Aspiring for unicorn status (startup being valued at $1 billion and more) is not such a bad thing but investors should not be fooled by facts and figures trotted out by the promoter.
Theranos, which captures therapeutics and diagnostics in its terse name, was its nineteen-year founder Elizabeth Holmes’ obsession born of a genuine desire to make blood tests painless. A device with a prick to extract just a drop of blood from one’s finger, like into the modern-day instant sugar testing machines, was envisioned to revolutionize medical treatment. Soon after the blood was collected into the contraption and transmitted over the internet to a diagnostic lab on a real-time basis, and the results were supposed to be made available to the patient’s doctor pronto once again over the net for him to immediately prescribe or alter medication.
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This seamless and fast action promised had everyone---academics, venture capitalists, movers and shakers---- eating out of Elizabeth’s hand. Alas, if only the flight of fancy was subjected to reality checks. Like how can a drop of blood be enough to perform as many as 70 different tests? How can the inevitable dilution not render the results suspect? How could it be a substitute for blood mandated to be drawn from one’s vein for certain purposes?
The path to hell is paved with good intentions, they say. An untested device impinging on public health, given the fact that 70 percent of a physician’s diagnosis is facilitated by diagnostic reports, thus came to be displayed on stores’ shelves leading to misdiagnosis and deaths. Less damning was the wool pulled over venture capitalists' eyes who blithely believed in Elizabeth who for good measure packed her board with formidable names like Henry Kissinger and George Shultz.
Experts on blood and blood testing were studiously kept away from the board to preempt possible tough questions. Secrecy reigned the office and lab precincts with a non-disclosure agreement for every visitor and staff being the norm. Staff suspected to be having an independent streak were shown the doors by Elizabeth’s man Friday and hatchet man Ramesh Balwani (call me Sunny please). Ruthless and browbeating lawyers were called in at the first hint of the clandestine secrecy clause being disobeyed. Advertising agencies gladly marketed the device, which was yet to be tested much less obtain regulatory approvals!!
Thus, was built a myth with an aura of reckless audacity but with an intense and heart-rending promise of deliverance for patients. The venture made it to the unicorn club soon and blossomed to command a valuation of $10 billion with Ivy League investors falling over themselves to get a sliver of equity. That Rupert Murdoch of all people burnt his fingers with a $100 million investment, but who made light of the loss by claiming it as a set-off against his ample mainstream income is revealing. But the Wall Street Journal (WSJ) owned by Murdoch turned out to be Elizabeth’s Achilles heel. Its intrepid reporter John Carreyrou blew the whistle aided by a few disgruntled employees and affected patients through a series of articles in WSJ starting 2015 and followed it up with an eminently readable book Bad Blood: Secrets and Lies in a Silicon Valley Startup released in May 2018. That the curtain fell on the most elaborate startup hoax spanning nearly two decades was a huge relief but even today people ask the most obvious question---how could one pull the wool over the eyes of regulators, academics, venture capitalists, lawyers, businessmen and above all patients for such a long time without batting an eyelid through sheer bluff and bluster.
It is a must-read for wannabe startups, venture capitalists and angel investors of the world and policy wonks. The Indian government must make it a compulsory case study for its officials manning the relevant departments. Aspiring for unicorn status (startup being valued at $1 billion and more) is not such a bad thing but investors should not be fooled by facts and figures trotted out by the promoter. Venture capitalists of all people should not be credulous. One shudders to think of the consequences had Theranos played out in India where an IPO can be made even by loss-making companies as long as it is through the 100 percent book building route. In the US, the rap and losses were absorbed by the deep-pocketed venture capitalists and angel investors. But in India, thanks to more liberal rules, retail investors would have been willy-nilly cast in the role of venture capitalists as often they have been without their knowing. Hardly a week goes by without some or the other start-up making it to the unicorn league (a valuation of $1 billion). Investor fixation with ‘new age' businesses is evident from the massive oversubscription numbers for the IPOs of these companies. Many experts have raised red flags about the manner in which valuations have risen sharply just before a public issue. When the going is good, just about everybody is willing to overlook these trifles. But then, bull markets don’t go on forever. Tempering one’s enthusiasm and asking more questions won’t hurt.
— S. Murlidharan is a CA by qualification and writes on economic issues, fiscal and commercial laws. The views expressed in the article are his own.
Read his other columns here
(Edited by : Jomy Jos Pullokaran)
First Published: IST