The Theranos Story, ch. 57: was it Silicon Valley and Startup Culture bad practices pushed to the max?

[grow_thumb image=”http://telecareaware.com/wp-content/uploads/2018/07/Rock-1-crop-2.jpg” thumb_width=”125″ /]Theranos is now formally in California insolvency proceedings (note on their website). Creditors may have enough awarded to them to go down to the local pizzeria to buy a slice or two. Hard lessons indeed for creditors and shareholders. But aside from the drama yet to come in the trial of Elizabeth Holmes and Sunny now Shady Balwani, a/k/a the Silicon Valley Trial of the Century, are there any further lessons to be learned?

For those of us who have not been closely following The Theranos Story, David Shaywitz’s kind-of-review of John Carreyrou’s Bad Blood coupled with a thought piece in Forbes is especially appealing. Even if you’ve been tracking it closely like your Editor, it’s a good read. He posits that in three key areas, Theranos exhibited Startup Culture and Silicon Valley Ethics (or lack thereof) at the very extreme in these areas:

  • Secrecy: extreme compartmentalization, siloing, stratification, and rigid definition of roles that prevent information sharing. No outsiders in, or peer-reviewed research out.
  • Promises, promises, promises: a rosy picture to the point of delusion that masks real flaws
  • I Want To Believe: for various personal reasons, investors, press, and supports need to believe

Secrecy can and should work for companies in keeping proprietary information and competitive advantage intact. All startup and early-stage companies have to paint a positive picture in the midst of pitched struggle. The glass is always half full not empty even when the bank account is, but when the old ‘fake it till you make it’ becomes too strong, papering over the truth is the thing and the institutional absence of tough self-scrutiny (or a professional kicker-of-holes) prevents companies from fixing obvious problems–you get a delusional organization like Theranos edging gradually, then very quickly, into outright fraud. Finally, Theranos’ supporters had their own reasons for wanting to believe the technology worked. 

He goes on to state that the fraud that Theranos perpetrated was not only financial and in harm to health, but also in the hope that change is possible in healthcare delivery, we can challenge the way it’s always been done and win, and that technology can be empowering.

Will we, as a result, in Mr. Shaywitz’s words, take the ‘hit to hope’ to heart and become ‘excessively chastened and overcautious”? This Editor tends to be on the overcautious side when it comes to technologies such as IoT and AI because the potential for hacking and bad use is proven despite the hype, but far less so in challenging incumbents–even it it resembles tilting at windmills till they buy you.   

Will l’affaire Theranos change the Silicon Valley and Startup Culture for the better? Here is my ‘hit to hope’–that this excessively aggressive, conformist, borderline irresponsible, and secretive culture could change. This Editor doubts it’s even entered their leaders’ ‘deep’ thoughts, despite this best-selling book.

A more typical review of ‘Bad Blood’ is by Eric Topol, MD (!) in Nature–who certainly borrowed ‘The Theranos Story’ from this series of articles!

The Theranos Story, ch. 56: Bye, bye Theranos…but the litigation continues (updated)

[grow_thumb image=”http://telecareaware.com/wp-content/uploads/2018/07/Rock-1-crop-2.jpg” thumb_width=”150″ /]No more blood in this rock. Really. Theranos, according to a report by John Carreyrou in the Wall Street Journal (unfortunately paywalled) is dissolving. An email to shareholders by (short-lived) Chief Executive David Taylor informed them that the company will cease to exist soon, and that whatever remaining cash will be distributed to unsecured creditors in coming months. The email also added that Theranos made overtures to more than 80 potential buyers through Jefferies Group, but despite 17 NDA’s signed, none succeeded. 

The dissolution process will start on Monday, pending approval by the board and shareholders. 

The shareholders’ letter is available here (PDF) including the rationale on dissolution versus bankruptcy.

Over $60 million was owed to unsecured creditors but there was evidently only $5 million (net of expenses and fees) left in the kitty to distribute, which may be enough to buy lunch or copies of ‘Bad Blood’ for most. That is because Fortress Investment Group now has full control of the assets and intellectual property. Part of Japan’s SoftBank Group, Fortress invested $65 million in Theranos in December 2017 of a possible $100 million, collateralized by the patent portfolio. [TTA 28 Dec 17] At the time of the Holmes/Balwani indictments by the DOJ in June (nine counts of wire fraud and two counts of conspiracy), reports indicated that Theranos would shutter by the end of July.

The few remaining employees were reportedly given notice last Friday. The website is offline. No one from Theranos is speaking to media. This Editor wonders what the shareholders from the $600 million funding round [TTA 18 May 17] will do with their doubled shares–presumably, use the paper as firestarter in their fireplaces this winter along with their printed selfies with Ms. Holmes. (Fear not, they will be receiving a copy of the certificate of dissolution to give to their accountant and IRS.) 

At the time of the Fortress investment, this Editor wrote:

Our takeaway is that the IP is worth far more than the company and that is what has been bought. SoftBank would dearly like another entree into Silicon Valley for their tech portfolio and can use that IP, if not at Theranos, elsewhere. For Fortress, which has $36.1 billion in assets under management and now backed by SoftBank, $100 million is pocket change with a smidge of lint.

One wonders what SoftBank and Fortress will be doing with that IP.

Theranos will not be leaving the headlines soon, as the June indictment of Holmes and Balwani (who was pushed out by Holmes in 2016) and the sidelights produced by their ‘Tainted Love’ will provide schadenfreude for many months.

