
Subprime ‘unicorns’ that do not look a billion dollars - prostoalex
http://www.ft.com/cms/s/0%2F91063628-73f5-11e5-bdb1-e6e4767162cc.html#axzz3omWxmFPw
======
pbreit
I don't know what to think of Theranos.

On one hand, it is tackling a huge, important market and appears or appeared
to have something legitimate.

On the other, so many of its tactics seem designed more to increase valuation
than successfully bring its technology to market. It's obscenely celebrity
board completely devoid of any relevant experience. A ridiculous $9b valuation
on a paltry (relatively) $400m raised. 100s of SKUs on its product list when
it should be perfecting on a just a few. The incessant PR campaign around its
founder. Giving Jim Cramer an exclusive? Refusing to participate in WSJ
article. Spending a whole day with Harvard Fellows. Hiring slick crisis
handlers. Threatening whistleblowers. I'm sure the incumbents wouldn't be that
excited about a patent-protected entrant into the market but it doesn't seem
like they are the ones mounting the attack. It either works or it doesn't
right? And it'll be easy to figure that out. Can someone help me out?

~~~
akiselev
I am on board with your skepticism, but I don't believe your concerns are
valid in the context of what Theranos is promising and what they have done
($400 million is nothing to scoff at in an industry where you have $0 revenue
until a real breakthrough passes the FDA).

The global pharmavertical industry is about $900 billion a year and has a very
wide variance in types of products so the normal idea of what what value a
"celebrity" is worth is very different. If you're a biotech company whose most
likely exit is an aquisition by Pfizer or Roche, you want industry insiders.
If you're like Theranos, and your business depends on consumer spending at
places like Walgreens, you're so far out of the normal pharmaceutical and
diagnostic industry that all bets are off.

Several hundred million for an IPO biotech company on ZERO revenue post dotcom
crash is common enough that $9 billion valuation (25 times revenue) is damn
good. There are literally thousands, if not tens of thousands, of labs that
can run an off site (for the consumer) screening for every one of Theranos'
target markers. The idea that anyone would invest hundreds of millions into a
diagnostic company without compelLing secret sauce is troubeling. I don't
doubt that VC firms make mistakes as silly as the rest of us, but I prefer to
give the benefit of the doubt assuming semi-competent due dilligence.

That said, no VC firm in their right mind would ever invest in a company like
Theranos if it had only a few SKUs. It is practically impossible (with current
technology) to come up with a generalized test that identifies anything more
precise than "gram negative bacteria." Either Theranos is a pump and dump scam
of epic proportions or they really do have some technological superiority that
allows them to convert expensive lab tests into a consumer technology.

As far as the other red flags, you'll usually find the same intrigue
surrounding most successful biotech companies. When your operating at the
cutting edge of the most difficult scientific field in the most stringent
regulatory environment on the planet, you have to take more shortcuts than
usual.

~~~
nl
It's worth noting that (many) blood tests don't need FDA approval. This makes
Theranos' approach unusual: they are getting FDA approval, but not publishing
the (easier and cheaper to do) tests.

I don't know enough to judge this one in any sensible way. I thought this
Forbes article[1] was good, and the author said:

 _How much is real and how much is hype? I’m not going to provide a final
answer here. I still have no idea how Theranos’ technology works. But I’m more
confident than I was before after spending a day talking to the company’s
partners.

Here are a few reasons for that confidence: The Food and Drug Administration
has just posted a detailed explanation of its decision to clear Theranos’ one
approved test, and, to my eyes, it does give some validation of their
technology_

[1]
[http://www.forbes.com/sites/matthewherper/2015/07/15/giving-...](http://www.forbes.com/sites/matthewherper/2015/07/15/giving-
theranos-a-few-tests/)

~~~
wavefunction
According to this, they are being forced to seek FDA approval as well as go
under review from other regulatory bodies:

[http://www.wsj.com/articles/hot-startup-theranos-dials-
back-...](http://www.wsj.com/articles/hot-startup-theranos-dials-back-lab-
tests-at-fdas-behest-1444961864)

I say forced because you made it sound like they had gone out of their way to
seek approval when actually they were not.

------
birken
Startup L. Jackson has a good tweet about it:

> 4/ You'd likely do better financially, on average, joining a Series A
> company, AND have more career upside.

> Source:
> [https://twitter.com/StartupLJackson/status/65515425472269107...](https://twitter.com/StartupLJackson/status/655154254722691072)

Why anybody would want to be an employee at a unicorn company is crazy to me,
especially in the world of ultra-inflated valuations.

If you join a huge public company you'll get liquid stock, at a real
valuation, along with lots of salary and perks. The stock can't 10x, but
companies will generally give you pretty large grants so if the stock goes up
20-50% you'll probably get a nice bump in your total compensation.

If you want to join a startup, you are much better off joining a ~10-20MM one.
You still get a salary, though maybe not as high as at a unicorn or public
company. However, it is much easier for a ~10-20MM company to 10x in value
than a 1B company, and if the smaller company does 10x you'd be a somebody at
a ~100MM company rather than a nobody at a ~10B one.

