Tuesday, October 18, 2016

All of this has happened before, and will happen again

I've been snowed under the last week or so and have had no time to write anything, so my various articles-in-process are just on hold for the time being. In the meantime, let me point you to another blog well worth reading - The Silicon Valley Way. It's an oldie but a goodie. Start at that link which is the first post, then read back through it chronologically, for another account of an engineer dealing with an insane startup and chronically bad management. It's told in a blow-by-blow manner as he experiences it, rather than remembered after the fact, which is a novel approach. Maybe for my next startup I'll keep a diary and then publish it starting a couple of years later...

Tuesday, October 11, 2016

Quick Updates: Theranos and Energous

Annoyingly busy and unable to post in detail until later, however two key stories in the press in the last 24 hours. First up, Theranos, where a current investor is now suing the company. Partner Fund Management LP (PFM), who invested $96 million in Theranos in Feb 2014 claim that:

“Through a series of lies, material misstatements, and omissions, the defendants engaged in securities fraud and other violations by fraudulently inducing PFM to invest and maintain its investment in the company,”


Elizabeth Holmes and a former executive deceived the hedge fund by claiming it had developed “proprietary technologies that worked,” and was close to getting regulatory approvals.

Who could have imagined a startup where the founder claims working proprietary technology, and vastly exaggerate its capabilities, when they have no such thing? Theranos, of course, plan to vigorously defend against the lawsuit.

Finally it seems someone in the VC community is acting on the best interests of their Limited Partners and looking to get their money out. It seems PFM, like me, don't believe Theranos' recent redirection has a chance of producing results and that they have better odds of recovering their investment through a lawsuit. It's a damning indictment of Theranos' plans, as looked at in purely monetary terms, PFM view the value they could ever gain as significantly less than the initial investment - lawsuits cost money and there's a less than certain chance of recovery. Essentially, they've calculated the costs of suing and chance of proving fraud are sufficient that compared to the expected value of the company it's better to sue.

Of course there's a potential cost to not suing too - it could be that the LP's are questioning PFM and there's a chance they'll sue PFM itself for not doing their due diligence in selecting the companies in which to invest. Better to prove that they were defrauded than bamboozled perhaps?

I'm trying to think of when this has ever happened before in this manner, certainly I'll be looking to see if PFM is just the first to rush for the exit to beat the stampede.

I'm hoping this is the beginning of a change where VCs take more responsibility for the companies they invest in, and as I've written in the past, they act to end the incentive for startups to act in unethical and illegal ways. Perhaps Boards of Directors will begin to take notice too?

Secondly, Energous. An interesting article on Seeking Alpha, where the author has looked through SEC documents detailing the CTO's share sales and found some interesting activity that they claim shows he's divesting his stock as much as possible. I've only read through it briefly, but will give some more commentary later on this, very damning if they are what they're reported to be.

Thursday, October 6, 2016

Theranos Admit Critics Were Right, Closes Blood Testing Service

One week shy of the year anniversary of John Carreyrou's article on Theranos that began to raise the awareness of what was going on at the company, Theranos have finally admitted that their lab testing business is not viable and are shutting it down. I've covered Theranos' history in the past, not just their shameless attempt to ignore the historical failings of the company, but to pull a 'bait and switch' and pivot to a product that has none of the amazing features claimed that enabled the company to raise $700 million. Ordinarily the failings of a tech startup would not have received this level of attention, however when that company's product affects medical diagnoses and they have to withdraw years of tests due to errors (and some say fraud), then it falls into a new category and cannot be ignored. The SEC, FDA, and FBI are all said to be investigating Holmes and Theranos, and the company is facing multiple lawsuits for its actions.

Theranos followed the time-honoured tradition of denying any problems, threatening lawsuits against those who speak out, until the weight of evidence became so strong that it could not be denied any longer. As recently as April, members of the board were continuing the Big Lie approach, and claiming Holmes would lead them to success. It seems however that the ban handed to Holmes by the CMS, preventing her from running a company that carried out lab tests for the next 2 years, is a blow they can't recover from, and the lab testing components of the company are being shut down.