Reports: Reuters, CNBC (video-Squawk Box), USA Today, TechCrunch  Our 55 chapters chronicling the slow-motion crash of Theranos can be accessed here.

The Theranos Story, ch. 55: ‘Bad Blood’s’ altered reality on ‘Mad Money’; it was all Bad Blitzscaling

[grow_thumb image=”http://telecareaware.com/wp-content/uploads/2018/07/Rock-1-crop-2.jpg” thumb_width=”150″ /]

She lied and the lies got bigger and bigger and eventually the lies got so big relative to reality that it became a pretty massive fraud. 

The hyperbolic Jim Cramer of CNBC’s ‘Mad Money’ settled down for a chat with John Carreyrou, the author of ‘Bad Blood’, to dissect what Mr. Cramer touted as ‘the best business book since Phil Knight’s book about starting Nike, ‘Shoe Dog”. Mr. Carreyrou outlines Elizabeth Holmes and Sunny Balwani went ‘live’ with fingerstick tests far too prematurely, burned through money, lied to the board, and (schadenfreude alert!) lied to attack dog David Boies, her attorney. There was also a real lack of ‘due diligence’–real diligence–on the part of companies like Safeway and Walgreens. A reveal coming out of this interview is that Walgreens hired a lab consultant, Kevin Hunter, as early as 2010, who ‘smelled a rat’ even then–and Walgreens executives ignored him, frightened that Ms. Holmes would go to CVS. Wrapping Ms. Inexplicable Me up, Mr. Carreyrou attributes her mindset to ‘noble cause corruption’; she really did believe that her blood testing machine would do good because the outcome would be good for society. Thus every corner cut was justified….which explains a lot, but really excuses nothing. The ten-minute video is over at ValueWalk (the transcript is only partial).

LinkedIn’s hyperbolic co-founder Reid Hoffman, like him or not, does have a way with words, and this article in Fast Company is a decent discussion of a new term that he actually coined, ‘blitzscaling’ which is pursuing rapid growth by prioritizing speed over efficiency in the face of uncertainty. It’s quite a lure he sets out to his classes at Stanford, that the only way to have a successful business in winner-take-all (or most) markets is to do this, and if you do it right you’ll have the next Google, completely ignoring the fact that 99.99 percent of businesses don’t need to change the world, just to get to breakeven, get to profitability, and endure (or get bought out). He springboards off this to where Ms. Holmes and Mr. Balwani Went All Wrong. The answer? Product failure=Mortal Risk–to the patient. They needed to meet a Walgreens deadline thus went out prematurely with their nanotainer testing knowing it did not work. The best quote in the article?

There’s a big difference between being embarrassed and being indicted.

The Theranos Story, ch. 54: cue up ‘Tainted Love’ in the courtroom

[grow_thumb image=”http://telecareaware.com/wp-content/uploads/2018/07/Rock-1-crop-2.jpg” thumb_width=”150″ /]Tainted Love, Labs, and Lucre Indeed. Drop the needle on the Gloria Jones version from 1964 or the Soft Cell version from 1981.

Consider that the very fates of Ms. Elizabeth Holmes, the now not-so-Sunny Balwani, and the formerly $9 bn Unicorn Theranos may hinge on the nature of their personal relationship and its influence on the governance of the company.

There are two legal actions against the company and the two principals, one by the DOJ for criminal fraud [TTA 16 June] and by the SEC on (civil) securities fraud [TTA 15 March].  Both are out on $500,000 bail on the DOJ charges. The possibilities on the latter can be up to 20 years in Club Fed, plus $250,000 in fines and clawing back of investor funds, if any can be found.

While Ms. Holmes settled with the SEC, paying a fine and exiting the company, Mr. Balwani did not and is fighting the charges, though this declaration was made before the DOJ charges.

Bloomberg Markets brings up an interesting set of dynamics which can play well with potential jurors and make the prosecution’s case far more convincing for a Northern California jury. To wit, in 2009 when she started running out of money, Ms. Holmes turned to Mr. Balwani, her boyfriend, for a $12 million line of credit. In return, he became president and COO. The nature of their relationship was kept strictly hush-hush to the board and investors. Secrecy was ratcheted up at the company and management started to break down. And the timing: a week after Mr. Balwani left, the news of bad patient test results and problems with their lab started to break big.

Jurors, even in Silicon Valley, love drama and personal intrigue–especially the type that underscores deception and $900 million in fraud perpetrated by a Stanford dropout who clumsily attempted to channel Saint Jobs and a somewhat schlubby dude who Should Have Known Better. Far more than gullible corporate suits at Walgreens and hedge funds….add to it the personal stories of patients harmed by bad Theranos tests and you get an emotional story worthy of Law & Order.

Do expect Ms. Holmes to bring up her Saint Joan if not a female Saint Sebastian analogy. Burning at the stake versus being shot full of arrows are too memorable images which she’ll try out. Add a #MeToo spin of a young woman coerced by an older man–a tale of at least tit-for-tat to get the $12 million. 

The rompin’ soap opera is likely to start next year. Stay tuned…. 

The Theranos Story, ch. 53: No more blood to squeeze out of this particular rock

[grow_thumb image=”http://telecareaware.com/wp-content/uploads/2018/07/Rock-1-crop-2.jpg” thumb_width=”150″ /]Rock. On. The latest chapter in the Last Throes of Theranos is the action by plaintiffs Robert Colman, Hilary Taubman-Dye, and other indirect Theranos investors to settle their lawsuit before there is nothing left. The settlement was made late last week in the US District Court of Northern California for an undisclosed amount.

The plaintiffs originally proposed a class action which would have included about 200 other individuals investing through various funds.This was denied by the District Court in early June, but the ruling permitted individual lawsuits. The class action would have been under California state law, as indirect investors are not eligible through Federal securities law.

Mr. Colman was an early (2013) investor through Lucas Venture Group and Ms. Taubman-Dye was a third-party investor through SharesPost in 2015 [TTA 30 Nov 16]. Their charges centered around Theranos’ false and misleading statements made by the company, They were excluded from the share buyback a few months later when there were still some funds in the company [TTA 29 Mar 17] and before Fortress Investment Group put in their funding (December). Their legal action was brought not only against Theranos, former COO Sunny Balwani, and former CEO/founder Elizabeth Holmes but also–interestingly–the SEC (Law360). 

A sidelight to this is that there is an HBO documentary about Theranos in progress. The filmmaker Alex Gibney has sought to make public video depositions from two Theranos cases, according to the WSJ (paywalled). Judge Cousins ordered Theranos to work with Mr. Gibney’s lawyer to determine what excerpts of recordings will be released. Mr. Gibney better get his skates on while there’s still interest in the barely-breathing Theranos–or Ms. Holmes pulls the full Saint Joan reenactment in a Home for the Very, Very Nervous. MarketWatch, Bloomberg, Becker’s Hospital Review  Our TTA coverage is indexed here.

A finger-prick, 10 minute CBC test which actually works from Sight Diagnostics (Israel)

The Theranos Effect may have tainted innovation investments (versus easy puzzle-piece fits), but complete blood count (CBC) via small blood samples is hardly a dead idea. It’s very much alive with the scientists who founded Sight Diagnostics, an Israeli startup with a fit-on-a-desktop lab, Olo, which can run multiple CBC counts. Blood can be taken from a traditional or finger-stick draw, with the usual caveats on capillary blood. The technology works via machine vision to take images of the blood sample to identify and count the different types of cells with AI to do the analysis. The goal is to be able to install a lab in a doctor’s office and run the test in 10 minutes, not five days.

Sight was founded by Daniel Levner, an artificial intelligence expert who was a scientist at Harvard’s Wyss Institute for Biologically Inspired Engineering (not a Stanford undergrad dropout), and Yossi Pollak, previously at Mobileye, an automotive computer vision developer that Intel bought for $15.3 billion last year–the largest Israeli tech exit ever. Oh, and they have an advisory board of Real Scientists.

Adding to Sight’s credibility is their CE Mark gained for Olo and completion of a 287-person clinical trial at Israel’s Shaare Zedek Medical Center, both announced this week. Webwire

The company is up to a Series B and has raised over $25 million since 2010 (Crunchbase)–a drop compared to Theranos, a subject where the founders are a little bit touchy, based on this Editor’s read of the Forbes article. While Olo is investigational in the US, their malaria test Parasight – which detects malaria using digital fluorescent microscopy and computer vision algorithms–has already sold over 600,000 units in 24 countries across Europe, Africa, and Asia–another major difference from Theranos. A significant investor is Eric Schmidt, formerly of Google, and head of Innovation Endeavors (SF Business Journal, slightly paywalled).

Video (01:56)

The Theranos Story, ch. 52: How Elizabeth Holmes became ‘healthcare’s most reviled’–HISTalk’s review of ‘Bad Blood’

[grow_thumb image=”http://telecareaware.com/wp-content/uploads/2018/07/holmes-barbie-doll-1.jpg” thumb_width=”125″ /]A Must Read, even if you don’t have time for the book. During the brief Independence Day holiday, this Editor caught up with HISTalk’s review of John Carreyrou’s ‘Bad Blood’, his evisceration of the Fraud That Was Theranos and The Utter Fraud That Is Elizabeth Holmes. Even if you’ve read the book, it’s both a lively recounting of how the scam developed and the willingness–nay, eagerness!–of supposedly savvy people and companies to be duped. The reviewer also reveals that Mr. Carreyrou wasn’t the first to raise questions about Theranos after raves in the press and kudos from the prestigious likes of Eric Topol. Mr. Carreyrou’s first article was in October 2015 [TTA 16 Oct 15] whereas Kevin Loria wrote the first exposé in Business Insider on 25 April 15 which raised all the fundamental questions which Theranos spun, hyped, or otherwise ignored–and Mr. Carreyrou eventually answered. (Our blow by blow, from him and other sources, is here.)

The review also picks out from the book the scabrous bits of Ms. Holmes’ delusions; her makeover to become the blond Aryan female Steve Jobs mit Margaret Keane-ish waif eyes–something she took far too literally; the affair between her and Sunny Balwani, certainly in violation of the usual ethics–and her Hitler in the Bunker, April ’45 behavior as Theranos collapsed around her. 

The review concludes by telling the healthcare community something we need said plainly, often, and written in 50-foot letters:

Theranos is a good reminder to healthcare dabblers. Your customer is the patient, not your investors or partners. You can’t just throw product at the wall and see what sticks when your technology is used to diagnose, treat, or manage disease. Your inevitable mistakes could kill someone. Your startup hubris isn’t welcome here and it will be recalled with great glee when you slink away with tail between legs. Have your self-proclaimed innovation and disruption reviewed by someone who knows what they’re talking about before trotting out your hockey-stick growth chart. And investors, company board members, and government officials, you might be the only thing standing between a patient in need and glitzy, profitable technology that might kill them even as a high-powered founder and an army of lawyers try to make you look the other way.

In other words, what you (the innovator, the investor) is holding is not a patient’s watch, it could be his heart, lungs, or pancreas. (Musical interlude: ‘Be Careful, It’s My Heart’)

The Theranos Effect is real in terms of investment in small companies out there on the ‘bleeding edge’. The cooling is mostly salutory, and we’ve been seeing it since late last year (see here). But…will we remember after it wears off, after the fines are collected, the prison time is served?

Rock Health’s ‘Another record-breaking first half’ in digital health funding is actually–flat. (With a Soapbox Extra!)

The Breathless Tone was the clue. “It’s déjà vu for digital health, with yet another record breaking half for venture funding.” It was déjà vu, but not of the good sort. This Editor hates to assume, so she checked the year-to-year numbers–and first half 2018 versus 2017 broke no records:

  • 2018:  $3.4 bn invested in 193 digital health deals 
  • 2017: $3.5 bn invested in 188 digital health companies [TTA 11 July 17]

But ‘flat’ doesn’t make for good headlines. Digging into it, there are trends we should be aware of — and Rock Health does a great job of parsing–but a certain wobbliness carried over from 2017 even though the $5.8 bn year finished 32 percent up over 2016, analyzed here [TTA 5 Apr 18]. Their projection for 2018 full year is $6.9 bn and 386 deals.

Let’s take a look at their trends:

  • “The future of healthcare startups is inextricably linked to the strategies of large, enterprise-scale healthcare players—as customers, partners, investors, and even potential acquirers.” It’s no mistake that the big news this week was Amazon acquiring tiny, chronic-conditions specializing prescription supplier PillPack after a bidding war with Walmart for an astounding $1bn, making its 32 year-0ld founder very rich indeed and gaining Amazon pharmacy licenses in 49 states. (Prediction: Walmart will be pleased it lost the war as it will find its own solutions and alliances.) 
    • Enterprise healthcare players are cautious, even by Rock Health’s admission, but the big money is going into deals that vertically integrate and complement, at least for a time–for example, Roche’s purchase of Flatiron Health. And when it doesn’t work, it tends to end in a whimper–this May’s quiet sale by Aetna of Medicity to Health Catalyst for an undisclosed sum. Back in 2011, Aetna bought it for $500 million. (Notably not included in the Rock Health analysis, even though they track Health Catalyst and the HIE/analytics sector.)
  • The market is dependent on big deals getting bigger. If you are well-developed, in the right sector, and mature (as early-stage companies go), you have a better shot at that $100 million B, D, E or Growth funding round. B rounds actually grew a bit, with seed and A rounds dipping below 50 percent for the first time since 2012. 
  • The Theranos Effect is real. Unvalidated, hyped up claims don’t get $900 million anymore. In fact, there’s real concern that there’s a reluctance to fund innovation versus integration. The wise part of this is that large fundings went to companies validating through clinical trial results, FDA clearance (or closing in on it), and CDC blessing.
  • The dabbling investor is rapidly disappearing. 62 percent of investors in first half had made prior investments in digital health including staying with companies in following rounds.
  • Digital health companies, like others, are staying private longer and avoiding public markets. Exits remain on par with 2017 at 60. Speculation is that Health Catalyst and Grand Rounds are the next IPOs, but there hasn’t been one since iRhythm in October 2016. The Digital Health public company index is showing a lot less pink these days as well, which may be an encouraging sign.
  • Behavioral health is finally getting its due. “Behavioral health startups received more funding this half than in any prior six-month period, with a cumulative $273M for 15 unique companies (nearly double the $137M closed in H1 2016, the previous record half for funding of behavioral health companies). Of these 15 companies, more than half have a virtual or on-demand component.”

Keep in mind that Rock Health tracks deals over $2 million in value from venture capital, excluding government and grant funding. They omit non-US deals, even if heavily US funded. 

Their projection for 2018 full year is $6.9 bn and 386 deals. Will their projection pan out? Only the full year will tell!

A Soapbox Extra!

Rock Health, like most Left Coast companies, believes that Vinod Khosla is a semi-deity. This Editor happens to not be convinced, based on predictions that won’t pan out, like machines replacing 80 percent of doctors; making statements such as VCs have less sexual harassment than other areas, and even banning surfers off his beach. He was at a Rock Health forum recently and made this eye-rolling (at least to this Editor) statement:

Is there one area in the last 30 years where the initial innovation was driven by an institution of any sort? I couldn’t think of a single area where innovation—large innovation—came from a big institution. Retailing wasn’t disrupted by Walmart, it was by Amazon. Media wasn’t changed by CBS or NBC, it was by YouTube and Twitter. Cars weren’t transformed by Volkswagen and GM—and people said you can’t do cars in startups—but then came Tesla.

Other than making a point that Clayton Christensen made a decade or more ago, the real nugget to be gained here is that formerly innovative companies that get big don’t grow innovation (though 3M tends to be an exception, and Motorola didn’t do too badly with the cell phone). They can buy it–and always have. 

Go back a few more decades and all of these companies were disrupters–and bought out (or bankrupted) other disrupters. CBS and NBC transformed entertainment through popularizing radio and then TV. VW created the small car market in the US and saved the German auto industry. GM innovated both horizontally (acquiring car companies, starting other brands) and integrated vertically (buying DELCO which created the first truly workable self-starting ignition system in 1912).

YouTube? Bought by innovator Google. Twitter? Waiting, wanting to be bought. Innovation? Khosla is off the beam again. Without Walmart, there would be no Amazon–and Amazon’s total lifetime profit fits nicely into one year of Walmart’s. Tesla is not innovative–it is a hyped up version of electric car technology in a styled package that occasionally blows up and remains on the borderline of financial disaster. (Model 3, where art thou?)

I’d argue that Geisinger, Mayo Clinic, and Intermountain Healthcare have been pretty innovative over the last 30 years. Mr. Khosla, read Mr. Christensen again!

The Theranos Story, ch. 50: DOJ indicts Holmes, Balwani for fraud (updated)

[grow_thumb image=”http://telecareaware.com/wp-content/uploads/2016/11/jacobs-well-texas-woe1.jpg” thumb_width=”150″ /]The other shoe drops into this bottomless well. If Elizabeth Holmes and Sunny Balwani thought that the March SEC action [TTA 15 Mar] would be it, they were misinformed. Today, the Department of Justice, US Attorney’s Office for the Northern District of California, charged them with two counts of conspiracy to commit wire fraud and nine counts of wire fraud. According to CNBC, they were arraigned in US District Court in San Jose Friday morning. Both were released on $500,000 bond each and ordered to surrender their passports. Holmes’ parents appeared with her in court.

If found guilty, both Ms. Holmes and Mr. Balwani face up to 20 years in prison, plus $250,000 in fines and clawing back of investor funds. 

“Wire fraud” in US law is fraud that is enabled and takes place over phone lines or involves electronic communications. By appearing online, making phone calls, emailing materials such as marketing materials, statements to the media, financial statements, models, and other information, Ms. Holmes and Mr. Balwani defrauded potential investors. Patients and doctors were defrauded by ads and other types of solicitations to use Theranos’ blood testing services at Walgreens, despite the fact that they knew the test results were unreliable.

Both Ms. Holmes and Mr. Balwani will have plenty of time to explain their sincere belief that their test devices and methods would be validated with time…but they had to, in Silicon Valley parlance, fake it till they made it. Indictments of this type take about two years to conclude, especially if they are big (as a formerly $9 bn valued company is) and tangled. Ms. Holmes will undoubtedly release statements on how she is being martyred like Saint Joan, how this doesn’t happen to men in Silicon Valley, and that they are allowed to fail but she can’t. Perhaps she was under the spell of the 19 years-her-senior Svengali Balwani. (Minus the Jobsian black turtlenecks, one anticipates her next choice of wardrobe. Sackcloth tied with a rope? Chain mail?)

Expect the doors to shut soon. Fortress Investment Group, which loaned Theranos $65 million (of a reported $100 million) in December 2017, was reportedly coming for the assets (as they are wont to do) by the end of July, according to the Wall Street Journal and other sources. 

Ms. Holmes is–finally–removed as CEO. Theranos announced that David Taylor, the company’s general counsel, has been appointed CEO as well as general counsel, while Ms. Holmes will remain as founder and board chair. None of this is reflected on their website. In fact, Mr. Taylor is nowhere to be found on the website’s leadership page. 

The estimable John Carreyrou, who broke the story in the WSJ and is the author of Bad Blood [TTA 13 June], on The Street’s Technically Speaking podcast at 06:00 shared this insight on how Theranos got away with bad tests. While both FDA and CMS highly regulate lab testing and the machines that perform them, neither actively police “lab-developed tests, which refer to tests fashioned with their own methods and devices” for blood testing. Basically, according to Mr. Carreyrou, Holmes and Balwani, our Bonnie and Clyde, “drove a truck right thru that loophole and took advantage of it.” Far beyond B&C, $1 bn of investors’ money is the Federal Reserve of banks.

On the indictment: WSJ, CNBC. The Northern District release on the indictment is here. Another essay by Mr. Carreyrou published 18 May is available to those who can get past the paywall. Hat tip to Bill Oravecz of WTO Consultants.

Updated: For additional coverage of what’s next in the legal vein for Holmes and Balwani, see the NY Times on potential defense strategies for the duo, including that they truly believed what they were saying to investors was true and they were bamboozled like everyone else, ‘materiality’–that investors didn’t use the statements as a basis for investing, and ‘prove it’. Will they take a plea deal? Stay tuned. 

The Theranos Story, ch. 49: CEO Holmes reportedly raising funds for a new company–and feeling like Joan of Arc

[grow_thumb image=”http://telecareaware.com/wp-content/uploads/2016/11/jacobs-well-texas-woe1.jpg” thumb_width=”150″ /]Here’s the place where your money will go if you’re an investor. John Carreyrou has now compiled his reporting for the Wall Street Journal on Theranos into a new book, Bad Blood: Secrets and Lies in a Silicon Valley Startup, and it is a Must Read for this Editor and anyone interested in the nexus of Tech, Healthcare, and Hype. (The link goes to AbeBooks, a worthy marketplace for independent booksellers.)

According to Mr. Carreyrou, the founder/CEO Miss Elizabeth Holmes–still leading the company despite settling with the SEC on fraud charges, surrendering her voting control, barred from serving as a public company director or officer for 10 years, and still fighting civil lawsuits–is raising fresh funds for a new venture.

Your eyes did not fool you.

Theranos was a Dogpile of Deceit. From hacking standard Siemens blood testing machines to work with tiny samples, falsifying test results, faking up the Edison test machine, to company financials, it was one lie on the other, chronicled for our Readers in nearly 50 chapters and multiple references. 

Mr. Carreyrou was asked by former Timesman and Vanity Fair reporter Nick Bilton whether, in this unmistakable pattern, Ms. Holmes was a sociopath. Mr. Carreyrou wisely refrained from diagnosis based on a used DSM-V, being a reporter and not her psychiatrist. From Mr. Bilton’s interview podcasted on ‘Inside the Hive’:

“At the end of my book, I say that a sociopath is described as someone with no conscience. I think she absolutely has sociopathic tendencies. One of those tendencies is pathological lying. I believe this is a woman who started telling small lies soon after she dropped out of Stanford, when she founded her company, and the lies became bigger and bigger,” Carreyrou said. “I think she’s someone that got used to telling lies so often, and the lies got so much bigger, that eventually the line between the lies and reality blurred for her.”

Mr. Carreyrou, and by inference anyone who doubted her, like her CFO, and especially those who went public with criticism–well, we are the Bad Guys:

“She has shown zero sign of feeling bad, or expressing sorrow, or admitting wrongdoing, or saying sorry to the patients whose lives she endangered,” he said. He explained that in her mind, according to numerous former Theranos employees he has spoken to, Holmes believes that her entourage of employees led her astray and that the bad guy is actually John Carreyrou. “One person in particular, who left the company recently, says that she has a deeply engrained sense of martyrdom. She sees herself as sort of a Joan of Arc who is being persecuted,” he said.

Mr. Carreyrou was set upon by this ‘martyr’s’ legal pitbulls, one David Boies, until he wisely exited stage left with a bushelful of worthless stock [TTA 21 Nov 16].

(And what is it about Stanford University that fosters people like Ron Gutman, recently ousted from HealthTap over employee abuse and intimidation charges in what may be a Silicon Valley First? [TTA 3 May] Here we have someone who plays with people’s lives and health in vital blood testing. Aren’t some ethics courses long overdue?) 

Mr. Bilton makes the extremely fine point that Silicon Valley will continue to be magnetically attracted to founders equipped with a ‘reality-distortion field’ (as he termed Steve Jobs). SV will relegate Theranos to a biotech outlier. Yet as long as Silicon Valley MoneyMen like Tim Draper will back the likes of Elizabeth Holmes as long as they have a good line of (stuff), despite being embarrassingly proven not just (and only) wrong, but now perpetrating fraud, the Jobsian Myth and black turtlenecks will rise again like Dracula. (Another analogy comes to mind, but precocious children might be reading this.)

We haven’t heard the last of her.

An excellent interview by Tom Dotan of Mr. Carreyrou is podcasted on The Information’s 411 in “You’re So Vein”, which gets the award for Title of the Week (trial signup required, or listen on SoundCloud). Starting at 15:00, interesting comments on the why of Sunny Balwani and Ms. Holmes’ series of ‘marks’ including George Shultz. Also Gizmodo and Politico’s Morning eHealth newsletter.

Health tech founder ousted over alleged ‘acts of intimidation, abuse, and mistrust’: some reflections (Soapbox)

And we thought they were par for the course. Those of us who have worked for company founders, CEOs, and senior execs have learned that some interesting personalities come with the territory, especially in entrepreneurial companies. This Editor has worked for at least one diagnosed ADHD, a bipolar ADHD, another with anger management/impulse control issues, and a gentleman who is now spending a few years in a Federal penitentiary for securities fraud. One of her most memorable CEOs made the cover of Fortune with the caption, “Is this America’s Toughest Boss?” and no, his name was not Donald Trump. (Clue: he was chairman of what was for a time the world’s largest airline conglomerate.)

Of late, there’s been the behavioral quirks of their founders leading to disastrous problems at Uber, Theranos, and Zenefits. It often seems that the more hype, the more sunshine, daisies, puppy dogs, mission, and ‘fab culture’ are on the website, the worse the dysfunctional reality and mistreatment of the troops.

Perhaps no longer. Monday’s very public firing by his board of Ron Gutman, CEO of HealthTap, a digital health all-over-the-map company that now has settled into a members-only patient-doctor mobile health platform, over non-financial behavior may be a first. Mr. Gutman was given the heave-ho by his board after, notably, months of effort. Recode cited a termination letter to him that he “committed acts of intimidation, abuse, and mistrust, and that [he] repeatedly mistreated, threatened, harassed and verbally abused employees.” The coup de grâce: “The toxicity you introduced into the workplace ends now.”

An all-hands memo to employees was more restrained:

After receiving concerning reports by employees about Ron’s conduct as CEO, the Board of Directors hired an outside law firm to conduct an investigation into these allegations. What we learned left us with no choice but to make this change, and we did so after taking the necessary steps from a corporate governance perspective.

The replacing CEO is Bill Gossman, a serial founder and a partner in one of the investors, Mohr Davidow Ventures.

Mr. Gutman has denied it all, stating that he did not abuse employees and that the VCs are in violation of their duties. (FYI, not a whiff here of #MeToo antics.)

Funded to the tune of $38 million by Khosla Ventures, Mayfield Fund, and Eric Schmidt’s Innovation Endeavors, but without fresh funding in five years, the public face of both Mr. Gutman and HealthTap (of which he is the very public face, appearing all over their website still) is one with a very large smile. Mr. Gutman gained some fame from his TED talk and book on the power of smiling. One wonders how the smile is doing today. A frown turned upside down. TechCrunch, Mobihealthnews

The Theranos Story, ch. 48: down to 24 employees in a last ditch before bankruptcy

[grow_thumb image=”http://telecareaware.com/wp-content/uploads/2016/04/Yak_52__G-CBSS_FLAT_SPIN.jpg” thumb_width=”150″ /]The ground is next. Theranos is down to its last two dozen employees or less, in a bid to buy a few more months of time before bankruptcy, according to a breaking report in the Wall Street Journal.

