Last week I made a quick stop at the library after picking up my kid from school to pick up a few books and while I was there, I checked out the personal finance/business section to see what books they had around that seemed interesting. I stumbled upon “Bad Blood: Secrets and Lies in a Silicon Valley Startup” and thought “Aha! this might be a quick interesting read”.
For those of you that may not know, this is a book about Theranos, a health technology company founded in 2003 by Stanford-dropout Elizabeth Holmes, that made tall claims about being able to perform several blood tests using a small amount of blood (from a finger prick) in an automated fashion using machines developed in-house. The claims also stated that the machines would be small enough such that the consumers could have these setup at their homes, and have their lab tests done and ready within a few hours instead of relying on a doctor and/or third-party labs and wait for days to have their test results. As one could imagine, this was such a big deal because it would revolutionize lab testing and the associated industries.
There was one tiny problem though: Theranos’s technology simply did not work and their claims were based on a mountain of lies. This is probably the largest scandal after the infamous Enron scandal that saw the downfall of one of the largest companies in the US. At the time of writing this, Elizabeth Holmes is being charged with wire fraud and the jury is deliberating on this case.
For what it is worth, I had already seen some documentaries on this topic and therefore knew a lot of the story beforehand. That said, I wanted to read the book by John Carreyrou, as he was the journalist that broke out the story on Wall street journal that marked the beginning of the end for Theranos. I have now finished this book and it did not disappoint one bit.
I chose to write about it here. Why? Not because I wanted to restate the same story over here. But rather I wanted to talk about interesting learnings from this book, as several investors were duped investing their capital in this business. While this is not one of those classical books on investing, there are important takeaways that are worth pondering over.
And they were all fooled…
So on the face of it, Theranos’s claims had a lot of appeal. Even a lay person, who does not necessarily have a background in lab-testing technology, could see the potential of how such a business could be profitable, if they had a solution that actually worked. What else did Theranos have going for it? It had a star-studded panel board of directors, ranging from former US Secretary of States (Henry Kissinger, George Schultz), to top defense lawyers (David Boies), to a retired 4-star marine (Jim Mattis). On top of that, it had political connections (association with Clintons) and backing from other high-profile investors (Rupert Murdoch, Larry Ellison etc.).
Furthermore, Theranos struck deals with Walgreens and Safeway allowing them to open up “wellness centers” within these stores and have patients sign up for a variety of lab tests at cheaper rates.
To top this off, Elizabeth Holmes was being covered heavily on the media, her face was everywhere, and this whole narrative of the “next Steve Jobs” was being drummed up.
Surely, the board of directors and these high-profile investors were not dumb enough that they could not have seen through the lies. Did they not do their due diligence? Or was it a case of the bandwagon effect or herd mentality i.e. Everyone is buying this stock, therefore it must be a good business. To me it seems more like the latter. None of these investors were savvy in the field of medical sciences, and they had not seen the technology demonstrated or understood it well enough. They simply believed that since some other big names had invested their capital, this business must have some merit.
What about Walgreens (ticker: WBA), a name that is quite popular in the dividend investing community? They have been around in the retail pharmacy business for such a long time. Surely, they would have seen through Theranos’s BS. This is their area of expertise after all, right? Well they didn’t. A lot of this probably points to a highly inept management at the helm when this deal was struck. But then there is also the possibility of being blind-sided by the question: “What if we do not invest in this opportunity and CVS did and this took off?”.
Here in lies my three biggest take-aways from this book:
- High-profile investors also make mistakes: To think otherwise would defy logic. This is where investing in a business simply because popular investors like Warren Buffett have invested in it, would be dangerous. There are several reasons for this.
- The average retail investor does NOT have the same information available to him/her as Warren Buffett does, to tell if this investment choice makes sense to their specific situation and portfolio.
- The amount of downside may be different. If this investment turns out to be a loss, this might mean different things to you or me as it would do to Warren Buffett.
- Warren Buffett could be wrong. Yes, the Oracle of Omaha, like all of us, had also made investing mistakes.
- FOMO is not restricted to the average retail investor: It is equally applicable to big corporations and other high-profile investors as well. IMO, this well and truly affected Walgreens in particular.
- Do not overlook the quality of the management running the company: Far too often, we investors are so hyper focused on the quantitative aspects of the business and use that to value it. Yes, this is important, but this is not all there is to valuing a business. It is also important to know that companies can do all kinds of “engineering” in their financial statements to portray a rosy picture. IMHO, the qualitative aspects are just as equally important in valuing/understanding a business. One of the qualitative aspects is the management that is leading the company. Neither one of Elizabeth Holmes or Sunny Balwani, the former president and COO of Theranos, had a background in medical science or lab testing technology. To top it off, they simply could not tolerate being challenged or questioned on the merits of their technology. This made the working environment at Theranos very caustic and unhealthy. As a result, Theranos saw a very high attrition rate with people being fired left and right if they would even raise a question about the technology or bring-up any concern whatsoever. These were massive red flags and unfortunately they were simply ignored by the board of directors and the other investors.
Overall, I really enjoyed reading the book. I think John did a pretty good job of not missing any important details of the entire story. The writing was engaging and very gripping and I kept coming back to read some more. I would like to share one of the stories from the book that I found particularly hilarious. As I had stated earlier, the working environment at Theranos was far from ideal with strict surveillance, people being fired randomly. In one such incident, an employee had had enough and decided to quit, emailed his resignation, served his notice period, picked up his belongings and was about to leave when he was confronted by Elizabeth and Sunny who stated that he could not leave without signing a non-disclosure agreement. The employee refused stating he had already signed a confidentiality agreement when he was hired, had already served his notice period and was free to leave. As he pulled his car out of the parking lot, Sunny sends over a security guard to stop him, the employee ignores the guard and drives off. Sunny then calls the cops and when an officer finally arrives, Sunny complains about how the employee had quit and departed with company property. When the officer asked what was taken, Sunny responds “He stole property in his mind.” This just goes to show the kind of paranoia that was present in the working environment at Theranos.
The Theranos story is far from over and we will learn more about this as time passes by. It is also worth nothing that such incidents are not isolated. I can see a lot of parallels with the story for another company called Nikola, whose founder is also in the dock for similar securities fraud.
I will end this post by wishing my readers a Merry Christmas and a Very Happy New Year. Here is hoping that y’all have a very happy and prosperous year ahead and make great strides in your personal finance journey.
Until next time…