Originally published at The Naked Hedgie blog; it's a rather lengthy article, so I broke it up in three parts. Part 2 is here. You can also get the full story in a fairly packed and fast-paced 43-min. video report below.
PART 1: MEDIA NARRATIVE VS. THE REAL STORY
The epic rise of Theranos and its equally epic unravelling has turned out to be one of the most spectacular stories in recent years. It went down as the largest fraud since Enron and the greatest scandal in Silicon Valley’s history. But media narratives have invariably focused on the company’s young founder and CEO Elizabeth Holmes. Countless reports and documentaries are all based on the unlikely assumption that Theranos was her own brainchild and that she herself was in control of events. We’ll consider a different perspective here: one which places Theranos in context of the current pandemic and the coercive measures planned by the global health authorities. As you’ll see, the real story of Theranos will prove very relevant to our present predicament. But most importantly, there is a very significant silver lining to this story. If you happen to feel pessimistic about the way things are going now, the real story of Theranos will give you encouragement and a great dose of optimism.
THE MEDIA NARRATIVE
Theranos was started in 2003 by then 19-year old Stanford University dropout Elizabeth Holmes. She claimed that she had invented a miniature blood analyzer that could perform as many as 240 different blood tests from just a single drop of blood. Traditionally, blood testing is done by drawing one or several vials of blood from patients to be analyzed on special lab devices developed by companies like Siemens, Abbott Labs, Quest Diagnostics and LabCorp. Holmes claimed that her portable analyzers would revolutionize the process, “democratize diagnostics,” and make the tests so affordable that people could make periodic snapshots of their personal health over time.
That story enabled the audacious 19-year old to launch her venture, raise a total of over $750 million dollars and assemble a board of directors counting some of the world’s most powerful individuals. Theranos obtained funding from a number of high profile capitalists including the billionaire venture capitalists Tim Draper and Don Lucas Sr, Rupert Murdoch, the Walton family, Betsy Devos, Larry Ellison, Mexican billionaire Carlos Slim and companies like Walgreens and Safeway.
Theranos Board of Directors included former Secretaries of State Henry Kissinger and George Shultz, former Defence Secretary William Perry, future Defence Secretary General James “Mad Dog” Mattis, former U.S. Senator and Chair of the Armed Services Committee Sam Nunn, power lawyer David Boies, Retired U.S. Navy Admiral Gary Roughead, and former CEO of Wells Fargo Richard Kovachevic. It was indeed the board to take over the world.
But there was a big problem at the core of this venture. Namely, Holmes’ inventions were mostly imaginary, her technology didn’t work, and her mission was based on wishful thinking. So how was she able to build her house of cards with such an impressive façade and make herself into America’s favorite entrepreneur and youngest female “self-made” billionaire? The narrative was that it was down to her supposed brilliance, her story, conviction, charisma, and her disarming personal charm. We’ve been led to believe that those were the weapons she used to persuade some of the most powerful people in the US military and political establishment to become directors of her startup and to convince a group of seasoned investors and experienced business people to back her venture with hundreds of millions of dollars.
That story is hugely implausible, but it is nevertheless being told and retold in the media without much critical analysis or skepticism, only allowing for the possibility that Holmes’s one co-conspirator was her partner and boyfriend Ramesh (Sunny) Balwani.
My own experience in raising money from wealthy investors
Over the last 20 years, part of my own work has been raising money from wealthy investors. Based on that experience, I find the Elizabeth Holmes story completely impossible to believe. Now, my experience was different in that I wasn’t raising money for a tech startup and I never worked in Silicon Valley. Rather, I sought funding for hedge fund ventures. But in essence, the process is the same: you go to wealthy investors, pitch your project and hope to raise funds. Your counterparts are shopping for investments that can give them a high return on capital.
The experience gave me a good sense of the way wealthy individuals make their investment decisions. For starters, they are not stupid; they are usually quite rigorous and don’t easily fall for cosmetics or charm. It’s true that some investors spray money on startup ventures less discriminately with the rationale that some projects will succeed. Typically they’ll look at your team, business plan, demand some proof of concept, and if they’re half-convinced that you have a shot at succeeding, they might give you some money. But in such cases we’re normally talking about relatively smaller sums – say, a few hundred thousand bucks or something in that ballpark.
But when it comes to large sums of money, investors tend to be very demanding. Venture capital funds tend to specialize in a limited number of industries and they use domain experts to vet prospective investments. Their job is to conduct thorough due diligence on potential investments and distill the most likely future success stories out of many, many applicants. This process is itself costly and time-consuming, and I would expect that in Silicon Valley, which attracts top notch creative talent from all over the world, the process is quick to eliminate candidates that fail to convince that they have a sound concept, competent management team and a compelling business strategy.
