Until last week, Theranos seemed just like any other Silicon Valley unicorn.
- Hot shot, media darling CEO described as the female Steve Jobs.
- A “breakthrough” innovation based on proprietary technology shrouded in secrecy.
- A rock-star board that includes the likes of Henry Kissinger and George P. Shultz.
- Unseemly amounts of money pouring in from high-profile investors.
- Opaque financials.
- A multibillion-dollar valuation that puts it on par with well-established players in the sector, despite its relative youth and stealth.
The story that The Wall Street Journal broke last week after months of investigation took a bit of the gild off that rose.
And serves a cautionary tale for payments’ innovators, the investors who throw money at them, and the companies that look to identify and integrate innovation into their own organizations.
THE BIG, BIG BREAKTHROUGH
Theranos’ big breakthrough is a blood test requiring only a pinprick and thimble-full of blood instead of the frequently painful blood draws from a person’s arm. Theranos claimed that it could do this for roughly 240 tests, including prostate cancer. Blood drawn in this way was run through its proprietary equipment named Edison, producing results in as little as 15 minutes. Since blood draws would be less painful, Theranos’ CEO, Elizabeth Holmes, said that more people would be less reluctant to have blood tests done, and therefore alerted earlier to any underlying health issues. And since a pinprick in a finger is a lot easier to administer than jabbing a needle into a person’s vein, a less skilled person could administer the tests. As a result, Theranos’ tests were deployed in more than 41 Walgreens in California and Arizona, in addition to other places, including doctor’s offices.
Since Theranos did not sell its equipment to other labs, it did not require FDA approval of its technology. But since it dealt with human beings and their health, Theranos had to prove to the Centers for Medicare and Medicaid that its test results were on par with those from other labs. That’s done by sending test results to an accredited lab a few times a year for certification. Allegations made by former employees — always dangerous given the “former” moniker — suggest that tests deemed proficient by these labs weren’t run on the Theranos Edison equipment at all, but on Siemens AG machines that are in Theranos’ lab. Others, including doctors, nurses and lab tech workers say that results run on Theranos technology were also highly inconsistent with test results for the same patients from other labs.
Although Theranos does admit that only “a small minority” of its blood tests are run on its proprietary equipment, it stands by its claims of accuracy. Any differences in results, they say, are easily explained by differences in time of day, medications taken or food eaten by a patient when blood tests were administered.
OK, BUT SOMETHING STILL STINKS IN DENMARK (OR SILICON VALLEY)
But here’s where things start to sound a bit odd.
Despite being a company with a mission to both innovate and disrupt science and laboratory procedures, how many scientists or lab experts do you think Theranos has on its board or employed as advisors?
That would be zero.
And how many articles do you think Theranos has published in scientific and/or academic journals?
That would be zero, too – even though the company has been around for more than 10 years.
It also seems quite uncharacteristic for a company seeking credibility in the medical and scientific community not to do what is regarded prima facie essential: to publish a bunch of research touting its results in accredited scientific journals or have rock-star scientists as advisors or board members. An associate professor in the University of Michigan’s Department of Hematology and Oncology said that it’s “very uncommon” for a company to get to be as large as Theranos without substantial disclosure and validation of results of the diagnostic performance.”
Yet, that hasn’t stopped investors from pouring $400 million into Theranos, valuing it at $9 billion. At that valuation, it’s equal to its well-established and FDA-approved medical laboratory brethren including Quest Diagnostics.
So, what’s going on?
One of two things – which makes Theranos less a juicy story about a company now seemingly in trouble and more about what payments companies and investors can learn from it.
MAYBE THIS IS ALL PART OF A BIGGER PLAN?
Peter Diamandis, founder of the X-Prize and co-founder of Singularity University, says that “Many people who try to do big bold things in the world find out it's not about the money or the technology: It's about the regulatory hurdles that will try and stop you.”
Amen to that.
That was the thesis of a piece I wrote a month or so ago questioning why in the world The Clearing House wanted to force new regulation on innovators in financial services and payments. My point then, and now, is that innovators in a highly regulated sector like financial services and payments can’t get out of the starting blocks unless they live with existing rules and regulations - and that we have a lot of built-in checks and safeguards that keep bad actors at bay and bad things from happening to consumers. As Diamandis implies, the more money that young companies have to spend on hiring compliance experts, the less they have to spend on product development and innovation. If we want more, not less, innovation, that’s the way it needs to stay.