~~~
pbreit
You're missing how startup equity works. At these multi-billion dollar
companies, employee shares are priced way less than the valuations you are
seeing published in the media. So you're almost guaranteed a nice payoff even
if the company merely treads water.

~~~
birken
A low strike price only matters if there is some eventual liquidity for the
shares. For common stock this means IPO, acquisition or some other share
buyback. Both IPOs and acquisitions generally don't apply to companies
"treading water", only the extremely successful and growing ones manage to IPO
(and even then it doesn't work out so great for shareholders: see YELP or BOX)
or get acquired. Get acquired for less than your ultra-inflated valuation?
Then the common shareholders get killed by liquidation preferences.

And as for other share transactions, you'll need to find a buyer. Most savvy
investors aren't going to be willing to pay huge valuation premiums for common
stock. And if they aren't going to pay a premium, then you really haven't
gained anything by issuing common shares at a lower strike price.

So basically, common shares have lower strike prices because they are worth
less.... It isn't some magic trick that automatically benefits employees.

~~~
pbreit
Both YELP and BOX made a lot of people very rich.

~~~
adventured
Box clearly did not make a lot of people very rich. They made a tiny group of
people richer (very early investors). Employees have not done well, as the
stock has been a disaster. All of the big rounds that Box raised basically
valued them at or above where their stock is now. They're worth $1.6 billion
and raised $558 million; their last round was at $2.5 billion.

Their latest quarter they did $73m in sales and lost $50m, with rapidly
slowing growth. Even worse, they're bleeding significantly on an operating
basis, implying the business may never be capable of making money. They might
be lucky if they have four or five quarters of cash left before disaster hits.
The near future returns for employees holding stock, is not likely to be
pretty.

Even the primary founder didn't get very rich in SV terms, after he had to be
diluted down to a sliver of ownership to keep the lights on.

~~~
pbreit
Even the late stage investors probably made money. The only employees who
didnt make money are the handful hired at the very end when the common
valuation finally meets up with preferred.

------
afarrell
> whose co-inventor committed suicide two years ago after telling his wife
> that it was not effective

I feel... strange about reading this in an article when it is framed as
evidence of anything. People's reasons for committing suicide are often
complex and to mention that here seems... improper for reasons that I can't
quite put my finger on.

~~~
dsugarman
The rate of suicide for founders is significant, it is not talked about
enough.

~~~
AndrewKemendo
As a (not yet suicidal) founder, I'd love to see some numbers if you have
access to any.

~~~
rgbrenner
This study covered mental health issues of entrepreneurs (results summary
starts on page 13):
[http://www.michaelafreemanmd.com/Research_files/Are%20Entrep...](http://www.michaelafreemanmd.com/Research_files/Are%20Entrepreneurs%20Touched%20with%20Fire%20\(pre-
pub%20n\)%204-17-15.pdf)

From the study, if you're an entrepreneur, you are more likely to have a
mental health issue (49%) than not (48%). Significantly higher rates of
suicide, depression, etc.

It's higher across the board.

But it isn't just from the stress of starting a company.. entrepreneurs are
more likely to have close relatives with mental health issues too.

I wasn't able to find much other than that... so if anyone else has more
links, I would be interested in reading them.

~~~
AndrewKemendo
Good info, thanks. Makes a lot of sense that ADHD would be prevalent.

------
Animats
Note that the author is the head of Sequoia Capital. "Sequoia, notably, also
counts the highest number of private, billion-dollar ‘unicorns’ of any
investor today and consistently finds itself in the largest tech startup
exits."[1] If the head of the VC firm financing the largest number of
"unicorns" says publicly that many of the "unicorns" are subprime, it's time
to pay attention.

[1] [https://www.cbinsights.com/blog/sequoia-capital-
teardown/](https://www.cbinsights.com/blog/sequoia-capital-teardown/)

~~~
benchtobedside
Serious question - what does he stand to gain from writing this piece?

~~~
Animats
A defense to accusations of insider trading if they're dumping equity,
perhaps.

