Theranos investors victims of narcissism

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On Thursday (March 23, 2017), the Wall Street Journal posted another seminal report from inside the tattered remains of biomedical company Theranos Inc. (Palo Alto CA). The company, which is currently the subject of a criminal probe for allegedly misleading government investigators, plans to give additional shares to investors who pledge not to sue the beaten-down blood-testing company or Elizabeth Holmes, its chairman CEO and founder, according to people familiar with the matter.

The deal includes investors who participated in Theranos’s latest funding rounds, which ended in 2015 and brought in more than $600 million. Those investors could get about two additional shares for each share they bought, one of the people said.

The additional shares would come from Ms. Holmes’ personal stake in Theranos. That would result in her surrendering her majority ownership of the closely held company, some of the people said. The deal was approved by Theranos’s board in February. Investors are still reviewing terms of the proposed agreement, but most have signaled that they will sign off on it, people familiar with the arrangement said.

“This is an affirmative development for the company, providing a path forward in partnership with employees, investors and other stakeholders,” said Theranos director Daniel Warmenhoven. “Elizabeth elected to contribute her own equity to protect any dilution of shares held by other parties.”

Warmenhoven added Ms. Holmes showed “a level of selflessness and grace reflecting her commitment to the company’s success.”

Sure it did. And if you believe that, I have a bridge….

Not that long ago, Theranos had a valuation of $9 billion (in 2014). The company was poised to revolutionize the healthcare industry and founder Ms. Holmes was hailed as the next Steve Jobs. The company’s flagship product, the Edison device, could draw and test blood from a single finger prick. However, in a series of investigative reports by the Wall Street Journal assessing the accuracy of the blood tests, the Edison devices were found to be faulty.

24/7 Wall St. reminds us that Theranos voided the tens of thousands of blood tests administered in 2014 and 2015, and Holmes’ net worth fell from $4.5 billion—for her 50% stake in the company–to zilch.

Theranos is hip-deep in you know what following a tidal wave of lawsuits from investors and consumers of its blood-testing products. Its main partner, Walgreens, has since bailed and is also suing the company.

As an example of the massacre to Theranos shareholders, Rupert Murdoch, executive chairman of News Corp. and 21st Century Fox, reached a separate agreement with the company to buy back shares purchased in early 2015 for about $125 million, people familiar with the matter said. Under terms of that deal, Theranos agreed to pay Murdoch just $1.

Murdoch could be entitled to an additional payment under certain circumstances, said MBNews. According to people familiar with the matter, he had refused to join the broad agreement with investors and wanted to sell his shares to Theranos so he could take an investment loss for tax purposes, potentially saving millions of dollars owed on other income.

In addition to Walgreens, multiple solo investors, many of whom invested more than $100 million in the company, have also sued Theranos. Patients who suffered heart attacks or other medical issues after receiving normal blood test results have also filed multiple lawsuits against the company.

Steve’s Take:

Let’s break this down now that Theranos is offering more worthless stock to investors who promise not to sue the company (Gizmodo likens it to the pinky swear).

Despite performing more than six million blood tests over the past couple of years, Theranos, somehow managed to vaporize nearly $700 million without generating any revenue, according to the Wall Street Journal. The company spent more than a decade developing what was supposed to be revolutionary technology that could run dozens of diagnostic tests from a few drops of blood at a fraction of the cost of traditional labs.

At one point Theranos had more than 1,000 employees churning through $20 million a month. When Theranos opened the first of 40 Walgreens Wellness Centers in 2013, it should have started generating revenue and been well on its way to breaking even some day, assuming the service was as cost-effective and scalable as it was made out to be. Even if the company charged just $10 a test, that’s $50 million right there.

But according to the Journal, the company told investors that there were no material sales for 2015 and 2016. Nada. Hard to fathom says Steve Tobak at The Entrepreneur. Thirteen years. 1,000 employees. $700 million of venture capital. Forty wellness centers. Two labs. Six million blood tests. And not a penny to show for it. Seriously?

Some even saw Holmes as a victim of the status quo, as she saw herself when the story first broke, recalls Tobak.

“This is what happens when you work to change things,” she said on Mad Money with Jim Cramer, “First they think you’re crazy. Then they fight you. And then all of a sudden you change the world.”

Bottom Line:

Tobak says Theranos was doomed by a culture of secrecy that kept everyone in the dark about what was really happening. It was doomed by Holmes’ hubris–the belief that she could do anything and would never need a backup plan. It was doomed by a desire to hear only what she wanted to hear. It was doomed by a PR machine that painted Holmes as the second coming of Steve Jobs.

The click-hungry media bought it all. Holmes somehow became an instant entrepreneurial icon before she’d ever accomplished a single thing. Investors should have known better. They were so enamored with Holmes, so swept up in the unicorn feeding frenzy of the private equity bubble, that they failed to conduct basic due diligence, Tobak argues. They invested in Holmes’ vision, sight unseen. The technology was never validated by any third-party testing or peer-reviewed journals.

In the meantime, the company was mismanaged by a delusional founder who should not have been running anything, let alone a company that sticks needles in people’s arms and provides data that doctors rely upon for critical medical diagnoses.

This is what happens when people feel entitled to run the show without the experience or talent to be effective. This is what happens when people treat ventures so casually and callously that risk becomes immaterial.

Sound familiar?

In the early 1990s, Jerrold M. Post published an article entitled “Current Concepts of the Narcissistic Personality: Implications for Political Psychology,” in the journal Political Psychology on exactly that topic.

One of the key features of the narcissist is that such a person believes in the entitlement of “the certainty of ultimate success” that give him a “sense of omnipotence and a feeling of invulnerability, that they cannot go wrong,” according to Post. Also, there “is a constant search for admiration and attention and more concerned with appearance than substance,” with “an exaggerated response to criticism or defeat, which can lead to feelings of rage….

Theranos was built from the ground up as a house of cards, Tobak claims, not unlike the biggest frauds of the dot-com era: Enron, WorldCom and Adelphia.

The company was mismanaged by a delusional founder who ought not to have been running anything, according to Tobak, let alone a business that sticks needles in people’s arms and provides data the doctors rely upon for critical medical diagnoses.

Selling a big bill of goods to investors, partners, federal regulators, the media, patients and the public is not “business as usual,” Tobak says. This is what happens when people “feel entitled to run the show without the experience or talent to be effective.” It’s what happens when people treat ventures so casually and callously that risk becomes immaterial.

Steve's Take: @Theranos stock offer is the final demise of this once-upon-a-time unicorn Click To Tweet

The news release about Theranos’s pro-forma stock offer to investors is simply heralding the inevitable, final demise of this once-upon-a-time unicorn. And yet the press release is still praising Ms. Holmes for “her selflessness and grace?” Just what she yearns to hear.