The announcement was made by Elizabeth Holmes Tuesday to approximately 125 remaining employees at its downscale Newark, California headquarters. (This Editor wonders if she wore a black turtleneck.) Interestingly, Ms. Holmes remains CEO after settling civil charges with the Securities and Exchange Commission (SEC) while a criminal investigation continues out of the US Attorney’s office in San Francisco. 

The WSJ article from the estimable John Carreyrou (who deserves an old-school Pulitzer Prize for his investigative reporting) recaps Theranos’ fall for those who need it. But…there’s more. Theranos received only $65 million of $100 million promised in their last (ditch) funding from Fortress Investment Group late last year, revealed by Ms. Holmes in an investor email this past Tuesday. The remainder is contingent on Theranos achieving an FDA Zika blood test approval using their miniLab. She stated that this test is still having problems and appealed to investors for yet more funding. The layoffs were designed to keep their cash reserve over $3 million until the end of July, below which Fortress is entitled to seize Theranos’ assets and liquidate them. This, as we have previously noted, is Fortress’ specialty–as now fan dancing is Ms. Holmes’.

According to Mr. Carreyrou’s sources, Ms. Holmes is still living large in basic black. “Until Tuesday, Ms. Holmes still had two personal assistants and two security guards who drove her around in a black Cadillac Escalade SUV, according to the people familiar with the matter.” This Editor wonders what happened after Tuesday. Public transit? A used car for a few thousand?

Theranos and the $900 million in lost investment may have also put a wet blanket on 2017 health tech funding, based on what we’ve learned in Rock Health’s report [TTA 5 Apr]. Other companies with real advances and promise may be paying the price for Theranos’ hype and fakery.

Our 47 past chapters and other Theranos mentions are for your perusal in our pages here

2017’s transition in digital health funding: is it maturity or a reconsideration?

Rock Health’s topline for 2017 digital health funding is impressively upbeat, casting it as “the end of the beginning in digital health, the start of a new era with new challenges”. Digging into it, there is a continued slowing that Rock Health itself predicted back in their 3rd Quarter report [TTA 3 Oct 17]. It seems that the big did get bigger, but if you weren’t on the train in 2016 or prior, 2017 wasn’t the year you left the station. Their findings bear this out, keeping in mind that their tracking is for US companies with deals over $2 million in value, which excludes much of the action from young and international companies:

  • No digital health IPOs this year, in a weak year in general for IPOs
  • For the companies already in public markets, they outperformed the S&P 500 31 percent to 19 percent
  • Average deals hit an all-time high of $16.7M ($5.8 bn over 345 deals) 
  • Big money went to better-developed, more mature companies like Outcome Health and Peloton exercise equipment at $500 million and $325 million. Rock Health duly notes Outcome Health’s troubles since. (To this Editor, Peloton is not a digital health company despite its glitzy overlay of video and exercise community.)  
  • Seven $100 million + mega-deals front-loaded in the first half of the year. Second half’s sole big deal was genetic testing and data marketer 23andme. The dominant category of business? Consumer health information represented by Outcome, 23andme, PatientPoint, PatientsLikeMe, and ShareCare, most with a B2B2C model.
  • Looking at deals by stage, not surprisingly the funding at D and later rounds soared to an average size of $74 million (from 2016’s $46 million). Seed and A rounds’ average funding at $7 million, while the majority, hasn’t varied much since 2011. Series B funding was also flat at $17 million on average.
  • Exits continued to be weak, indicating the reality of healthcare investing being long haul. M&A deals declined for the second straight year to 119–18 percent fewer than 2016 and 36 percent fewer than 2015

Also Modern Healthcare.

This Editor’s opinion? One damper on 2017 was the $900 million credulously blown on Theranos. Call it the Theranos Effect.

As usual we will look at StartUp Health‘s always numerically bigger report after release, but this Editor’s bet is that it won’t be ‘crazy’ like earlier in 2017. 

The Theranos Story, ch. 47: the post-mortem, blaming–and ghost chasing–begin

[grow_thumb image=”http://telecareaware.com/wp-content/uploads/2016/04/Yak_52__G-CBSS_FLAT_SPIN.jpg” thumb_width=”150″ /]Now that Elizabeth Holmes is the former CEO of Theranos, many of the publications who huzzahed their ‘revolutionary’ blood testing system three short years ago are publishing their post-mortem analyses, often of how the wool was pulled over their eyes.

Jenny Gold from Kaiser Health News and NPR has a short ‘alarming’ tale of her press visit in November 2014 to a Theranos testing site at a Palo Alto Walgreens for an NPR feature. At Walgreens, she spoke with patients on the record and was invited to witness their blood draw–not the finger prick Theranos (and Walgreens) promoted, but a standard volume blood draw. After multiple and telling upset reactions from her company press handlers, including demanding Ms. Gold erase her audio recording (!) and accusing her of harassment, alarms went off at the Walgreens store for a non-existent fire. She was baited with an interview with Ms. Holmes–which never happened–and wound up with a corporate attorney instead who made unsupported statements. Ms. Gold canceled her story, which if she tracked the bad smell would have been likely the first press shot across the bow. What this post-mortem tells us is the extent of the coverup and the sheer (and unethical) fawning flackery that appeared in places like the New Yorker, Forbes, Inc., and Fortune.  NPR

The FT further digs into our gullibility, our wanting to believe that someone in a black turtleneck could put the Big Labs out of business,  how we in the press hungered for a new and female Steve Jobs to shake up the status quo. Andrew Hill: “Trouble often hits, though, when leaders stick to their story after it has diverged from reality, swerving into embellishment, mythmaking and, in Ms Holmes’s case, apparently fraud.”

