to date), and that they are working with the authorities to deal with these issue. They added a well qualified medical board too ("look, big names with titles, stop asking questions!"). From an article in the NYTimes, there were some sections that stood out as very familiar to me:

"She (Holmes) stays relentlessly on message, as a review of her numerous conference and TV appearances make clear, while at the same time saying little of scientific substance."

As I've pointed out before - even when you are exposed, stick to the message is the best game plan. But this next section from Professor Frank Partnoy of University of San Diego School of Law was just a stunning quote, what I have been trying to put into words and say in this blog:

“We’re deluged with information even as pressure has grown to make snap decisions. People see a TED talk. They hear this amazing story of a 30-something-year-old woman with a wonder procedure. They see the Cleveland Clinic is on board. A switch goes off and they make an instant decision that everything is fine. You see this over and over: Really smart and wealthy people start to believe completely implausible things with 100 percent certainty.”

You can have experts in the field publish peer reviewed papers, or simple maths that demonstrates the engineering near impossibility of it all, but show a TED talk and an article in Marie Claire and the chequebooks still come out. To quote myself regarding Energous:

"We had, through the use of physics, mathematics, and reasoning, completely demolished their claims and proven that what they are saying is unachievable ... but it got complicated and so you just switched off, ... overall you just didn't care."

To be blunt - technology has gone beyond the capacity for most people to be able to comprehend, even some otherwise very intelligent and educated ones. That deluge of information 'overloads' most people and they fall back on the simplest of solutions - they look for authority figures who have already made decisions for them, or rely on the 'wisdom of crowds' and simply go along with the majority. Actual reasoning shuts down, and following that the idea that someone as smart and educated as you could have got it wrong just can't be entertained (or in the case of existing investors, ever acknowledged).

Something needs to change in how billions of dollars of funding, much originating from retirement funds, is distributed. The system is setup to reward certain behaviours, and good stewardship of this money, and the efficient application of efforts of thousands of workers to benefit our society, in my opinion are not among them. 

Theranos, and others like it, were simply inevitable and the symptom of a much deeper problem.

Couldn't have said it better myself

I'd been sitting debating what to write as a post tonight, when someone sent me a link to a blog post entitled "What Mark Suster Missed In His Blog Post Defending uBeam". After reading through it, I was amazed at not only how insightful it was, but how well written, and how quickly it appeared. I have no idea who this person is, but they did a better job than anything I could have written today, so I'll just quote this section below, and strongly encourage you to read the full piece.

"So the message to women in STEM from those like Perry seemed to be to not worry about getting Bachelor’s degrees let alone advanced degrees in a particular field of expertise relevant to a future career (or indeed in the case of Elizabeth Holmes of Theranos, another women-in-STEM inspiration, a college degree at all), but have a vision, be dogged and hire sheep like Scientists, Technologists, Engineers with PhDs and experience – all ironically male it appears for uBeam and Theranos –  to constantly prod them out of their unimaginative stupor to produce the idea in the visionary founder’s head.

Indeed what Perry (and Holmes) represent is symptomatic of an anti-intellectualism where advanced degrees and fundamental research instead of being seen as a progressive way to deeply understand and investigate issues in a systematic manner under the guidance of experienced mentors and peer reviews and communication, leading to the creation of new ideas, are seen as impediments to true progress."

Those Other Guys, Pt II

So back to Energous. Where we left them was that we had, through the use of physics, mathematics, and reasoning, completely demolished their claims and proven that what they are saying is unachievable - that is they are either idiots, or liars (or maybe I'm the idiot!). That's where we'd be in a sane world, but it got complicated and so you just switched off, maybe you heard 'blah blah' or sounds like the Peanuts' teacher, but overall you just didn't care. 

So let's take a look at the business side of Energous instead. You can find lots of information out by looking at their S-1 or their 10-K/Q, because they're now a public company - more on that later.

Energous was formed in late 2012 by an MIT graduate with lots of experience in wireless communications. His parents even invested $10,000 to get him started. Normal startup so far, but then it gets weird. Just three months later, an investment bank, MDB Holdings, come in and start advising and investing. Barely a year after that, they then file for an IPO - that is, selling shares to the public. A company with no product, no revenue, nothing at all, is filing for an IPO. They do have great publicity and a great story, however, and are talking about world changing products coming later that year. Who wouldn't want to get in?!

