Sunday, November 27, 2016

More Things That Just Shouldn't Be


A few weeks ago I wrote about Juicero, the "Keurig for Juice", and how despite it being a $700 juicer that required $120 million in funding to realise, there were reasons that an investor would put money into it (dumb reasons, but justifiable dumb reasons). Now it's the turn of "June", the toaster oven. To quote the company:

June is a modern appliance company dedicated to bringing intelligence to the tools you use in the kitchen. Our first product, the June Intelligent Oven, allows everyone to discover the joy of cooking at home by enabling precision cooking and restaurant quality performance on your countertop. The June Intelligent Oven's unique features and brilliant design put an end to guesswork and pave the way for faster, better cooking. Our team of designers, hardware and software engineers is committed to transforming the kitchen experience.

Now, apart from the fact that the joy of cooking is the constant improvement and learning through experience to produce tasty food from imperfect ingredients and tools through skill, it's a nice idea. Maybe they can help the average Joe who doesn't have time to learn to cook prepare quick and nutritious food at home rather than dining out or eating salt and sugar laden pre-packaged meals. Looking at Target and Amazon, the price ranges for most toaster ovens are in the the $50 to $150 range, with the highest rated top-of-the-line ovens going for about $225, so a superior oven may go for $300 to be competitive. 

What does the "June" retail for? $1495 (yes, one thousand four hundred and ninety five dollars).

So what do you get for this $1250, or 500%, premium over the best of the rest? Well it comes with a camera that recognizes your food, and then uses its "intelligence" to cook it to perfection, all the while sending you updates via your phone, letting you know it's ready. Of course, it's got that "Apple look" so that's worth a premium too, but that's about as far as the innovation goes. 

And what did it take to produce this masterpiece oven? According to Crunchbase, near $30 million (yes, thirty million dollars), and from their own website, it looks like June has near 50 people working for them. Interestingly, of those 50, I only count around 6 who are potentially involved in hardware design. It's no surprise, then, to hear that the actual hardware design was outsourced to Ammunition (who designed the Lyft logo). Yes, June didn't even design the hardware, and likely just gave Ammunition a list of key features needed without remembering to include "and a Bill of Materials of no more than $100". That, combined with the founders who are software and not hardware people, is probably why nobody said "Um. This is going to be way more expensive than the competition and not deliver substantially improved performance in any area, maybe we should rethink this."

Even the company itself is really struggling to push its virtues - the website uses this as one of the leading quotes from a review in the Wall Street Journal:

The June Intelligent Oven is an Internet-connected countertop system that can recognize foods and automatically cook them for you.

Wow, I have to get myself one of those! An oven that cooks! Amazing! The co-founder then goes on to really sell it well in a Techcrunch article:

“It’s always surrounding your food with hot air,” Bhogal said. “What’s cooked in the corner will always taste like what’s cooked the middle. We spent a lot of time adding precise temperature controls, and that’s not usually seen in this space. We spent a lot of time fine-tuning the cavity. We used a cavity which helps with heat, we fine tuned our insulation, and even the door itself.”

So basically it acts like every other convection oven, but - and here's the real key differentiator - there was a team of Silicon Valley startup engineers who spent lots of time fine tuning components. Yep, that'll make your food taste better and your wallet hurt less. (BTW, the engineers who make ovens actually do spend time working on things like that, they just know they're on a budget)

And this is both why this product is ridiculous, and why a large portion of the world looks at Silicon Valley with contempt. This product is not about the customer, or serving an unmet need. It's about serving the egos and notion of self-worth of a couple of people in the top % of education and income. The customer doesn't care how much time you spent fine tuning things, what the technology is, or how much you need to believe you're changing the world - what they care about is a product that solves their problem, makes their life easier, gets things done faster, all at a reasonable price. That's it. While the privileged few can worry about their feelings of self-worth, most people just need to pay the bills and get through the day as best they can.

It's why the likes of Uber succeed and despite their sometimes dubious business practices remain popular. They take a useful and needed service like on-demand transportation, that is currently underserved, and then make it frictionless and easy to use, all at a price point that's highly competitive. They tapped into a need of the customer, and met it. It's why in the traditional layout of a pitch deck that is presented to VCs by a startup, there are a couple of slides on things like "Customer Need" and "Pain Points".

