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Theranos

But Did Theranos Really?

There has been something tragically mesmerizing about watching the Theranos scandal unfold over the last few months. Better than reality television, followers are dying to know what will happen next as every day seems to bring another revelation, investigations, threats of fines and even whispers of criminal charges.

While this saga will likely carry on for months, if not longer, there is already some serious Monday morning quarterbacking to do. It seems obvious to all now that things were never quite as they should be with Theranos. But the promise of cheaper, faster, less painful medical technology had broad appeal, to investors and the masses alike. And that coupled with a fairy tale startup story starring a charismatic young woman, Elizabeth Holmes, meant the press that would later have a feeding frenzy on its demise, was in love with Theranos.

With all the dazzling lights, due diligence on Theranos, alas, could have been done better. The lessons to be learned are not new revelations. Rather, it’s a realignment with conventional wisdom and some intelligent insight. When performing research and analysis at Zirra, there are some key things that are always reported as “potential risks” in our company profiles and reports, and many of them were clearly present in Theranos. Taking a few of them from the profile, we can make this fiasco a teaching moment and use Theranos to show why some of these risks, even seemingly innocuous ones, are always worth taking into consideration.

Theranos Zirra Ratings

The Risks of Going It Alone

We call them potential risks, because they are part of a wider scope of variables and have the potential to turn into a costly flaw, or turnout to be part of a company’s secret sauce. For instance: “Theranos has only one founder. This may pose a risk as a potential single point of failure.” Lone wolves sometimes do come in the form of Mark Zuckerberg, but there are potential pitfalls to being a sole founders and many investment firms shy away because of this. Any weakness of that one person will be the weakness of the whole company, and there won’t be anyone there to share the stress with or bounce ideas off of.

Further, it can mean that there isn’t anyone around to hold that one person accountable. Adviser and board member Richard Kovacevich, former Wells Fargo executive, has commented regarding Ms. Holmes that “she doesn’t have to answer anything she doesn’t want to.” And while she put together a star-studded board of directors, as the founder with controlling interests, their power to disagree with her is limited. That is, assuming that the former statesmen and bankers would know enough about phlebotomy to challenge their leader.

Elizabeth Holmes REUTERS/Mike Blake

Age Before Beauty - Or at Least Experience Before Charm

Which leads to another obvious risk: “Founder has little or no relevant experience in entrepreneurship and/or the field in which the company is operating.” As much as the board didn’t know about the medical field, her experience was also lacking. True, she did a summer internship in Singapore prior to dropping out of university at 19, but that is the extent of her formal learning. It’s all about perspective but what may have at one time been an inspiring story of a young genius is showing it’s flipside - an underprepared and underskilled founder whose power is buttressed by an unqualified and impotent board.

The Art of Being Clear as Mud

This power structure is part of the overall situation that allowed Theranos to function for so long without being questioned deeply enough by investors and the press. In fact, an enthusiastic and complicit press shares some responsibility for keeping the wunderkind aura going for so long. It took years, until 2015, when a reporter sardonically questioned the “comically vague” Theranos gospel. Thus, a further potential risk we saddled on them: “Theranos is maintaining high levels of secrecy, releasing only small amounts of information publicly relating to the product.” It is understandable to protect proprietary information but, unlike other areas of technology, a certain amount of transparency is simply a safety issue that carries massive liability.
Theranos Red Flag

Staying on the Right Side of the Law

“Theranos will have to address the regulatory issues of each market it enters, slowing distribution in some regions.” This is a potential risk that has several angles. Other than just slowing the path to fantastic profits (medtech is notoriously glacial), here is an option for proper due diligence, especially considering the above mentioned secrecy. Here it is important to know what agencies will be involved, what the processes are and where the company stands on this process.

When thinking about medical approval, the FDA (Food and Drug Administration) is the acronym that comes to mind first. However, as Theranos is offering a test, not a drug, it is CLIA (Clinical Laboratory Improvement Amendments), part of CMS (Centers for Medicare and Medicaid Services), that typically approves laboratory tests. When Theranos was publishing FDA “CLIA waiver” for a herpes test, this was not an FDA approval, and neither were the other pending waiver requests. It was a loophole and one that raised eyebrows, though not initially.

And the Higher You Are, the Harder You Fall

Whatever caused some in the press, public and investment world to turn a blind eye to these potential risks is something that continues to be debated. On a CNBC TV panel it was suggested she got away with it as a woman, but rather than this simplistic explanation, it was likely a perfect storm of these potential risks. A single charismatic founder entered an industry that is accustomed to long periods of development, allowing her to operate in stealth for more than a decade while a celebrity board of directors attracted press but provided little useful medical insight. And just like a patient’s fingertip the bubble built to protect Theranos has finally been pricked.

Deflated Valuation