But we were no smarter than those who gave Ms. Holmes and Mr. Ramesh ‘Sunny’ Balwani $700 million in Mad Money. (more…)

The Theranos Story, ch. 45: a ‘Christmas present’ $100 million loan from Fortress averts bankruptcy (updated 8 Jan)

[grow_thumb image=”http://telecareaware.com/wp-content/uploads/2016/11/jacobs-well-texas-woe1.jpg” thumb_width=”150″ /]A present or a Trojan Horse? Revealed on Christmas Eve by the intrepid John Carreyrou of the Wall Street Journal (paywalled) is Theranos’ securing of a $100 million loan from Fortress Investment Group LLC. This Editor notes the word ‘loan’, and loans come with conditions. Mr. Carreyrou revealed that according to an email sent by (unbelievably still in place) CEO Elizabeth Holmes on Friday 22 December and reviewed by the WSJ, it is “subject to achieving certain product and operational milestones.” 

As our Readers know, with the Walgreens Boots settlement in August, cash on hand from June was about $54 million with a burn rate of $10 million per month [TTA 3 Aug]. Technically, Theranos was out of funds by December. This Editor thought the next article on Theranos would be an obituary issued from their warehouse in Newark, California. Updated: As of 8 Jan, there is no announcement on the Theranos website or comment to press.

According to the article, Fortress specializes in distressed investments. “The loan from Fortress is collateralized by Theranos’s patent portfolio and the deal grants Fortress warrants for 4% of the company’s equity, Ms. Holmes told investors in her email. She said she anticipated the loan would provide Theranos “sufficient liquidity through 2018” which is quite a fan dance.

Interestingly, Japan’s SoftBank Group completed its acquisition of Fortress yesterday (release). 

Our takeaway is that the IP is worth far more than the company and that is what has been bought. SoftBank would dearly like another entree into Silicon Valley for their tech portfolio and can use that IP, if not at Theranos, elsewhere. For Fortress, which has $36.1 billion in assets under management and now backed by SoftBank, $100 million is pocket change with a smidge of lint. Remaining investors also have likely written down the value on their investment. It’s a bit of a tweak on the expected denouement, but do not bet on Theranos and Ms. Holmes rising like phoenixes from the ashes of their Edison lab equipment.

Updated: Theranos’ last words on their website tout their accepted/presented publications and posters, but there is no further word on Theranos’ actual sale of Zika virus detection technology or the much-touted miniLab. It’s all a far cry from the palmy days three years ago of co-marketing with Walgreens and Ms. Holmes headlining Forbes, Fortune, and dozens of healthcare conferences and accumulating nearly a billion in funding as The Greatest Thing Since Sliced Bread.

Prediction for 2018: Ms. Holmes will be removed and replaced, then the company will be reorganized and/or renamed.

Full WSJ article on Yahoo! Finance. CNBC. Gizmodo. Our prior chapters on the Theranos Story are here

The Theranos Story, ch. 44: Walgreens settles lawsuit, cash box empties further

[grow_thumb image=”http://telecareaware.com/wp-content/uploads/2016/11/jacobs-well-texas-woe1.jpg” thumb_width=”150″ /]Walgreens realizes Theranos’ funds are not bottomless. Confirming the June Wall Street Journal report [TTA 26 June] that Theranos had advised its investors of a negotiated settlement with Walgreens Boots Alliance, Tuesday’s announcement offered few specifics. According to the Theranos release, the settlement resolves all claims by Walgreens and dismisses the lawsuit, with no finding or implication of liability. Terms were not formally disclosed, but sources told the WSJ (FoxBusiness) that the settlement was over $25 million. In June, it was estimated to be less than $30 million, so the over/under wasn’t very wide. Payment timing was not disclosed.

As we noted in June, Walgreens had invested an estimated $140 million between direct funding (a $40 million loan convertible into equity), and an “innovation fund’ designed to fund the store location rollout. The lawsuit filed last November was intended to recoup that amount. The thorn that Walgreens and its attorneys grasped was that even with insurance, there was not $140 million left in Theranos and nothing of equivalent non-cash interest. As a public company, certainly the realization that putting $25 million on the books this year was better than nothing. It is also likely that $110+ million has already been written off.

Not much left in Theranos’ till, other than some dollar bills and coins. In June, Theranos disclosed that their cash on hand was $54 million with a monthly burn of $10 million, leaving as of today $44 million. Even if the Walgreens settlement is covered 100 percent by insurance, at best Theranos has about four months of life–if nothing extraordinary happens. There are also ongoing SEC and DOJ investigations, plus the Colman/Taubman-Dye suit in California, which may result in more fines and settlements.

While Theranos makes much of its new management structure and commercializing new technologies (of which there is no word), there are no signs that beyond recapitalization earlier this year that there is fresh investment. Reports indicate they are trying, at long last, to exit real estate they no longer need–subleasing their expansive (and expensive) Palo Alto headquarters and relocating to their former lab in an industrial park in less tony Newark, California. As this Editor concluded in June, it is increasingly difficult to see a future for Theranos without Chapters 11 or 7 in it. It is rapidly arriving at a familiar place for startups, but not former Unicorns: Flat Brokedom.

Meanwhile, Walgreens Boots Alliance, barely dented in the exchequer, has closed on a $1.4 bn joint investment with KKR for institutional pharmacy company PharMerica. Drug Store News