The cosmetics alone – the stories, visions, displays of confidence or personal charm – they won’t get you past the gatekeepers if the stuff behind the façade doesn’t convince. In Elizabeth Holmes’s case, even minimal due diligence should have eliminated her: she set out to revolutionize health care but had no qualifications or experience in medicine and only rudimentary training in biochemistry. In almost all cases, her patents specified design of future solutions but not the functionality. She published no white papers or technical specifications, and could not demonstrate that her supposed inventions even worked. Any specialist in the field of medicine or biochemistry would have easily disqualified her claims and determined that there was no substance to her story.
Holmes’ fakery was obvious from the start
For example, Holmes was twice introduced to Stanford clinical pharmacologist and professor of medicine Dr. Phyllis Gardner with the recommendation that she was brilliant and had a revolutionary investment idea. But professor Gardner saw right through her: “she had no knowledge of medicine and rudimentary knowledge of engineering… And she really didn’t want any expertise, she thought she knew it all!” Another qualified longtime observer of the Theranos saga was also skeptical. Dr. Darren Saunders worked as an associate professor of medicine at the University of New South Wales where he ran the Ubiquitin Signaling Lab. He knew that Holmes could never do what she claimed. In an interview for the 60 minutes Australia program, he said that “it takes years and years to develop any one of those tests and make sure that it’s accurate.”
Indeed, what was glaringly obvious to Dr. Gardner and Dr. Saunders should have been just as obvious to any specialist in the field. In fact, Holmes also failed to convince the US military to adopt Theranos technology. In spite of wholehearted help from General Mattis, she was unable to pass the vetting process at the Pentagon. A few years later, in May 2015, University of Toronto professor Eleftherios Diamandis analyzed Theranos technology and also politely concluded that “most of the company’s claims are exaggerated.” Diamandis expressed that opinion at the time when the hype about Theranos and Holmes were at their peak.
For some reason however, Elizabeth Holmes’ ascent was not obstructed by any scrutiny of her fantastic claims. Early on, not only was she able to get a face-to-face meeting with Don Lucas Sr., one of the most prominent venture capitalists in Silicon Valley, she also managed to persuade him to make a large investment in Theranos. Lucas explained his rationale for that decision in a 2009 interview: “Her great-grandfather was an entrepreneur, very successful. And it turned out later that the hospital [near] where [her family] lives is named after her great-uncle.”
Apparently, her great uncle’s and great-grandfather’s success was enough for Lucas to invest in her project. I wonder if that same qualification was equally convincing to all other investors? Or was it her passion and charm? Whatever the case, big fish investors gave her more than $750 million, unconcerned about her qualifications or the functioning of her technology.
This is all very strange, to put it politely. The media narrative has meanwhile contrived plausible-sounding explanation for this: you see, the big investors gave Holmes a ton of cash because they were just so afraid of missing the next facebook or google. But this explanation is just as unlikely as the rest of the story. Nor do such silly rationalizations explain the massive allocations from a group of top-notch power players, or the terms of investment that prohibited verification of Theranos technology, or share prices that valued the fraudulent venture at $9 billion.
THE REAL STORY
So what’s the real story? How did Holmes manage to get that meeting with Don Lucas Sr? How did she meet Henry Kissinger, George Shultz, Rupert Murdoch, Mad Dog Mattis and all the other power players? To get closer to the truth, let’s first look at her background and the path that led her to launch Theranos.
Elizabeth Holmes was born in Washington D.C. in 1984. She came from a relatively wealthy and well connected family. Her father, Christian Rasmus Holmes IV had a long and distinguished career, mostly as a government bureaucrat, but also in private enterprise. Here’s a list of his professional positions:
- Second Lieutenant, Civil Affairs, US Army Reserve
- Vice President for Tenneco Energy
- Chief Financial Officer and third ranking executive at the US Environmental Protection Agency
- Director of US Trade and Development Agency
- Senior Vice President, Program Development at the Global Environment and Technology Foundation (GETF)
- Vice President for Strategic Conservation Initiatives at the World Wildlife Fund
- Chief Operating Officer at the Office of US Foreign Disaster Assistance
- Member of the Market Advisory Board of Ze-gen Inc
Christian Rasmus Holmes the fourth was also Vice President at Enron, which became the largest U.S. fraud case before his daughter snatched that distinction for Theranos. Holmes’ family friend, Dr. Richard Fuisz, described Cristian Rasmus as someone very proud of his family’s lineage: “…the father would speak quite often about their lineage. They really took that mantle of this family history very, very seriously indeed.” That sense of her family’s importance was imparted also to young Elizabeth. In a 2014 interview for The New Yorker she said: “I grew up with those stories about greatness.”
Her own path to greatness would begin to take off when she was 18. Allegedly fluent in Mandarin, Elizabeth was included in a tour of China organized by Stanford University. While enrolled as a student there, she managed to convince Chemistry Professor Channing Robertson to let her work at his lab. He granted her that wish even though only advanced level and Ph.D students worked at that lab. Within a year, she was off on another tour of Asia and this time she happened to have witnessed the SARS outbreak. Somehow, having barely finished her freshman year at Stanford, she got a stint at the Genome Institute Lab in Singapore where she supposedly worked on developing systems to detect the SARS virus.
Holmes returned from that trip determined to change the world and soon filed her first patent application: a wearable patch with microneedles that could continuously test the wearer’s blood and administer the right dose of medicine in real time. At 19 she dropped out of Stanford and launched the venture that would become Theranos. For some twelve years her star would rise inexorably: in addition to raising astronomical sums from investors and bringing the who’s who of the US foreign policy and defense establishment to her board of directors, she also became the nation’s favorite entrepreneur, treated as a veritable celebrity…
The dark secrets
But the dark secret at the core of Theranos was that its technology simply did not work. Of the 240 tests they claimed it could perform, it actually performed only 15, and none of them reliably or accurately. In spite of the publicly projected façade of success and glamour, this secret was known to Theranos’ own technicians including Erika Cheung. A recent Berkeley graduate, Cheung joined Theranos in 2013 and looked up to Elizabeth Holmes as a role model. But she soon discovered that Theranos Minilab produced very unreliable results and was scandalized that it was used to diagnose patients, potentially putting their health and lives at risk. Cheung brought these problems to her superior’s attention, but she was warned to keep quiet, intimidated and placed under close and aggressive surveillance.
Cheung discussed these problems with her colleague Tyler Shultz and together they resolved to bring these issues to Tyler’s grandfather George Shultz who sat at Theranos board of directors. As they would later testify, at some point in early 2014 the two visited George Shultz at his home and warned him about the problems at Theranos. At the dinner table they explained to him that “When you think that they’ve taken this blood sample and they put it in this device, and it pops out a result, what’s really happening is the moment you step outside of the room, they take that blood sample, they run it to a back door, and there are five people on standby that are taking this tiny blood sample and splitting it amongst five different machines.”
This episode is extremely revealing about the power play involved with Theranos: if George Shultz had merely been duped by Elizabeth Holmes into supporting Theranos at risk of his own reputation, you would think that this discovery would have absolutely scandalized him. At the very least he should have demanded an explanation from Holmes and if there were any substance to his grandson’s and Erika Cheung’s allegations, you’d expect that he would have immediately distanced himself from Theranos and sounded a warning to other board members and investors. But that’s not what happened: George Shultz dismissed his grandson and Erika Cheung, saying: “I know Tyler’s very smart, you seem very smart, but the fact of the matter is I’ve brought in a wealth of intelligent people, and they tell me that this device is going to revolutionize health care. And so maybe you should consider doing something else.” Cheung resigned from Theranos the next day after only seven months on the job.
While Theranos continued in operation unhindered, she and Tyler Shultz became targets of very aggressive surveillance and intimidation. Keeping them silent was entrusted to David Boies’ law firm Boies Schiller. Recall, David Boies was also on Theranos board of directors and the fact that he had a hand in pressuring Tyler Shultz and Erika Cheung to keep quiet indicates that he too was in the know about Theranos dark secrets. But rather than investigating those secrets, action was directed against Theranos employees and potential whistleblowers. At a later point in time, George Shultz invited Tyler to his house to convince him to keep quiet. On that occasion Tyler indicated that he would consider signing a confidentiality agreement at which his grandfather said, “Good, there are two Theranos lawyers upstairs; can I go get them?” But ultimately his grandson declined to sign the papers.
Eventually, the case was brought to the attention of the Wall Street Journal reporter John Carreyrou who had previously broken several stories of corporate malfeasance and corruption and had extensive experience with surveillance and intimidation. He said that it was, “a very stressful time. I knew that they were working hard on intimidating sources and turning sources and making people recant.” But apparently, Boies Schiller’s tactics went far beyond what he had ever experienced: “I’ve been a reporter for over 20 years, and I’d never experienced anything of that magnitude. I mean, it’s not even close.” Tyler Shultz apparently received the harshest treatment – so much so that even Boies Schiller subsequently conceded that, “In retrospect, … he should have been treated more gently than he was.”
Protection in high places
Elizabeth Holmes was kept at helm well after she had lost support among many Theranos employees and managers. The directors and investors continued to back her because supposedly, she was just such a strong leader and a brilliant CEO. General Mad Dog Mattis gushed over Holmes in a Fortune magazine article about her: “She has probably one of the most mature and well-honed sense of ethics — personal ethics, managerial ethics, business ethics, medical ethics that I’ve ever heard articulated.” The general is better known for his motto in life: “Be polite, be professional, but have a plan to kill everybody you meet,” which may explain his nickname. Mattis stayed on as a director at Theranos all the way until late 2016 when Donald Trump nominated him as Secretary of Defence.
The myth of Elizabeth Holmes’ brilliance
Holmes’ cult of personality was bolstered with the claim that she would be “the next Steve Jobs,” and she herself had an obsession with emulating Jobs in many different ways. Apparently, this even led her to bring Avadis (Avie) Tevanian to Theranos management team and Board of Directors. Tevanian had been Steve Jobs’ right hand man at Apple where he led the software team that developed the Mac operating system X. Unfortunately for Holmes, Tevanian would also turn out to be the only person in Theranos management suite who would ask probing questions, demanded real answers, and could not be intimidated into silence. He would soon demolish the myth of Holmes’ supposed managerial brilliance.
“Don [Lucas] honestly believed that she was the next Steve Jobs,” Tevanian Said. “I think what she didn’t expect was … that I would ask tough questions…” Having confronted Holmes with tough questions, Tevanian was so impressed with her that he demanded that she be immediately replaced as CEO. But since Holmes was protected, it was Tevanian who had to go: “I was done with Theranos,” he said. “I had seen so many things that were bad go on. I would never expect anyone would behave the way that she behaved as a CEO. And believe me, I worked for Steve Jobs. I saw some crazy things. But Elizabeth took it to a new level.”
Holmes’ well-honed sense of ethics
There were several more episodes from the Theranos saga that also couldn’t be explained by Elizabeth Holmes’ projected brilliance and charisma. One was Teranos cooperation with Pfizer on a pilot test for cancer patients. Knowing that her company’s tests were unreliable, Holmes nevertheless pressed ahead for this program that put patients’ health and lives at risk. Blood tests are an important factor determining the dosage of medication for patients in chemotherapy and false results could prove fatal. Apparently this didn’t bother either Holmes or Pfizer. In 2015, the Centers for Medicare and Medical services (CMS) conducted an inspection of Theranos lab in Newark, California. In a letter they subsequently wrote to Theranos, they stated that Theranos tests and consequently inappropriate drug dosage caused “immediate jeopardy to patient health and safety.”
The inexplicable Walgreens deal
Then there was the inexplicable Walgreens deal. Their collaboration began in 2010 and by September 2013, Theranos announced a partnership with Walgreens, making them the exclusive provider of Theranos blood tests across its chain of pharmacies. Walgreens invested over $140 million in this partnership but apparently never bothered to test whether Theranos technology even worked.
Recall, neither Theranos nor Elizabeth Holmes had any papers published in any peer-reviewed medical literature. Regardless, Walgreens would go on to offer a menu of 192 Theranos tests which were supposed to be done on their Minilab devices. Only half of the tests offered were even theoretically possible on those devices. In reality, Walgreens ran 90% of the tests using traditional, legacy equipment. In spite of all this, they remained committed to the deal for nearly 6 years before finally breaking the Theranos partnership in June 2016. That was more than seven months after the Wall Street Journal had already run the John Carreyrou story unmasking the fraud.
The fact that Elizabeth Holmes could dazzle the general public thanks to months and months of media- hype is not so surprising. But the idea that she could continually deceive scores of industry experts and specialists in firms like Walgreens, Safeway, Pfizer, GSK and numerous health care institutions, as well as many high level business executives and investors, that is very difficult to explain. How should we believe that all these people had been hoodwinked by Holmes and that she could keep them all hoodwinked for over 12 years (2003-2016)?
The foregoing was first of three parts about the real story of Theranos and its important implications. In part 2 we discuss the powers behind the stage and why Theranos was such an important project for them. In part 3 we’ll look at the lessons of Theranos, which are very relevant to what’s going on in the world today as they offer encouragement and optimism.
Alex Krainer – @NakedHedgie publishes daily TrendCompass reports, enabling investors, traders and hedgers to navigate trends in over 200 financial and commodity markets - profitably, with confidence and peace of mind. To request a 1-month free trial, please e-mail us at TrendCompass@ISystem-TF.com