How a Company Scammed Silicon Valley and How It Got Caught | Hacker News Reader

How a Company Scammed Silicon Valley and How It Got Caught

nytimes.com

83 pointsraleighm40 comments

I’d argue that it was largely dumb money that was scammed. Not Silicon Valley. Those so-called marquee investors named in the article were not even VCs. In fact you see a lot of this in enormous funding rounds. You didn’t see the premier firms in there like Sequoia, Khosla, Founders Fund, a16z, Benchmark, ... DFJ was the only notable firm there and it looks like they came in early with Draper seeding it when it was still idea-phase.

There are a million ways you could be screwed by an entrepreneur so due diligence is really about finding the 3-5 questions that will make or break a business. In the case of Theranos, the whole idea relied on an assumption that you could massively reduce the amount of blood needed to do an analysis. So that’s where your due diligence starts. But after 20 minutes of desk research you’ll find that small blood samples intrinsically heterogenous for many tests. VCs are trained and paid to ask the right questions. This was dumb money plain and simple.

>I’d argue that it was largely dumb money that was scammed. Not Silicon Valley.

Bubbles have normal air in them. Economic bubbles include plenty of normal economic activity that has not much to do with the fact that it's a bubble.

I would make the case that calling SV and "dumb VC money" one in the same is perfectly appropriate in the context of an article written for a general audience.

> I would make the case that calling SV and "dumb VC money" one in the same is perfectly appropriate in the context of an article written for a general audience

Please do make that case, because its much easier to make the case that it's deliberately misleading to get clicks and make a headline than actually informative or accurate.

The general audience is quite capable of understanding "dumb rich people" vs "experienced venture capitalists".

"How did they get scammed?"

"Because they're dumb rich people."

"How do you know they're dumb rich people?"

"Because they got scammed."

No but thanks for putting words in my mouth. They were dumb because they clearly didn’t even bother to do basic due diligence. The fact that there were no other marquee VCs in on a $10b valuation should have raised some flags. It did not. And they weren’t taking a $100k punt. These were investments of tens of millions of dollars so you think that there would have been some basic technical due diligence. This is what I call dumb money.

When a VC sees a huge valuation and the only other investors on the captable beyond the Seed/A rounds are celebrities, pension funds, SWFs, family offices and hedge funds they say: “we’re worried that this is the next theranos”

DFJ defended them to the very end though, even today I think. Hard to make the claim they fell for the Theranos lies when the project had nothing to audit or do due diligence on, because they're still falling for them now.

Draper defended. He’s not DFJ and has left the firm.

My company recently interviewed a Theranos veteran - this person was a scientist working on a small part of the analytical pipeline. Apparently there were many, many smart people working at Theranos (including the candidate) who had no idea the company was a scam. This was in part due to intense secrecy and very rigid information silos within the company.

There’s probably a lesson to be learned there, of course - one too many “need to know basis” explanations and it’s time to start asking some hard questions.

By that metric Apple could be a scam.

Except Apple delivers.

The difference is that it is trivial to determine whether they’re selling something that works, which would be the thing to hide in the event of fraud.

Or the fraud is purely financial, in which case it wouldn’t be obvious to an engineer anyway because that level of siloing is normal.

Just like wearing turtlenecks won’t make you Steve Jobs, maintaining a corporate culture of total secrecy will not make you Apple.

No. For starters we have plenty of evidence that Apple is not a scam. Secondly "one too many “need to know basis” explanations and it’s time to start asking some hard questions" is a pretty clear qualifier. The difference between protecting legitimate secrets and keeping things secret that aren't really secrets anywhere else and have no value as secrets accept to deceive is pretty clear.

Did you end up hiring the person? Do you feel like working there significantly damaged their career prospects?

I have Friends and Family at Symantec right now, and they are all very worried what the potential FCC violations could to their resumes.

They are specifically in Finance, but also weren't aware of any of the current news items.

I know people that worked there and having Theranos on their resume caused them to not get an interview at at least one company.

Not the OP, but I have also interviewed and hired ex-Theranos engineers. I don't think it damaged their career prospects. So long as they can talk about the normal things you talk about at an interview they'll be fine.

I feel like most people recognize that given the huge number of employees, most working there are genuinely good, competent people who got caught up in a bad situation. No reason to hold that against them.

Interesting that the review is by Roger Lowenstein:

https://en.m.wikipedia.org/wiki/Roger_Lowenstein

I just finished his book on Buffett, which I wish I’d read 20 years ago.

Why do you wish you'd read it 20 years ago?

Probably so that he’d have enjoyed the gains of investing in Berkshire Hathaway?

I would still own Google, Amazon, and Apple today. I would have always kept those stocks.

Find today’s equivalent then hold for 20 years.

But would these outweigh your losses to other (nowadays unknown) stock?

Because I was investing in the Internet Bubble.

“Be fearful when others are greedy, and greedy when others are fearful “

You are buying a company. Would you want to own that company if the market shut down for 5 years?

Don’t use leverage.

I owned Amazon, Google, Apple, etc at some point during my life.

I was forced to sell on margin calls during the tech crash.

I would have thought about investing a lot more differently.

Buffett doesn’t sell his gems during a recession. He doesn’t try to time Mr Market.

I was mostly in cash for the collapse of housing. My 2009 portfolio was worth simply holding until now and I would have been much better off than trading in and out of stocks.

I would also have paid attention to fundamentals: Income Statement, Balance sheet, Cash Flow Statement

In short, I would have been more of an investor.

Listen to Buffett.

What was your main takeaway?

also curious

Also the author of _When Genius Failed_, about the LTCM crash, which is a great book.

"There is a larger moral here: The people in the trenches know best."

It seems obvious, and yet it is a truth so many leaders fail to grasp. Keeping a finger on the pulse of employee attitudes is a great way to nip issues in the bud before they become systemic.

Although I guess that doesn't really help if the leader is the issue.

The problem is that the grunt employees know where the bodies are buried. There's usually a body or two buried somewhere -- if you kept the pulse of grunt employees, you'd never invest in anything.

I'd expect that's only true for a particularly risk-averse investor.

If there's a metaphorical body buried in almost every company, then that's just risk, and knowing what it is would actually be better for an investor than not knowing.

Why would it be a dealbreaker?

At Theranos at least, they could have been very literal bodies.

> Based on Carreyrou’s dogged reporting, not even Enron lied so freely.

The rest of the article was more or less just copying every other article about the subject, but this line is just beautiful.

I think Murdoch did a great job by letting the editors decide what to publish. There is something that company boards can learn from editors ;)

Even that photo looks staged. All those technicians standing there looking at machines like they are trying to monitor something.

Those are all machining stations where CNC parts (likely for the instruments) would be cut. The guy in the front has a boring day ahead of him, watching the chip conveyor delivering waste material into the dumpster.

So Theranos actually got CNC machines in-house? Most companies would outsource it one of the dozens of CNC shops in the bay area (or elsewhere is large enough volume.)

They published a video of the manufacturing that showed those CNC machines, injection molding, and robotic assembly.

It's a lot faster to iterate if you have in-house machining and molding; you can get parts made or modified in <day vs weeks with an outside shop. You can also work closer with the machinists to iron out challenges.

Slant article of a topic that has been slaughtered to death by people with more industry knowledge than the author

The article is a review of the book written by the journalist that first broke the Theranos story (John Carreyrou).

Whoops! Slanted review

VCs Hate Her: This CEO got hundreds of millions with this one weird trick!

> marquee investors including Robert Kraft, Betsy DeVos

Is this a joke? or was that intentional?

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