Subprime ‘unicorns’ that do not look a billion dollars
ft.com
ft.com
On one hand, it is tackling a huge, important market and appears or appeared to have something legitimate.
On the other, so many of its tactics seem designed more to increase valuation than successfully bring its technology to market. It's obscenely celebrity board completely devoid of any relevant experience. A ridiculous $9b valuation on a paltry (relatively) $400m raised. 100s of SKUs on its product list when it should be perfecting on a just a few. The incessant PR campaign around its founder. Giving Jim Cramer an exclusive? Refusing to participate in WSJ article. Spending a whole day with Harvard Fellows. Hiring slick crisis handlers. Threatening whistleblowers. I'm sure the incumbents wouldn't be that excited about a patent-protected entrant into the market but it doesn't seem like they are the ones mounting the attack. It either works or it doesn't right? And it'll be easy to figure that out. Can someone help me out?
My best guess is this is just 'fake it till you make it'. If they've got a 9 bil valuation, at least they can hire some smart folks who would otherwise be unhappy in proper academia. Maybe they're on to some technology and we will see that pivot soon.
The global pharmavertical industry is about $900 billion a year and has a very wide variance in types of products so the normal idea of what what value a "celebrity" is worth is very different. If you're a biotech company whose most likely exit is an aquisition by Pfizer or Roche, you want industry insiders. If you're like Theranos, and your business depends on consumer spending at places like Walgreens, you're so far out of the normal pharmaceutical and diagnostic industry that all bets are off.
Several hundred million for an IPO biotech company on ZERO revenue post dotcom crash is common enough that $9 billion valuation (25 times revenue) is damn good. There are literally thousands, if not tens of thousands, of labs that can run an off site (for the consumer) screening for every one of Theranos' target markers. The idea that anyone would invest hundreds of millions into a diagnostic company without compelLing secret sauce is troubeling. I don't doubt that VC firms make mistakes as silly as the rest of us, but I prefer to give the benefit of the doubt assuming semi-competent due dilligence.
That said, no VC firm in their right mind would ever invest in a company like Theranos if it had only a few SKUs. It is practically impossible (with current technology) to come up with a generalized test that identifies anything more precise than "gram negative bacteria." Either Theranos is a pump and dump scam of epic proportions or they really do have some technological superiority that allows them to convert expensive lab tests into a consumer technology.
As far as the other red flags, you'll usually find the same intrigue surrounding most successful biotech companies. When your operating at the cutting edge of the most difficult scientific field in the most stringent regulatory environment on the planet, you have to take more shortcuts than usual.
Regardless, there are so many biotech IPOs based on literally zero revenue that this isn't even worth mentioning. Off the top of my head, these are the public biotech companies that I know of that went public with no revenue to speak of: Genentech (yes, THAT Genentech, biggest acquisition in histoty at over $50 billion by Roche), Celgene, and in the last year alone, Axovant Sciences, CytomX, Strongbridge, MyoCardia, RegenX, and Global Blood Therapeutics (I'm almost certain that "in the last year" in actually "in the last few months")
I don't know enough to judge this one in any sensible way. I thought this Forbes article[1] was good, and the author said:
How much is real and how much is hype? I’m not going to provide a final answer here. I still have no idea how Theranos’ technology works. But I’m more confident than I was before after spending a day talking to the company’s partners.
Here are a few reasons for that confidence: The Food and Drug Administration has just posted a detailed explanation of its decision to clear Theranos’ one approved test, and, to my eyes, it does give some validation of their technology
[1] http://www.forbes.com/sites/matthewherper/2015/07/15/giving-...
http://www.wsj.com/articles/hot-startup-theranos-dials-back-...
I say forced because you made it sound like they had gone out of their way to seek approval when actually they were not.
A couple weeks ago I got a blood test. I walked into the test center, which was staffed by a single person. I waited in line (there was one person in front of me), and told the person my name. She walked me over to a chair, drew enough blood for a whole bunch of tests, and that was it. I was in and out in 12 minutes (I timed it), and it was almost completely painless.
This wasn't Theranos. It was "Lab Corporation", an utterly non-unicornish testing center, and the local branch was staffed by a competent phlebotomist. It turns out that, once you stick a tiny IV needle in, you can draw a few vials of blood very quickly and painlessly.
In contrast, I once had a test at Theranos. The tech poked my finger with the magic lance (which stung more than the IV needle), put the little magic capillary collection widget over the drop of blood on my finger, and squeezed REALLY FUCKING HARD, repeatedly. My finger tingled weirdly for a few hours, because the REALLY FUCKING HARD squeeze hurt and probably broke a few capillaries. And the process took considerably longer than the blood draw at Lab Corporation. See, a little needle with a vacutainer at the other end draws quite a few mL of blood very easily, but a little finger prick struggles for more than a drop or two.
(Next time you give blood and get the finger-prick hematocrit test first, look at the tiny amount of blood that they get. Then imagine the rather large multiple of that amount that you'd need to fill the little Theranos collection widget. Ouch!)
I suppose if I were afraid of needles, then maybe the squeeze-the-finger-really-hard approach would have been an acceptable idea.
(I am an anaestheologist and often perform or ask nurses to perform post-op point of care pinprick blood counts to look for anaemia in patients who have had big surgeries. We do 2 readings to check for error, and I often find that samples which have been squeezed out have a haemoglobin value 10-20% different to those which are drawn from a vein due to expression of tissue fluid.)
However, the skill level of whoever performed the fingerpricks for that data may be significantly higher than the average technician at Theranos's wellness centers. And of course we have no idea about the hundreds of other tests. There seems to be some other correlation data on Theranos's site (https://www.theranos.com/our-lab - scroll down to 'Representative Clinical Correlations'), but there's no captions or text to provide context.
The infrastructure to support the kind of experience you're used to at Lab Corporation or Quest Diagnostics does not exist in much of the world. With the ubiquity of electricity and wireless broadband, a charity like Doctors Without Borders or Red Cross can drop a Theranos test device in a developing country and only have to worry about delivery of consumables to the location instead of shipping samples out, which requires a reliable postal infrastructure instead of a once a month delivery by airplane, boat, train, truck, or rickshaw for that matter.
I'm excited by Theranos' technology because the FDA has strict limits on how much blood you can draw from patients during a clinical trial. As our therapeutics get more and more complicated, we'll need a lot more data but the FDA will not raise this limit much, if at all, in the future. This is a known issue that you have to design around when running clinical trials, especially if you're developing something like a cancer cocktail where you might be looking for half a dozen metabolites and intermediary molecules in extremely low concentrations that each need a vial of blood. This isn't Theranos' target market (intermediaries/metabolites can be much harder to design tests for) but their tech's ability to test onsite with a tiny amount of blood might allow them to move into this market.
http://www.washingtonpost.com/news/wonkblog/wp/2015/10/15/th...
"Usually such deficits in the board of directors would be offset by an equally stellar scientific advisory board and/or medical advisory board," Church said in an e-mail. "I don't see either for Theranos."
Lab Corp is worth $11 billion. With $6 billion in sales (and having generated ~$1.6 billion in profit over the last three years). The market Theranos is tackling is not as huge as some people apparently would like to think. Lab Corp is a monster in the field, and they're merely doing $11 billion. It's not an Uber situation, where a company blindsides an entire industry, and that industry stands still - Lab Corp has the resources and scale to respond to anything Theranos can do.
In the perfect scenario, Theranos is doing little more than pulling at least a decade of future returns forward at a $9 billion valuation. There's nothing they can do that will generate $6 billion in sales in the next five or six years. Their business model is partially built on neutering the high margins that companies like Lab Corp enjoy.
They are valued at $880M, and had ~ $200M revenue and $27M profit in the last financial year.
http://www.abaxis.com/about_us/history.html
[1] http://www.piccoloxpress.com/products/panels/function/
[2] http://www.piccoloxpress.com/wp-content/uploads/2015Revision...
If they were in startup world those numbers would probably make them over $1BN in valuation.
My theory, assuming they aren't outright committing fraud.