------
jimjimjam
Simple search on LinkedIn for Theranos: 139 current employees. 239 past
employees. This company may technically be 10 years old, but lots of these
churned employees listed Theranos as their last or second to last employer.
That is a terrible ratio for a company of that size and age.

~~~
LukeB_UK
You're assuming that LinkedIn is a reliable source.

------
hkmurakami
Crucial note: This piece is written by Mike Mortiz of Sequoia. It appears to
be in tandem with his recent appearance on Bloomberg News
([http://www.bloomberg.com/news/articles/2015-10-17/sequoia-s-...](http://www.bloomberg.com/news/articles/2015-10-17/sequoia-
s-michael-moritz-q-a-venture-capital-is-high-risk-poker-))

------
tristanj
Non-paywall link:

[https://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=newss...](https://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=newssearch&cd=1&cad=rja&uact=8&ved=0CB4QqQIoADAAahUKEwi_18vgrsjIAhVC9mMKHdwwAmg&url=http%3A%2F%2Fwww.ft.com%2Fcms%2Fs%2F0%2F91063628-73f5-11e5-bdb1-e6e4767162cc.html&usg=AFQjCNEK2a0p_l8KdvG3wo-
QO_IQLLnHzA&bvm=bv.105454873,d.cGc)

------
dawkins
"some of these valuations are illusory because the most recent investors have
structured their investments as debt in all but name, meaning that they will
stand to profit even if the company is worth far less"

Can someone please explain this?

~~~
toufka
Not my field - but it was talked about recently here. I'll do my best, but
help me out here guys...

Essentially, the money VC invests can be invested with a 'first-out' kind of
option. So that were the company to fail, or sell for less than expected, that
the very first people paid out of whatever pot of money is left would be the
VCs. So imagine they say the company is worth $1B and a VC put in $200M.
Company sells for a 'dismal' $210M. VC exits with their $200M back, and
founders, team, other investors etc. all fight over the $10M that on paper
seemed like $800M. As I recall, sometimes the investments are not just
'preferred' but are '2x preferred' or such things.

In the end it distorts the incentives of the VC. The _want_ the company to be
worth a billion dollars, but if they say it, it's not true, the company
crashes, and loses nearly everything, they in reality only lost the time-value
of their investment, not actually any cash.

------
ChuckMcM
I really like the label "sub-prime Unicorn".

I really hope Theranos is not a fraud, I think the concept of rapid
diagnostics with minimal source material is critical to scaling health care to
the planet as a whole. But having watched people like Affymetrix and other
"silicon-meets-organics" concepts go through the process of validation, I have
always felt Theranos talks too much about how great they are going to be and
how cool their founder is, and not enough about how they are going to get
there. My observation is that companies that far ahead of the hype wave are
more likely to flame out than ones that start very quietly and intercept the
hype wave at or just after product introduction.

Someone is going to figure this space (instant diagnostics through direct
inspection) at some point. Still wondering if someone has.

------
7Figures2Commas
It's kind of amusing that so many in Silicon Valley rail against Wall Street
and "financial engineering" when the biggest "winners" of this tech boom are
products of Wall Street and "financial engineering."

~~~
adventured
If we're talking only about start-ups that have gotten big during this boom,
then you're very wrong.

Uber, Xiaomi, Airbnb, Palantir, Snapchat, Didi Kuaidi, Flipkart, WhatsApp,
Pinterest, and Dropbox are among the biggest winners so far. There's nothing
Wall St or financial engineering about any of those. They're all legitimate
businesses and or services that consumers blatantly want.

~~~
lmm
Uber and Airbnb are very much about financial engineering. Most of their edge
comes from tax avoidance and regulatory avoidance.

~~~
the_economist
Uber and Airbnb are about consumer demand first and foremost.

------
mcintyre1994
> Forget the fact that some of these valuations are illusory because the most
> recent investors have structured their investments as debt in all but name,
> meaning that they will stand to profit even if the company is worth far
> less.

Can anyone recommend anything to read to get an insight into how one of these
deals works?

It's always seemed like liquidation preferences push a deal a fair way toward
debt because (I think?) they get paid first and fully before anybody else. But
that doesn't seem to be a recent thing at all.

~~~
danielrhodes
A lot of these big rounds these unicorns are raising have crappy liquidation
preferences, making the signal they give off of confidence in the company look
much different.

~~~
mcintyre1994
Don't Sequoia do this too though? They had 4x and 2.7x in Zappos rounds [0],
they were in Stripe's reportedly >2x Series C [1].

Not trying to call out the author or Sequoia but this doesn't seem like
anything new. Are the current deals even worse than 4x?

[0] [http://www.wac6.com/wac6/2009/08/sequoias-liquidation-
prefer...](http://www.wac6.com/wac6/2009/08/sequoias-liquidation-preference-
in-the-amazon-zappos-deal.html) [1] [https://pando.com/2014/01/24/memo-to-
stripe-winning-the-hear...](https://pando.com/2014/01/24/memo-to-stripe-
winning-the-hearts-of-valley-startups-is-not-winning-payments/)

------
aetherson
I want to like this article, but it seems pretty short on supporting evidence,
besides Theranos in particular. Is there a reason to believe that Theranos is
typical of the unicorns?

------
sjg007
Extreme secrecy seems to be a bad thing in unicorns.

~~~
mcintyre1994
Sam Altman tweeted the same thing about YC applicants too:
[https://twitter.com/sama/status/654708548237066243](https://twitter.com/sama/status/654708548237066243)

