According to Wikipedia, Theranos collected over $700M in funding from investors. Where did all the money go? Employee salaries? Did they actually spend a significant amount of money pursuing their new technology?
Did investors get any of their money back once the fraud was revealed?
To many places: yes, to salaries, but also to operating expenses, lab equipment, building leases, travel expenses, and wining and dining prospective investors are some cost categories. And to other business related expenses.
ETA — to legal fees too. And patent filings.
It might be that Softbank, who got the patent portfolio, might be able to go patent trolling and make a bit of money back. But nothing like what the patents were supposedly worth if the technology worked. Still, the patents have a lot of life left, and if someone is able to make some of the tech work in the future Softbank have a chance to see some real value back.
A few investors would seem to have gotten out early, but the big ticket investors who though they were going to win big on the back of big investments ended up with equity in nothing of value.
The amount of money spent on propping up the sham must have been significant. 800 employees will burn though cash at an eye watering pace. Especially in Silicon Valley.
Some of this reminds me of a startup a while ago (wish I could remember the name) that claimed especially good on-line language machine translation software service. Turned out that their software was no better than anyone else’s or was actually worse, and they were propping the edifice up by employing real people to do the translations whilst madly trying to get their own software to work. Didn’t work out. Crash out or crash through. The kindest reading of the Theranos disaster would be that. But given the history, it is clearly much more complex and murky.
How valid would patents be if the core of the trial is that they don’t work?
(But of course, the essence of patent trolling is going after those who don’t have the size or pockets to fight back…)
At very least, that would be an interesting data point in any lawsuit. At worst, does the patent office revoke patents if they make false claims?
The patents wouldn’t be granted if they had no inventive step (usually) and if they didn’t work. So, assuming the patents were granted in countries that followed worldwide conventions, they might have some value in that they are incremental advances over prior art. The machines themselves are still garbage.
Yeah, a patent must contain enough information to allow someone skilled in the art to reproduce your invention. That is the deal - you disclose enough to allow others to use your invention, and you get protection of the invention for a limited time. If you break your side of the deal by not providing enough information to allow someone to make it work, the patent can be invalidated. But the patent offices don’t invalidate patents, the courts do. So you need to fight the patent in court. If the invention could not be made to work, it is good evidence that the disclosure was inadequate. OTOH, it isn’t a perfect argument. Maybe it was too expensive to fully implement, and that is why the product and company failed. So the argument could go that the patent is valid, just ahead of its time.
There are a huge number of patents assigned to Theranos. It isn’t just a matter of the magical analyser working on a pinprick of blood. There is all manner of supporting stuff. The staff working there were for the most part working honestly on the tech. Some will have invented useful things. It wasn’t that the tech and machines didn’t work at all, it is that they didn’t work well enough for purpose, and probably couldn’t be made to. There will still be some good ideas to be salvaged.
Sadly the outcome is the worst possible. Softbank will have no interest in pursuing the tech, and will simply sit back and wait for some other company to accidentally run afoul of one of the patents, and then they will demand their pound of flesh. Whilst they might reasonably feel they are just recouping some of their losses, the overall effect will be a drag on innovation. So the community at large is one that pays for the Theranos disaster.
(hijacking, but I guess original question largely answered)
It really makes you think about the line between success and failure.
Had some group within the company made some incredible breakthrough that made the whole thing feasible, we’d be hailing Elizabeth Holmes as a genius now (and the boffins in that group would be faceless and nameless).
Even if it was later revealed that she had bullshitted, that would probably be considered as necessary business savvy to get people on board.
Hmmm, she burnt though $800 million. That is a lot of cash for no salvageable result. She would have probably have done better going to the casino and putting it all on 13. You can’t run a company hoping for blind luck to repay your creditors and investors.
But this whole mess has reignited the criticisms of the modern Silicon Valley. Fake it until you make it. Too much money chasing too few good ideas. Everyone wants to be the next Apple. But nobody wants to put in the work. And nobody is Steve Jobs (or Elon Musk.)
There are lots of lingering questions. What exactly the board of directors were up to in this period is a potentially very embarrassing one. Their job is to protect the investors interests. But the board was pretty weird, and had essentially no expertise. They were selected to look prestigious and pretty. And nobody putting money in cared.
I see there is a movie already supposed to have been made. Premature I would say. There is a lot more to find out about how this played out. I suspect it will make Enron look tame.
She was being hailed as a genius before the scam came to light.
Well-paid investors might not care so much, but I’d like to hope the SEC would take action. Expressing overconfidence about your ability to overcome technical problems in the near future isn’t exactly prosecutable, but claiming those problems have been solved when they actually haven’t is a major problem.
Sure, and my point is, if some people in her employ had somehow solved all the problems there would basically be no other interpretation right now.
She was a complete bullshitter (whose first “idea” had been an injected magical diagnostic and cure-all, but that one was too obviously pie in the sky) but our economy and culture is such that bullshit and luck was all that was required.