The technology works, at least within a tolerance they think is reasonable. It's possible that early scientific staff (part of the huge turnover commented elsewhere) weren't happy with that tolerance.
Now they are in the process of getting FDA approved. At the same time Theranos is also following a Silicon Valley strategy, building an audience with a loss leading product. In this case it's doing blood tests at a price well below cost, using normal lab equipment, and covering the difference with VC money.
They dont want to admit this for two reasons
1) It exposes them to the competition, who know they are losing money on every transaction and it also would make doctors and patients wary of dealing with them
2) As discussed in the WSJ article taking less blood and using normal machines just means a less accurate blood test, which makes the benefit of not getting a needle much smaller and messes with their core marketing message
I think this also explains the directive discussed in WSJ to only submit sample results from normal lab equipment, as at the moment they are simply operating as a normal lab.
I think this is a clash between staff who think Theranos was all about creating a reliable way of doing blood tests with less blood, and the current direction they are taking building scale with traditional equipment.
> 4/ You'd likely do better financially, on average, joining a Series A company, AND have more career upside.
> Source: https://twitter.com/StartupLJackson/status/65515425472269107...
Why anybody would want to be an employee at a unicorn company is crazy to me, especially in the world of ultra-inflated valuations.
If you join a huge public company you'll get liquid stock, at a real valuation, along with lots of salary and perks. The stock can't 10x, but companies will generally give you pretty large grants so if the stock goes up 20-50% you'll probably get a nice bump in your total compensation.
If you want to join a startup, you are much better off joining a ~10-20MM one. You still get a salary, though maybe not as high as at a unicorn or public company. However, it is much easier for a ~10-20MM company to 10x in value than a 1B company, and if the smaller company does 10x you'd be a somebody at a ~100MM company rather than a nobody at a ~10B one.
And as for other share transactions, you'll need to find a buyer. Most savvy investors aren't going to be willing to pay huge valuation premiums for common stock. And if they aren't going to pay a premium, then you really haven't gained anything by issuing common shares at a lower strike price.
So basically, common shares have lower strike prices because they are worth less.... It isn't some magic trick that automatically benefits employees.
Their latest quarter they did $73m in sales and lost $50m, with rapidly slowing growth. Even worse, they're bleeding significantly on an operating basis, implying the business may never be capable of making money. They might be lucky if they have four or five quarters of cash left before disaster hits. The near future returns for employees holding stock, is not likely to be pretty.
Even the primary founder didn't get very rich in SV terms, after he had to be diluted down to a sliver of ownership to keep the lights on.
If the company doesn't reach the IPO and get acquired, well check what liquidation preference means. Check this post to understand better how stocks in a startup works: http://heidiroizen.tumblr.com/post/118473647305/how-to-build... (it is focused on founders, but employee get the same treatment).
() Not a founder or executive/director, who'll get up to 5000x that.
I'd be interested a breakdown based on "joined at funding stage X". From what I understand, if you joined Square in 2011, when it was already super hot, you're doing pretty well and could sell your stock on the secondary markets for a handsome windfall even well before this IPO.
Do you have any sense of what the equity numbers would have been like at year 0, 1, 2, 3... based on your general knowledge of startups (not necessarily Square)?
$130K plus 15% bonus plus $70K/yr in stock for a senior engineer isn't that out of the ordinary at big public companies. Total comp ends up around $220k. I don't see too many startups paying over $150k, so the average employee at an exceptional startup like Square makes around the same if not less than at a big company, even with a decent payout.
~$300K is great cash, but it's peanuts relative to $6B. Everyone worked hard, but only the founders and the very top tier actually get rich. The rest get one-thousandth or many-thousandths of what founders get.
People are shitty negotiators, and everyone just accepts that they should get a tiny little slice of the pie. I believe in part it's because they think everyone has a small slice. They don't realize how much the founders kept for themselves (they think it mostly all went to the big VCs), and how huge the drop was from founders to engineer #1, and from #5 to #6, etc.
Everyone just accepts that the leadership (and ONLY the leadership) should become ultra-rich at the end, while the rest move on to the next venture and hope to do a bit better next time.
"But I took the risk!" says the founder. Sure, buddy, you took the risk and everyone else just enjoyed a walk in the park.
You'd expect that for taking on the risk (relatively low as it may be for a unicorn) you'd do better than the extremely low-risk public stock packages being offered by BigCos.
I also know some people at other BigCos getting similar levels (to be clear: $300-400k/yr total comp of cash + public stock) so it's not just a GOOG/FB thing.
If you join a Series A company your stock may well 10x on paper. But what're your chances of actually getting to cash that out? If you join a "unicorn" they can quite probably match the salary and perks you'd get at a large public company, and are likely to give you more stock, which probably still has better odds of getting a decent bump than the large public company stock does. Heck, apart from anything else, the "IPO bump" is a thing.
I feel... strange about reading this in an article when it is framed as evidence of anything. People's reasons for committing suicide are often complex and to mention that here seems... improper for reasons that I can't quite put my finger on.
If it's just financial success and you're a very sharp, bright person, be a quant trader at a prop trading firm or something similar.
The popular culture, however, points to the tech area as the source of the new rich. If you want to be the new rich today, you found a tech company.
You're right, though, that there is also an element of success is more than about financial success today. Not just in the valley but in the privileged world that it is peppered with. We don't want to just be rich - we want respect.
From the study, if you're an entrepreneur, you are more likely to have a mental health issue (49%) than not (48%). Significantly higher rates of suicide, depression, etc.
It's higher across the board.
But it isn't just from the stress of starting a company.. entrepreneurs are more likely to have close relatives with mental health issues too.
I wasn't able to find much other than that... so if anyone else has more links, I would be interested in reading them.
[1] https://www.cbinsights.com/blog/sequoia-capital-teardown/
https://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=newss...
Can someone please explain this?
Essentially, the money VC invests can be invested with a 'first-out' kind of option. So that were the company to fail, or sell for less than expected, that the very first people paid out of whatever pot of money is left would be the VCs. So imagine they say the company is worth $1B and a VC put in $200M. Company sells for a 'dismal' $210M. VC exits with their $200M back, and founders, team, other investors etc. all fight over the $10M that on paper seemed like $800M. As I recall, sometimes the investments are not just 'preferred' but are '2x preferred' or such things.
In the end it distorts the incentives of the VC. The want the company to be worth a billion dollars, but if they say it, it's not true, the company crashes, and loses nearly everything, they in reality only lost the time-value of their investment, not actually any cash.
I really hope Theranos is not a fraud, I think the concept of rapid diagnostics with minimal source material is critical to scaling health care to the planet as a whole. But having watched people like Affymetrix and other "silicon-meets-organics" concepts go through the process of validation, I have always felt Theranos talks too much about how great they are going to be and how cool their founder is, and not enough about how they are going to get there. My observation is that companies that far ahead of the hype wave are more likely to flame out than ones that start very quietly and intercept the hype wave at or just after product introduction.
Someone is going to figure this space (instant diagnostics through direct inspection) at some point. Still wondering if someone has.
Uber, Xiaomi, Airbnb, Palantir, Snapchat, Didi Kuaidi, Flipkart, WhatsApp, Pinterest, and Dropbox are among the biggest winners so far. There's nothing Wall St or financial engineering about any of those. They're all legitimate businesses and or services that consumers blatantly want.
This has nothing to do with consumer demand. There was consumer demand for subprime mortgages too. What we're talking about is where the late-stage money is coming from and how the valuations are being manufactured.
Can anyone recommend anything to read to get an insight into how one of these deals works?
It's always seemed like liquidation preferences push a deal a fair way toward debt because (I think?) they get paid first and fully before anybody else. But that doesn't seem to be a recent thing at all.
Not trying to call out the author or Sequoia but this doesn't seem like anything new. Are the current deals even worse than 4x?
[0] http://www.wac6.com/wac6/2009/08/sequoias-liquidation-prefer... [1] https://pando.com/2014/01/24/memo-to-stripe-winning-the-hear...