In March 2014, 18 months after forming, it sells $24 million of shares. That $10,000 his parents put in is now worth $26 million. Nice return. The company is worth well over $100,000,000 - remember, no product, no revenue. But you know someone's making money in all these transactions.

And now the SEC is involved - there are major penalties for lying in any statements from a public company, so they must be being honest, right?

Since then, two years on, and there's still no product, in fact they are backtracking and pushing dates further out, and drastically cutting performance specs on their product. But they've added lots of big names as boardmembers and advisors! These smart advisors and big name board members wouldn't join unless there's something there!

And recently, they admit that they still haven't demonstrated a commercial level product, even in their lab. Uh-oh, they must be collapsing and in terrible trouble.

Well, no. The CEO now makes $2 million per year - for a company under 4 years old, with no product, and no sales. The VP Engineering and VP Sales/Marketing each make $1.5 million.

That's $5 million per year in salary for three people, once again for a company with no product and no revenue. So let me summarise:

• Come up with a really good story for a product people just have to have
• Just make it believable enough, and for people to want to believe, for the skeptics to be ignored
• Create massive hype in the media to boost interest
• Announce fantastic products somewhere out in the future
• Never quite directly answer the critic's questions over the practicality, always dodge and claim 'proprietary'
• When eventually it gets to that time you need to show product or demos, get in some 'big names' instead and make them public to make outsiders think it's all still great
• Keep it going long enough someone eventually buys you and cash out

Remember I said earlier that in my opinion those behind the company are idiots or liars? Well, they made $5 million in one year from it. Which do you think they are?

Here's the genius of Energous. Normally a startup cycle works with the early investors trying to get it to the point where there is a product revenue, or more likely a buyout where they cash in. It usually takes several rounds of financing, with lots of dilution along the way, along with a big chance of failure. Energous bypassed that and went straight to IPO, and got their money out at the beginning. No risky and long slog to return - just jump straight there. It looks to me like they gamed the system, and did so brilliantly.

Now they had better hope they didn't lie in anything the SEC related, but otherwise, they're laughing. They don't even need to make a product to earn more money from this, each, than most people earn in a lifetime of 9 to 5.

But, hey, there has to be something there. People wouldn't just make stuff up to make money, that never happens. And if they did, it would be a one-off, an aberration. There couldn't possibly be other hyped technology companies following that bullet point list from above, could there?

The Sausage Factory

Today is the 6 month anniversary of my resignation from uBeam, a startup I'd spent the previous two and a half years working on. I had gone from being one of the three engineers working in a garage to create the basic technology (literally), through fundraising nearly $23,000,000, and being VP Engineering in one of the hottest tech startups, to being willing to walk away from both a team I had built and was proud to work with, and any chance of recouping the income and opportunities I had sacrificed in getting there.

It marked the end of about four years of working on a several different startups, during which time I made a lot of mistakes, worked on some very interesting things, met some fantastic engineers and other co-workers, and got first hand insight into the workings of VC and startups in tech. It's the last part I find most fascinating - how the whole ecosystem of startups actually works.

I've watched all the recent publicity surrounding Theranos, about a young, media-darling, Steve Jobs idolizing female CEO, who defies the skeptics and without any training in the field apparently makes strides that promise to change the world. Who raises millions on promises of ground-breaking technology that's just around the corner, yet never makes public demonstrations or subjects their technology to third party audit. A CEO of a company that never answers substantial questions raised by veterans in that field, or criticism that they are doing nothing but playing a smoke and mirrors game to fleece the next round of investors, but is more than willing to speak to the press on their 'vision' (and nothing more).

I've followed that story and felt an odd sense of deja-vu about the coverage. How does a company, founded by someone with no realistic credentials or experience, raise so much money on what may never be delivered? Who decides it gets so much press coverage? Surely the VC's are performing their due-diligence and there are adults minding the store?

There's a saying: "You don't want to see how the sausage gets made."

Let's talk about how the sausage gets made...