Think of all those other entrepreneurs right now, who commonly get referred to as being “worth” $10 billion or whatever, in gushing articles designed to make most of us feel inadequate.
ETA: What Francis_Vaughan said.
Agree on both, but my point was more about what the wider public and media would think.
I apologize for the hijack, and I’ve just seen there is a thread for general discussion of the trial in MPSIMS.
Bullshit encompasses a lot of different kinds of statements. Some of them would obviously be fraud. If you claim to be a major shipping line with 100 cargo ships but instead you own only a single converted fishing boat, that’s fraud. But other bullshit statements aren’t actionable as fraud when they are “mere puffery.” . Generally, puffery includes statements that are not falsifiable (“Our medical labs are the best!”) or that are statements no reasonable person would rely on (“A lot of people are interested in our stock!”)
Finally, you need to prove damages in a securities fraud case. You are basically right that if she made a induced a bunch of people to invest with entirely bullshit statements about material facts but those people made bunch of money anyway, the investors would have trouble proving their damages.
Theranos did apparently manage to develop one actual novel test, for the Herpes Simplex Virus (HSV-1), which has full FDA approval. I have no idea if it actually offers any advantages over other tests or if it’s commercially competitive on its own, but that patent potentially has some actual value. Theranos also patented an internet-based software package that was supposed to allow its magic box to compare test results to a database and use that information to automatically run additional tests. If that technology were hooked up to machines that actually worked, it might be useful. And the company really did put a lot of money and effort into developing the “Edison”, so it’s not impossible that they managed to produce at least some genuinely useful innovations in technologies dealing with microfluidics.
Even that test has been questioned.
“Another former employee…filed a complaint with the FDA…alleging the study submitted by Theranos for its herpes test was “tainted by breaches in research protocol,” according to the Journal.”
"What does this mean for Theranos? According to the Journal article, the company hasn’t seen the allegations and believes this former employee could be “disgruntled.”
Since Theranos went kaput, presumably the herpes test no longer is available and it’s doubtful anyone would want to look at it further given the taint involved.
Incidentally, Theranos referring to the ex-employee as “disgruntled” is an example of a classic corporate smear tactic in response to whistleblowing. Nothing to see here, just some unbalanced worker with a grudge. 
I expect that’s true for a civil case in which the investors are the plaintiffs, but is it also true in a criminal case, i.e. one where the SEC is pursuing charges?
Well crucially no-one would be pursuing her for damages.
In the alternate universe where the grunts in the lab aced all that boring “actual science”, and solved all the tremendous engineering and scientific challenges, Ms Holmes is hailed as a goddess.
The investors have all made bank. Theranos has become so cool there’s a bunch of new slang terms for getting your test done. And because she’s a lot easier on the eye than Zuckerberg, she’s everywhere.
Who, in that reality, is going to do the hard work of trying to prove that at the time she claimed to have working tech, she actually didn’t? Or would care about her lying about tests and endorsements prior to having the real thing?
My guess is that at most, in the middle of some breakfast show giving a gushing appraisal of her “ruthless drive” to make the company succeed, a legal expert on the sofa might interject with “Well, you know, we don’t want to encourage everyone to do that. It wasn’t strictly legal…”
For a patent to be valid it has to be enabled. If the technology doesn’t work as set forth in the patent then it’s a dead patent.
…
I see now that there is some discussion of this in medias. The key term here is “enablement.” If a court finds that the parents don’t work as described then there is a failure of enablement and the patent is invalid.
When you file a patent you have to actually be able to make the invention work. You can’t just say you invented a perpetual motion machine and file a bunch of garbage and have a valid patent.
“we’d be hailing Elizabeth Holmes as a genius now”
No, she wouldn’t ever be considered a genius, because at the core of this invention is that it really has no need. There is no market for it. There was a need for the iPhone, but there is no need for her invention even if the invention worked because her claims of how this was badly needed and lies about how it was being used by the military were all a fantasy. Investors and a Walgreens simply got caught up in her con game. Think about this, her claim that testing was expensive and making it sound like expensive doctors were gatekeepers was complete nonsense.
Anyone with health insurance has a co-pay that’s less than the cost of a pizza, and gets the results within 2 days on average. I just got a blood test ordered by my doctor and got the results in 2 days and my out of pocket cost was $15.00. I didn’t have an office visit, so it cost me nothing in time or money to have the doctor produce a prescription for the blood test. Why was it so important to stop off in the drug store and get immediate blood test results? There was no market for this invention, but too many people who should have known better were getting caught up in her lie. She talked about her father dying of cancer in the same breath about having testing to catch things early. He didn’t die because the blood test results needed to be done in an hour and couldn’t wait a couple of days. Soldiers weren’t dying in the battle field on a helicopter because they couldn’t get their blood tests fast enough. If they needed to know blood type for a transfusion that is already part of the medical records for the soldiers. There was no real market for what she was promising. Lab tests don’t offer a diagnosis, that’s what the doctors do.
Derek Lowe has a nice commentary on the subject. As always, a worthwhile read: