So much went so wrong at Theranos that it’s hard to know where to begin. At its core, it is another case of deeply flawed, if not failed, governance at a company that too quickly achieved global recognition and a $9 billion valuation.
Some might say that as a private company, there is no harm or foul. That would be a mistake.
The Food and Drug Administration is investigating whether Theranos administered diagnostic blood tests despite knowing its system was inaccurate and whether the company modified its equipment during the FDA approval process, a violation of research practices. Recently Walgreens announced that it has postponed deployment of blood testing centers in partnership with Theranos and Safeway has delayed the launch of a similar program.
Thirteen years in, Theranos’ technology has never been independently tested.
Despite longstanding questions about the efficacy of its technology, the firm has surrounded itself with an all star cast of investors and advisors, including:
- Riley Bechtel, chairman, Bechtel Group (director)
- David Boies, attorney (director)
- Timothy Draper, Draper Fisher Jurvetson (investor)
- Larry Ellison, CEO, Oracle (investor)
- William Foege, former director of the U.S. Center for Disease Control and Prevention (medical board member, former director)
- Bill Frist, former Senate majority leader (medical board member, former director)
- Henry Kissinger, former secretary of state (advisor, former director)
- Richard Kovacevich, former CEO and chairman, Wells Fargo (advisor, former director)
- Don Lucas, earl investor in Oracle (investor)
- Sam Nunn, former senator (advisor, former director)
- William Perry, former U.S. Secretary of Defense (advisor, former director)
- George Schultz, former secretary of state (advisor, former director)
Among a recent flurry of highly skeptical media coverage, The New York Times credits Theranos founder Elizabeth Holmes with executing the Silicon Valley playbook perfectly from dropping out of college to embracing quirks worthy of Steve Jobs to championing a humanitarian mission. “But that so many eminent authorities — from Henry Kissinger, who had served on the company’s board; to prominent investors like the Oracle founder Larry Ellison; to the Cleveland Clinic — appear to have embraced Theranos with minimal scrutiny is a testament to the ageless power of a great story.”
Last year, $633 million in new investment flowed into Theranos. This demonstrates the degree to which many investors will suspend disbelief for a hot commodity.
While Silicon Valley and the VCs who typically speak for innovative technology companies are known for their skewed views on governance, the executives and board at this company appear guilty of large scale malpractice. Reports that in October the company had filed to issue more shares suggest that the board could have been complicit in Ponzi-like plans to cash out early investors, even as the company’s troubles continued to mount.
Despite the setbacks experienced at Theranos, the board hardly appears chagrined. A press release from the firm attributes this quote to the board and other advisors: “Theranos’s technology is both transformative and transparent: Our blood tests are faster, less expensive and require less blood than traditionally required. As a group, we embrace this promise and stand with Theranos.”
This saga demonstrates how boards of directors, despite their pedigrees, can be far, far out of touch with the companies they are supposed to oversee. Many directors are simply spread too thin to be effective. In the case of Theranos, Bill Frist is on 3 public company boards, seven private company boards and six non profit boards.
Theranos is just the latest proof of the need for continuous vigilance in our markets. It shows how the system continues to benefit from, even encourage activist hedge funds, whistle blowers and regulatory watchdogs to ensure that investors get reasonable protection and, when it comes to health and public safety, rigorous standards based on peer reviewed science.
Breaking Views says that they Theranos case could reflect badly on unicorns, privately held startups valued at more than $1 billion. Good, it should be hard to achieve a high valuation and it should be harder still for companies which hide behind walls of secrecy like Theranos, regardless of who is on their board.
It seems that every sector of the financial industry reaches a point where hubris gets the better of them.
For investment banks, it came in 2009 with Lloyd Blankfein’s “doing God’s work” line. Private equity is now in the crosshairs and Mitt Romney’s claims that Bain Capital created jobs is falling on deaf ears. The latest to cross the line are venture capitalists. Twelve years after the dot-com bust and emboldened by recent IPOs of social media companies, VCs are emerging from their bunkers and they’ve hatched some peculiar ideas while plotting their comeback.
The Wall Street Journal had two articles yesterday on Andreesen Horowitz , the VC firm co-owned by Marc Andreesen, tech whiz behind Netscape (remember 1994?). “We are encouraging all of our companies to put in place a dual-class share structure if and when they go public,” said Andreesen to the Journal. “It is unsafe to go public today without a dual-class share structure,” he continues.
What? It’s 2012, fellas! Andreesen and his partner have been soaking too long in the Hot Tub Time Machine. Not only do they not recognize that multiple classes of stock are routinely denounced by corporate governance experts, but they are overstepping their own expertise and role in the marketplace when they comment about how to organize long-lasting, public companies.
This anti-shareholder view is not new for Andreesen. In a blog post from 2009, he argues that dual-class shares are OK when “the controlling Class B shareholders have a commitment to treat Class A shareholders fairly and equally in all respects other than voting power.” Yeah, that’s realistic. In his list of nine factors that can work against the almighty founder-CEO’s quest to create a “long-term franchise” he lists “hedge funds aggressively short-term buying and shorting stocks for the quick pop, and often spreading malicious and untrue rumors along the way” and financial journalists who might “write all kinds of nonsense.” ROTFLMFAO. If a CEO can’t handle facts of business as usual like short sellers and negative press, then there is no chance for a long-term franchise!
In the other Journal article Ben Horowitz (the other half of Andreesen Horowitz) recalls encounters with an “activist investor” when he was the 35-year-old founder and CEO of Loudcloud. “She started this campaign to force the board to remove me so we would sell the company for $10 a share. She would go to shareholder meetings, call sell-side analysts and send letters to the board,” he laments. The journalist does not identify the investor, but one can assume this was not an institutional investor advocating for change in a programatic way. It was some vocal individual, perhaps a smart individual, but one person all the same. That’s the price of going public Ben. Live with it.
In our economy, venture capital firms, investment banks, private equity firms have valuable specialist roles to play. No one would argue that Morgan Stanley should prowl the garages in Silicon Valley to fund the next big thing. Venture capitalists like Andreesen and Horowitz should stay in their start-up sandboxes and understand that being a public company is a privilege and with that privilege come expectations for performance and that founder-CEOs in particular need checks and balances.
Demand for social media companies, however, has resulted in several IPOs with multi-class stock and founders who retain voting control. According to the Journal, 14% of tech IPOs in the last two years have at least two classes of stock — most notably, Facebook, LinkedIn, Groupon and Zynga.
Update: Felix Salmon at Reuters also takes a look at Andreesen’s comments and notes that Andreesen “has a level of access to management and corporate information that most public shareholders can only dream of. If he likes that system, maybe he should start thinking about how to port it over to public companies, as well.”