In a sane world, when the CEO of a company is subject to a legal ban that prevents the company performing the only service which results in revenue, that CEO is removed from their position, or has the good grace to resign knowing they are unfit for the role. Not so in the case of Theranos - despite having raised $700 million, Holmes personally was reported to hold over 50% of the stock and had full control of the board, effectively making her immune to Board action. In an act of hubris that only in the closeted world of Silicon Valley elite startups could be considered rational or ethical, Holmes chose not to resign, but instead to shut down the lab testing services and put 340 Theranos employees out of work.

In her open letter, Holmes makes a brief statement which I'll selectively highlight and translate:

"we have moved to structure our company around the model best aligned with our core values and mission. We have decided to close our clinical labs and Theranos Wellness Centers, which will impact approximately 340 employees... We are profoundly grateful to these team members, many of whom have devoted years to Theranos and our mission..."

Translation: Our core values and mission are to protect the CEO regardless of the cost to the company bottom line or its employees. You were all led to believe this would change the world, and worked incredibly hard and well at an impossible task, but we really don't care, and thanks for all the uncompensated hours you put in. One CEO under investigation by the SEC, FDA, and FBI is more valuable than the 340 of you, so you're all fired.

"We are fortunate to have supporters and investors who believe deeply in our mission of affordable, less invasive lab testing, and to have the runway to realize our vision."

Translation: Since we have raised $700 million and the investors can't take it back, we have years of runway to continue to try to make the founder's dream a reality, despite no peer reviewed scientific evidence known to exist to support it. And now that we've fired half of you, we can keep things going for twice as long.

"I look forward to sharing more with you as we progress along the way."

Translation: We'll go on a press blackout from here, you won't be hearing much from us beyond the minimum, and certainly no uninhibited access to our miniLab system to run independent tests. (It's a bit of a staple for companies with no released product to "peek their heads out" with an open letter from the founder that end with promises of more to come, such as with uBeam's latest announcement)

The letter is par-for-the-course these days, full of doubletalk to hide the fact it's a massive climb down from the past claims, no ability to point to a product or market even approaching the scale of the original company goal, and the firing (I'm sorry, they weren't fired, but "impacted") of near half the staff who until yesterday thought that they were part of the "core mission". As with many company press releases it's not what is said but what is not said - in this case it's an admission that the capability of Theranos to run hundreds of tests on a few drops of blood is a fiction, and that they have no expectation of that changing. The claims of Carreyrou and others, derided for so long as "bitter" or "disgruntled", or threatened with lawsuits for speaking the truth, are vindicated.

Now to be fair, the company is in a very tricky position - anyone brought in to save the them at this point has a Herculean task. The blood analysis side of the company is now simply one of many in a low margin market, coming from behind stronger incumbents with a tarnished reputation - a difficult task with minor rewards at best - and not one that the numbers can likely justify continuing in.

One could imagine spinning them off into their own low margin business, with a new CEO not encumbered with a federal ban, however that not even that is happening shows they have nothing. This, however, is likely the elephant in the room at any Theranos board meeting - that the Founder and CEO is the single biggest liability to the company, and any hope of salvaging anything involves her removal - yet it is the only option not on the table.

The promise of simple and ubiquitous blood testing was really what drove the monster valuation of Theranos until earlier this year. What is left is the gamble that the company can produce a table top blood testing system superior to those already in existence, and providing enough of a business to justify a $700 million investment, which means a multi-billion dollar valuation. If anyone knows of a comparable blood testing equipment company with a single product and that kind of market cap, please point me to it.

This isn't to say there is not likely to be useful technology somewhere in the company - there are no doubt talented engineers and scientists at the company who have developed useful techniques and equipment, but in isolation and nothing for a product that is world changing. This smacks more of a situation where that IP could be licensed to other companies to recoup some money.

Without the lab testing, or a new system that massively outperforms the existing methods, Theranos are unlikely to ever show a profit and on a financial basis may simply be better off closing down and returning the money to investors. While Michael Dell said that of Apple in 1997 and was proven slightly wrong, Apple had actual products and weren't facing multiple federal investigations. Given the lawsuit ridden future of the company, this may be the simplest of many complex options.

This is a victory for a variety of groups - patients, investigative journalism, and government regulation - but a black eye for the tech press, venture capital, and boards of directors. John Carreyrou in particular can feel great pride in what he did in breaking this story at the WSJ, as not only did his work save patients from bad bloodtests, he's lifted the lid on some of the dubious practices in Silicon Valley and the billions of dollars invested there. The work he did does not come easy or cheap, and is a reminder to support those journalists who do so - I've made a point of subscribing to outlets such as the WSJ because of this. Without their work, we'd never see this type of story, and (selfishly) bloggers like myself would have no primary material with which to work.

There are now many journalists looking for "the next Theranos", and 'unicorns' are under more scrutiny to validate their claims and ensure their products are safe and effective before moving into truly important fields such as healthcare. Without doubt, there are other Theranos-like companies out there, and perhaps now they'll take the chance to pivot and moderate their claims in the hope they'll not receive the same attention - but if the founders are anything like Holmes, you can expect the "true believers" to continue to the bitter end despite reality.

The story of Theranos is far from over, there are no doubt years of stories to come - however its legacy may ultimately be in helping "clean up" tech investment now it is such a huge part of our economy. Boards of Directors may now actually scrutinise the companies they oversee, and perhaps may be inclined to resign when they cannot make an impact on poor behaviour. The federal government has made it clear that all its regulatory agencies that once turned a blind eye to private tech startups will not be doing so any longer. The FDA, SEC, FCC, and other agencies are not just unnecessary red tape but a real safety check necessary for our health and financial wellbeing - and despite their issues, we're much better off with them than without.

The Hawaiian Vacation Employee

Another definition of a term I use regularly - The Hawaiian Vacation Employee. This is the person on any sizable team who should be sent on an all expenses paid vacation to Hawaii for the duration of the project, as things will go faster, better, and cheaper without them.

This can be anyone in the company, and given the typical payscales and large effect of their actions, can also include the CEO.

Tuesday, September 27, 2016

There are Some Good Ones

Much of my writing is about pointing out the darker nature of the VC/startup/tech media ecosystem, and that is most easily highlighted by covering the mismanagement, fraud, corruption, and stupidity that's prevalent in it. There are, however, some intelligent, considerate, capable, and honest startup CEOs and investors out there, and I very, very occasionally have had the good fortune to work with them.

In 2013 I was running my own consulting company, mostly doing ultrasound and medical imaging work, but having led a software development business for some years I was occasionally contracted to work on software projects. A mutual friend introduced me to Anil Sethi, a veteran of three successful startup exits, looking to change the healthcare system with the company he had co-founded, Gliimpse. To quote some recent articles, the goal for Gliimpse was to "create a platform for securely collecting, managing, and sharing private health records", "turning information from labs, hospitals, and pharmacies into a single shareable report."

I was with Gliimpse in its earliest stages for several months in a variety of roles, helping his team get the company started, fundraising, and advising on business strategies and approaches. It was a great experience working with Anil, watching how he ran his company, placing the security and privacy of data first and foremost (even ahead of MVP delivery), and for the first time seeing a CEO treat their employees as valuable team members with thoughts and desires of their own. Until then it was my experience that a CEO would pay lip service to 'valuable employees' but still do everything to underpay and demoralise their staff, and react angrily when they would have the temerity to request fair pay or reasonable better conditions. There were several times with impending deadlines and deliverable dates that things grew stressful, but being part of that team and knowing that the CEO actually appreciated the work kept me pushing through.