So, one theory is that Theranos, knowing this, kept a lid on what they were doing purposefully.
As it stands today, the bar for proving success in medical technology is incredibly high – as it should be anytime that human beings and their health and well-being are directly involved. It’s, thankfully, not possible for med-tech innovators to simply throw new invasive innovations like diagnostic testing in the market, watch what happens and then pivot if people start getting sick (or worse). The FDA is tasked with making sure that consumers don’t literally become human guinea pigs as innovators try for the moonshots that get and keep them motivated.
But critics argue that the old model in matters of med-tech – develop, prove, document, trial – and then go out and raise money – is broken. In addition to slowing things down, the odds are greatly reduced that anyone other than big pharma with deep pockets can fund innovation. That, they say, only forces companies like Theranos to operate in secrecy for years – and seek funding from well-heeled private investors and VCs who as a condition of giving money, then want to occupy their boards.
So maybe Theranos did the really smart thing, just like Uber, and engaged in “permissionless” innovation. Once everyone was hooked on its simple and effective tests, it could stare down the regulatory beast in D.C. just like Uber stared the beast down in New York City recently.
Or maybe (and more likely) the big bets on Theranos were just the result of groupthink at work.
WHO, ME, DISAGREE? I LOVE WHAT YOU DO. (WHAT DO YOU DO AGAIN?)
Groupthink isn’t a new idea. As a behavioral phenomenon, it first bubbled to the surface in scientific literature in the mid-1970s. Think of groupthink as consensus gone awry – when people in a cohesive group value conformity above all else. Members of the group then agree to get along only because being part of the group is more important and more valued than disagreeing with the group’s collective opinions or actions.
Groupthink is actually a corollary of the “Wisdom of the Crowds” concept. But crowds include lots of different kinds of people – the wisdom comes from the diversity of opinion that each person brings to the decision or action. In a crowd, mistakes cancel out and the average opinion tends to be right.
In groupthink, people are all just alike. Same profession, same social status, same town (or Valley), same age, same …..you get the picture. In groupthink, the group tends to make the same mistakes so the mistakes don’t cancel out.
But it’s actually worse than that.
Diversity of opinion is discouraged because it creates disharmony in the “tribe.” Those who disagree are ridiculed, ostracized, even bullied, for not toeing the party line and tossed aside as outliers. Since people want to be part of the group, they agree, no matter what.
Groupthink is what experts now say made Kennedy’s Bay of Pigs crisis a crisis. No one at the time, including Arthur Schlesinger, wanted to publicly push back against the CIA’s recommendations, despite expressing concerns in private and in memos to then President Kennedy questioning the wisdom of an invasion versus an airstrike. In group discussion, everyone went along with the CIA’s recommendation.
It’s also why 20 “witches” were killed in Salem Village – not too far from where I am writing this piece – in 1692. No one wanted to question the authority of those in charge in the Village who made persuasive arguments to the God-fearing Puritans that the “Devil” was to blame for the behavior of those who were sick or (what we know now to be) suffering from mental illness, even though many later wrote that they knew what was happening was wrong.
PUSH BACK? NOT ME!
It might also be why no one, until now, ever questioned what Theranos was doing and how it was doing it.
Who’s going to question the soundness of a company or an innovation when savvy investors like Larry Ellison and Draper Fisher are pouring hundreds of millions into it? And public intellectuals the caliber of Henry Kissinger and George Shultz serve on its board?
Who has the guts to push back when the media is pushing story after story of how a female entrepreneur with a fear of needles is now the next Steve Jobs? (Hey, she does wear black turtlenecks after all.)
And when Bill Clinton gushes about the company at the Clinton Global Initiative and how it’s going to save lives, who would have the audacity to even whisper a criticism of what Theranos and Holmes were doing?
Pushing back and asking questions would have been seen as criticizing the mission of the company and tearing down one of the few female technology innovators to emerge from Silicon Valley. And the questioner would have probably been publicly flogged, humiliated and discredited as being out of touch.
GROUPTHINK – NOT JUST FOR THERANOS
Theranos isn’t the only story where groupthink may be alive and well. Groupthink appears to be alive and well in payments – and, in particular, in the land of bitcoin.
Coindesk wrote last week, “with more than $800M so far invested in bitcoin and blockchain technology startups since 2012, it's safe to say that venture capitalists are certainly captivated.”
Captivated? Or captured by groupthink?
As a global currency, bitcoin was dead before it even got off the ground, for many of the reasons I’ve written here over the last several years. Yet, a few years ago, a few really influential VCs dumped a ton of money into it and proclaimed it the future “the internet of money,” a claim that is also a bit misleading – for all of the reasons I’ve written here. Yet, if you pushed back, tried to reason why it would never work as a global currency, you were ridiculed, laughed out and pegged as “too out of touch” to really get it. After all, how could 200 VCs who’ve dumped hundreds of millions into bitcoin be wrong?
Which might be starting to crack a bit. Today, some of the ventures that were given millions to go out and satisfy the pent-up demand for bitcoin are now quietly cutting back and laying off staff. Bitcoin companies are pivoting and bitcoin is forking. Internet entrepreneur and bitcoin evangelist Halsey Minor, who last year at the Innovation Project couldn’t say enough great things about bitcoin’s future, to take one example, just last week rebranded his company to remove “Bit” from its name and is diversifying away from bitcoin. So is Circle.
GROUPTHINK BUBBLES – HIGH ACCESS TO CAPITAL AND LOW BARRIERS TO ENTRY
Then there’s the investments being made in on-demand delivery.
In 2014, food and grocery delivery received $1 billion of VC funding – yes, $1 billion and four times what it was in 2013. The rationale for that funding is that no one will ever want to step foot in grocery stores or restaurants again, and will instead outsource that activity to Instacart, GrubHub and the million other players who are springing up to pick up orders and deliver to people who’ll never leave their houses. Now this is not to say that on-demand delivery is a bad idea – it’s awesome – and a sector with a lot of room to grow. But to suggest that it’s worthy of a billion dollars worth of funding and that players in the space like Instacart deserve a $2 billion valuation because it has managed to do a deal with Whole Foods, hire people who like to grocery shop and then deliver those groceries to yuppies living in a few big cities seems a bit of a stretch. With barriers to entry pretty low, and access to capital pretty high, on-demand food delivery seems like the next groupthink train wreck.
Instacart, by the way, is but one of the 142 unicorns, with a collective “valuation” —based on recent funding rounds — of more than a half a trillion dollars that exist today. It wasn’t that long ago that the notion of a billion-dollar company was a lofty and difficult goal to hit. Now all it takes is but a few well-placed VC bets, and the funding rolls in and the valuations soar, despite any sign of revenue or viable business model. No one wants to be left out, so they don’t push back and ask questions.
But, many of these unicorns have among the shakiest business models and foundations going; very few of them make any money. Even Bill Gurley seems disturbed by the fact that, in his words, Silicon Valley has more people working for ventures that don’t make any money than ever before. That doesn’t sound healthy, yet tends to be the reality when groupthink takes over.
IF IT SOUNDS TOO GOOD TO BE TRUE, IT MIGHT BE GROUPTHINK!
So, I guess the moral of the story here is that just because a cool-sounding company gets a few million bucks from a storied VC firm in Silicon Valley with fancy schmancy people on the board doesn’t automatically mean that it’s the next big thing. I’d also hold onto to my angel investor wallet for anyone who’s called the “next Steve Jobs” who actually wasn’t anyone until she/he actually had an extremely successful innovative product in the marketplace that people were gobbling up.
Most importantly, when everyone says something is a sure thing, and no one is disagreeing, that might be a good sign that groupthink is in action, and it’s time to really kick the tires, push back and ask some tough questions.
And then, depending on what you hear, to walk the other way.
As for Theranos, we know that they hired famous lawyer, David Boies to defend itself. Maybe the next David they should think about bringing into the fold is Nobel Prize winning biologist, David Baltimore, to help burnish its claims of medical and scientific integrity.