So what would June have presented to VCs in this regard, to show the market need, huge potential for growth, and ongoing revenue? Well, I've sat here for a few hours trying to come up with the pitch that, like with Juicero, would make this product make sense, and I've failed. Here's the only thing I could come up with: One of the co-founders was the co-founder of Lyft. That's it. He previously co-founded a successful startup and even though it is not even in the vaguely same space, software/service rather than hardware, that's all that's needed. Everyone knows the hardware part is easy, and you just outsource that anyway.

Now, to be fair, they may have been pitching the larger play, in getting into "the connected home", and becoming a brand name like Nest, and therefore willing to pay an upfront cost of an expensive first product to gain the skills needed to iterate and improve - the long game, as it were. Even there I just couldn't see where the money comes in. However even if that's the play they've made a basic mistake, and that's in the outsourcing of the hardware.

In not building the hardware themselves, they clearly fail to appreciate the interaction of hardware and software, the necessary back and forth between the engineering teams. The adjustments, the compromises, the understanding of how things work together, are all key to building a product that meets a need in a cost effective manner. It's a common mistake from people with a software only background, when leading a hardware project, to "black box" everything like modules and view it as a Gantt Chart rather than as an interconnected system where feedback between the components is an integral part of the design and development phases. Now, even after $30 million in funding, they don't have the skills to do their next product themselves, it's going to have to be outsourced again. 

I can't blame the outsourcing company for taking the gig, after all, payment is not based upon the product actually selling, but rather satisfying the ego of a startup founder with millions of dollars of other people's money. I can't even blame the founders for taking $30 million, if it's offered. That VCs funded this without someone really looking at their business model is just stunning, but hey, hardware is hard, and the guy did co-found Lyft, so what more do you need?

All the actors in this play are just acting in line with the incentives. Put the money out there, and they'll play whatever part allows them to get a share of it. Without that money, or with different metrics for award of it, the world of $1500 toaster ovens might actually become one where there are products made that customers need.

And how well does the product work? To answer that I'll leave with this quote from a product review entitled "This $1500 Toaster Oven is Everything That Is Wrong with Silicon Valley Design".

Cooking has always been a highly personal, multi-sensory experience, where trial and error is the only way to become the all-star cook most of us know as grandma. But as I put the salmon on the table 40 minutes later than projected, I had no idea what I should have done differently, other than to never have used June in the first place.

Thursday, November 24, 2016

Support Real Journalism: Subscribe

If you're concerned about real news, quality journalism, and supporting people who are dedicated to getting the truth out there, then support it with money and subscribe to a newspaper or other outlet whose work you've admired. People like me who blog do so based off the primary work of real journalists - without them, there's nothing.

This year, John Carreyrou has been a standout journalist for his work on Theranos. He broke the story of a company that was risking the lives and health of all of us, deceiving customers and investors, and intimidating those within the company who tried to speak out - and his paper, the Wall Street Journal, supported him against the heavy handed legal threats made. This will make a real difference in people's lives, and the effects of Theranos' actions will be felt in the VC community for many years to come. This takes not just a journalist with skill and real determination to build and break a story, but an organisation that maintains standards and supports their reporters even when it gets tough.

If you want this type of journalism to continue, then support them with money - subscribe to their publication. This year, I've subscribed to the Wall Street Journal in large part due to Carreyrou's work, and also to the New York Times. The NYT is having a sale on subscriptions here, WSJ is having their Black Friday sale here.

I've also found myself reading Business Insider (Biz Carson did great work on Hampton Creek), Bloomberg, and Garrett Reim got me reading the LA Business Journal.

Whichever publication or journalist you've admired the work of - support them in whatever way lets them keep working and stay independent!

And to all those reading in the USA, Happy Thanksgiving!

Wednesday, November 16, 2016

Theranos News

Just a brief update on the ongoing Theranos story. Hopefully in a week or so I'll actually have the time to write something substantial on this again. 

First, Walgreens is suing Theranos for $140 million. Walgreens was the company that had the deal with Theranos to use their Edison blood testing for patients in their stores, and this deal was one of the key reasons Theranos were taken seriously. This is a major blow, and along with the investor lawsuit for near $100 million, and the eight class action lawsuits they have, puts them at good odds of all the money in the bank disappearing in settlements and legal fees. 

Then, Tim Draper, one of the original VCs to invest in Theranos, continues to defend Elizabeth Holmes and starts playing both the victim and sexism cards on her behalf. It's somewhat ridiculous at this stage, and I don't know if it signifies desperation, denial, or delusion.

Finally, another fantastic piece by John Carryrou on the whistleblower on Theranos - the 26 year old grandson of former Secretary of State (and Theranos Board Member) George Schultz. To summarise, he worked at the company and began to question the effectiveness, legality, and safety of what they were doing, reported his concerns up the chain within Theranos, got a beatdown from the COO, left, went to the authorities to inform them, and met with intense intimidation from the Theranos legal team. 

And what was his reward for his good behaviour? $400,000 of legal bills and lost contact with his grandfather. It makes clear that any excuses that the youth of a founder/CEO excuses them from understanding the ethical and legal consequences of their actions are nonsense, and that whether the person in charge is 19, 39, or 99, they are capable of knowing right from wrong. More importantly, though, is that this article should make clear the answer the question "Why are so few people are whistleblowers?"

Sunday, October 30, 2016

Still busy

"Millstones of Justice turn exceedingly slow, but grind exceedingly fine."
~John Bannister Gibson (1780-1853), American jurist, Pennsylvania Supreme Court

Still ridiculously busy, making it hard to really write anything well - or at all for that matter. I'm going to try and do a few shorter posts just so I at least mention things that are going on in the startup world, and try to get back to them later if they merit it.

One of the big things was the Wall Street Journal story on the patients actually affected by Theranos, "Agony, Alarm and Anger for People Hurt by Theranos’s Botched Blood Tests". Check back in my previous posts to cover the history of Theranos, but the main story this comes from is here, where they admit their results were wrong and withdraw them. It was clear when that story came out this was going to be a major issue, but now we actually have accounts of healthcare and lives actually impacted by the company failure.

In summary of the above - Theranos claimed to be able to do a large number of tests on small amounts of blood, effectively much cheaper than conventional methods, with their "Edison" machine. It turns out that they were mostly using industry standard machines from other vendors, but not even using them correctly, which ultimately results in sanctions from Federal agencies. Their own Edison machines were used for a small number of tests (allowing them to say "less than 1% of tests" were affected, because they rarely used their unreliable proprietary technology - yet they were likely telling investors that is what was regularly used). 

These tests were used in the diagnosis of patient's conditions, and informed and changed treatments. In the WSJ story, one patient changed his blood thinner medication based on these false results, potentially increasing his chance for strokes. Another was led to believe that she potentially had a new tumor having just gone through major cancer treatments - it turns out, after many other tests and worry, that she did not. Theranos's test was wrong by a factor of over 150 (yes, 150 times too high). There will be many more out there.

While things can go wrong with any tests, Theranos simply didn't follow basic procedure and are absolutely liable for missing the basics. As the WSJ says:

While inaccurate tests can occur at any laboratory, Theranos failed to maintain basic safeguards to ensure consistent results, according to regulators, independent lab directors and quality-control experts.

If you have a culture that not just enables but encourages breaking the rules, when it moves into fields that cover our health and safety, you can be sure that there are disasters like this going to occur. The regulatory agencies like the FDA are there for a reason, and this type of thinking is going to be stamped out. I'll bet that it's going to be made clear that this behaviour will not be tolerated, and company officers will be held accountable.

It seems Theranos thought the rules didn't apply to them, that they could mislead investors, customers, and the FDA that they had technology they didn't, raise $700 million dollars, affect people's health, and that no-one would notice. It may have taken years, but right now I can imagine various Law Enforcement Agencies working their way up the hierarchy of Theranos, as each layer points to the one above, until it gets to the very top. As I've said before - In my opinion, someone's going to jail over this, and this time it's not going to be one of the minions.


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,”

Further

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.