I was beginning to approach full time even as a consultant, and during this time I also started doing consulting work for another company - for a period I was working a combined 80 hours a week. Something had to give, and I had to make a choice which to go with - and to my occasional regret I went with the other company, it had an extremely challenging problem I was interested in working on that would test the skills I had learned over the previous two decades.

As I ended my work with Gliimpse, Anil asked if I would consider joining the Advisory Board and continue helping them with business strategy and acting as a sounding board for him, and I agreed. (Yes, I know I've commented on some uses for Advisory Boards, but as I noted there they can be done well too) It was another interesting few years as Gliimpse struggled and grew, and watching this CEO be a decent ethical human being while running his company, and for once the good guys won - Gliimpse was purchased by Apple earlier this year. I couldn't be happier for Anil, his cofounder Karthik Harriharan, and all of the Gliimpse team, they absolutely deserve this success and I'm looking forward to seeing how the resources of Apple can propel their vision forward.

Now I have a hard rule learned through years of mistakes, and that's whenever you work you don't work for promises of future rewards, that everything is on paper, legally binding, and cash. It's unfortunate as study after study shows that high trust societies are more efficient, and result in greater economic gains for all. It can be a short term gain for someone to abuse that in a high-trust society, to get employees to commit effort on the reasonable expectation of fair future compensation that somehow never materialises. Beware the CEO who proclaims their fairness and promises huge rewards "when you prove yourself", but acts insulted when you ask for that committed to paper. The recent publicity around WrkRiot is a good example of this, and it's not an isolated case in my experience. Those CEOs who view the world through a 'zero sum' lens may gain for themselves in the short term but often impoverish society as a whole.

Anil is one of the very, very few whose word I would trust to actually deliver on his promises. How did he earn that trust? You don't see him publishing articles on his amazing backstory that ignore the company and team, he doesn't proclaim his genius and take credit for the hard work of others, doesn't give lists of "13 things I've learned as CEO and you should too", sacrifice employees well-being on the altar of an impractical "mission", or sit on conference panels taking pointless softball questions simply for the publicity. Instead, he gained that trust by acting consistently, honestly, ethically, rationally, compensating employees fairly, and being true to his word even under difficult circumstances. 

That's all. It seems simple yet so rare to find, and the story here is one that is easily missed - that this being Anil's 4th exit as a founder is not despite his character, but in large part because of it. There are others like me who have worked with Anil before, who will take his word and commit their resources to a project because they know him. He asks for help, he'll get any help I can provide, without looking to contracts and negotiations first. That trust is hard to earn, and easy to lose, but if you want to look at it in purely economic terms, is near priceless - yet the short term gains of burning your employees seems to be the preferred route today. To all the current and aspiring CEOs out there, I'd urge you to take a page from Anil's book, and when you're under pressure look not just to your current startup but the next one and the one after that. Even once you have VC money, there are some things that it just can't buy.

As for the other company I chose to work for instead? Well that was called uBeam. You may have heard of it...  

And in other news...

I've not been commenting much on uBeam lately - there's really no need, I've said pretty much what I felt needed saying, and I'll wait for the post-mortem to take much more time out my life to talk about them - but there have been a couple of events recently that warrant at least a couple of lines.

The first is an article that appeared in Epic Magazine in July, "Silicon is Just Sand", a sizable piece by author Stephen Elliott on Silicon Beach, regarding the growth of technology companies in the Venice/Santa Monica area. It's a nicely written piece that gives a great flavor of the people and culture in Silicon Beach, it reminded me of my time there, and his sarcastic responses to many of the more ridiculous parts lend the feel of "the only sane man in the asylum". Each of the many sections is devoted to a different person or company, with a particular thread running through it. uBeam, however, earned two sections to cover the extraordinary fit of self-destruction that an industry friend of mine described as "managing to shoot themselves in both feet with a single bullet". (Sections 8 and 9, but I encourage you to read it all.)

I'm not going to go line-by-line through the jaw-dropping hilarity of the article. It speaks for itself, just read it. My personal reaction to it was "Yep, sounds like a typical day at uBeam" and I laughed as he was taken from believer to skeptic and closed with "Fake it till you make it".

Second is an announcement from uBeam, which can be found here. The headline is that they've hired an SVP of Engineering, Larry Pendergass, who is a big name and is another tick-box in the needed list for Series B funding. Congratulations, I'm sure this means they are about to give a public demo and release a commercial product any day now, as promised.

What's more interesting, though, is what's not said. First of all, this was picked up by exactly zero press outlets that I'm aware of. A year ago this would have been all over the tech media news, but even Techcrunch didn't touch it. Was this deliberate? If you self publish seemingly important company news last thing on a Friday afternoon it's usually an attempt to bury it, but I'm also wondering if the services of uBeam's PR team are "no longer required" following the above "Silicon is Just Sand" debacle and it's the B-Team that are running press releases now. It's garnered a whole eight likes in the three weeks it's been up, which is about half the number of likes I have on my lowest viewed LinkedIn article and I'm a nobody. It seems the sparkle has dimmed a bit. 

Next thing hidden in there is that it sounds like my replacement as VP Acoustics has "graduated" to the advisory board after about 7 months in the job. Perhaps I can add "gives the company a less embarrassing exit route for departing executives" to the list for reasons to have an advisory board? I'm not sure who is on the team now that has any extensive ultrasound experience, it'll be interesting to see who my replacement's replacement will be. I'm sure he'll be the cream of the crop.

I do love the pictures of what looks to be a monster office in San Jose (8500 sqft or so given landlord data?) for what is now two employees. I'm sure that's been a necessary expenditure over the last few months in light of the imminent product release and huge expansion.

That's it, not much more to say here. Back to more important things.

Update: Rather than do a new post, I thought I'd add this in here:

uBeam are now advertising for a Director of HR. If you are interested, one of the key requirements is:

defining the couture (sic) best able to position the organization as the leader in the market place

so I guess a stylish uBeam uniform is the last thing the company needs before releasing their demo and product by the end of the year? There's a simpler way to ensure they get the job - don't come to the interview through the door, just break in through a window. And if you get rejected, turn up for your first day of work anyway, only losers take 'no' for an answer.

Wednesday, September 21, 2016

The Emperor's New Clothes

A few weeks ago Nick Bilton of Vanity Fair wrote an article on one of my favorite companies, Theranos. "How Elizabeth Holmes' House of Cards Came Tumbling Down" is a fascinating piece, not because of any particular revelations but because it highlights so well the mentality and attitude among certain Founder/CEOs, that they simply don't play by the same rules as you or I, that the narrative of a company is far more important than the reality, and that this behaviour is both enabled and rewarded by VC and tech media.

There are a few points in the story regarding Holmes and Theranos I'll come back to in future posts, however one section in particular hit home for me. This one section of the article reminded me why I'm not a journalist, as in just over a paragraph, Bilton summarises everything about the Venture Capital/Tech Media/Startup ecosystem I've been trying to highlight in this blog, and does so in a way that almost anyone can understand:

While Silicon Valley is responsible for some truly astounding companies, its business dealings can also replicate one big confidence game in which entrepreneurs, venture capitalists, and the tech media pretend to vet one another while, in reality, functioning as cogs in a machine that is designed to not question anything—and buoy one another all along the way.

It generally works like this: the venture capitalists (who are mostly white men) don’t really know what they’re doing with any certainty—it’s impossible, after all, to truly predict the next big thing—so they bet a little bit on every company that they can with the hope that one of them hits it big. The entrepreneurs (also mostly white men) often work on a lot of meaningless stuff, like using code to deliver frozen yogurt more expeditiously or apps that let you say “Yo!” (and only “Yo!”) to your friends. The entrepreneurs generally glorify their efforts by saying that their innovation could change the world, which tends to appease the venture capitalists, because they can also pretend they’re not there only to make money. And this also helps seduce the tech press (also largely comprised of white men), which is often ready to play a game of access in exchange for a few more page views of their story about the company that is trying to change the world by getting frozen yogurt to customers more expeditiously. The financial rewards speak for themselves. Silicon Valley, which is 50 square miles, has created more wealth than any place in human history. In the end, it isn’t in anyone’s interest to call bullshit.

The only thing I'll disagree with is the last sentence - it is in almost everyone's interest to call bullshit, just not those currently profiting from the system. The misallocation of society's resources, both in straight cash invested and the working efforts of thousands of the smartest and most talented people on the planet, harms us all. These events have impact beyond just the company and the investors - imagine during Theranos' positive publicity peak in 2015 a scientist promoting their genuinely amazing blood testing technology to VCs, that truly does everything they claim, yet does not meet the fantasy specs touted by Theranos. How well do you think they fared in the fundraising? Exactly. What life enhancing technologies may we have lost because investors demand founders willing to be flexible with the truth?

In the past, I've sat inside a company watching the CEO engage in a war of fantasy performance stats and delivery dates with a competing vaporware company, using the tech press to launch salvos of ever increasing capabilities. When the enemy returned fire with a further 'improved' product, there was panic at the top and demands made to engineering that our product get better or timelines be shortened - statements from those trying to be rational, such as "No. Their numbers are just as made up as ours.", garnered a mix of confused and annoyed looks.

Neither company has, to my knowledge, released a product since then and in part this is connected to these inflated performance promises. It may have been possible to produce a more modest and realistic package that engineering originally wanted to do, but demands for "Perfect. Now." tend to wreck the ability to build anything of quality.

Many people have no problem dealing with bullshit in their working lives, and in fact for many in the legal, marketing, and sales side of business it's an intrinsic part of their day (apologies to the ethical ones among those groups!). Some drink the Kool-Aid and believe, some know the reality but the paycheque keeps coming in and it's not too important anyway. With engineers though, it's different. Our ability to perform and deliver in large part depends on our ability to spot falsehoods and mistakes, the desire for things being 'correct', and our inability to lie to ourselves about the reality of the situation (at least as far as the technical is concerned).

I rarely see engineers quit over pay (except when large inequities are made very clear), but I do see them quit over death march projects or managerial destruction of a long term and rational approach to delivering a product. If they don't quit it's common to see engineers continue on despite the conditions, desperately trying to save the product in the mistaken belief that either they have some form of personal responsibility beyond their employment contract, or that they will ultimately be rewarded for their perseverance when finally things are done. To their own detriment, this can result in significant personal health issues due to the stress, depression that can take them years to recover from, or even in the case of Ian Gibbons, the Chief Scientist for Theranos, can tragically end in suicide. Investors and tech press laud the dedication founders have to their company, to the perseverance, but forget the sacrifices made by those who don't have a 50% ownership in the profits.

In reading this piece by Nick Bilton I realised that the internal divisions I have experienced in companies are often between those who believe or profit from the bullshit, and those who either cannot or will not. It's the common "C-suite vs Engineering" - and in almost every case the former 'win', at least until the point it all comes crashing down. Why? Because making today look better, even at the long term expense of a worse tomorrow, is most profitable for those at the top. This shows up whether it's salesmen pulling forward orders from future years, CEOs cutting R&D for future products to make the bottom line better, or founders and investors "putting the most positive spin on things" (to be polite) in order to sell on to a greater fool.

It looks like the federal government may be cracking down on abuses that have been growing over the last few years, and Theranos seems likely to be the precedent. In my opinion we'll be seeing a rash of prosecutions of startups by the SEC, FCC, FDA, and other regulatory agencies over the next few years, and some very large investments will become worthless. They'll put it off as long as possible, but once it starts to hit the pockets of the large investors, suddenly we'll hear that it is in the interest of everyone to call bullshit. Here's hoping that comes sooner than later.