Theranos’ Letter to Shareholders Shows the Company Is on Its Deathbed

Of course, prior investors are incentivized to continue to act like it was a viable company lest their clients, the investors for their funds, realize that there was no due diligence on this deal and possibly on other deals these firms have engaged in.

The fact that Fortress already gave them some funding, at arguably the "last minute" is evidence of this.

Fortress, you will note, was probably more of a vulture investor than venture investor here.

Happens to investors and money too sometimes.

I don't think it will here, but I'm just a peon.

https://www.crunchbase.com/organization/theranos/investors/i...

Unfortunately, I think Ms. Holmes has a long road ahead even after the company officially closes. Based on what I've seen there is a non-zero chance that she goes to federal prison over all of this. I think she genuinely believed that she could make it all work, but there's no room for lying to investors in this game.

Also, there may be (somewhat) rational reasons for investors to invest more.

For existing investors, there’s the statistics. Let’s say you invested a billion in a company that says ”if you don’t pay 10 million now, you’ll lose all of it”.

If you think there is a 1% chance that 10 million will save them and bring back your money, you, statistically, play evens if you give them that money (paradoxically, if, a week later they say they need another 5 million, giving them that at that time is OK as long as you think you still have ½% chance of getting all your money back, but you shouldn’t give them 15 million up front when you thought you had a 1% chance)

Of course, some serious delusion may be needed to believe that, firstly, that 10 million will keep them afloat, and secondly, that it will enable them to recover all of your billion.

For potential new investors, it is almost as if that billion is a plus. It is really hard for a company to have spent a billion and not be worth at least 10 million. Fire sales _can_ be bargains. For the Theranos case, all that money should have produced some patents, some of which may be worth something.

Note I said assets. Technically the company doesn't appear to be insolvent in which case instead of an ABC you could basically strip what you want away from the obligations.

And those laid-off people? They got 60-day notice; certainly some of them have already jumped but probably not most of them and in such a restructuring you might be able to retain the ones you want (which could be all of them).

It’s really $X million, not $X minus 3 million, because you should have $3 million from any source other than them (e.g. revenue) and failure to have it represents mismanagement.

This particular covenant does not provide material downside protection to the lender; it’s more designed to prevent an aggressive company from riding things too close to the knife’s edge. There would often exist parallel covenants about borrowing money, assigning assets, increasing management salaries, paying dividends, etc.

(Father worked in commercial real estate; lenders have to get increasingly creative when a borrower’s situation is closer to the brink, which is where I learned about these.)