Hoodwinked! The Theranos/Zano/uBeam Conundrum

Some of you may have heard of Theranos, Zano or uBeam, many may not have.

Theranos

Theranos was once touted as being the next big thing in the healthcare sector. It’s charismatic CEO Elizabeth Holmes has overseen the company as it reached the heady heights of a $9bn valuation and secured deals with household names such as the Walgreens chain of drug stores in the US and funding from high profile names like Larry Ellison, all on the back of its claimed revolutionary few drops of blood testing techniques which are allegedly able to do away with traditional expensive lab tests for a range of tests.

Unfortunately, this is where the fairy tale ends. The Wall Street Journal has written a scathing series of articles calling into question the accuracy of the results of Theranos’ Edison testing machines and process. Theranos in the meantime has voided two years’ worth of blood tests due to inaccuracies. Additionally, it is facing class action lawsuits, a federal criminal investigation and a civil probe by the SEC.

Zano

Zano was a different picture, a crowd funded camera drone with claimed capabilities beyond anything else available, all at an enthusiast rather than professional price point. Engadget even shortlisted the Zano for its Best of CES award that year, despite the fact that they never saw a working prototype. Kickstarter themselves also selected Zano as a Staff Pick which highlighted it on the site during its fundraising campaign. The end result was a massive funding of over £2.3m when all they were looking for was £125,000. Less than a year later, the project and company would fold catastrophically. Kickstarter hired an independent journalist to investigate and figure out what went wrong. You can read about Mark Harris interesting assessment of the Zano implosion here.

uBeam?

uBeam is now the latest firm balanced on the precipice. The former uBeam Vice President of Engineering has raised doubts about the technology supposedly on offer on his blog here. Other professional engineers are now also questioning whether uBeam’s claimed long range wireless charging technology is possible and safe (of course, it needs to be both). According to the Wall Street Journal, several VC firms who invest in hardware and science based tech startups have passed on investing due to the company not being able to answer basic questions. Even so, uBeam is currently funded to the tune of about $24m with high profile names like Marissa Mayer included in that roster of backers.

Entrepreneurs, not Gods

Theranos and uBeam were at least somewhat traditionally funded firms, not taking the crowd route, but the point is still valid. The rich who fund are capable of getting hoodwinked as much as the ordinary person on the street who pledged a few hundred bucks on Kickstarter for a drone or pair of headphones.

Ultimately though, there is a question on the technologically savvy press to hold to account the claims of the tech startup entrepreneurs. Unfortunately, we live in a world that often thrives on hype and a question mark of whether critical journalism still has a serious place left in the world, particularly given the thorny questions over whether a critical outfit will get access to a successful company for its pieces once the ship has sailed and the next Apple or Google is acknowledged to exist.

The most important thing to remember is that at the end of the day, entrepreneurs are just people. Fallible people, just like you and I. Sure, maybe they've achieved great things, maybe they will achieve great things, but that doesn't mean that their startup promises are carved on tablets.

Return on “Investment”

So we get to the concept. Many think they understand what they’re doing, but all too often they don’t. The disconnect between investment and return is very real for some people. In many ways, all expenditure is an investment, but a lot of people have difficulty looking at money they spend in a shop, online, at the petrol station as an investment. Of course all of it is, however the calculation is an oddity of the human mind in that it often doesn’t happen. Real investing of course is a serious business. Trillions of your currency of choice flow throughout the investment industry on a regular basis. But here, the measurement is clear. We receive nothing tangible other than growth (or on bad days loss) on our principle investment. We invested (gave cash) and we expect a return (more cash).

The problem however arises when you look outside the professional investment community (an environment which is beset by problems, despite its massively regulated nature) and look to a new non-traditional form of investing. The investing for product.

This is a tricky area, and many are still trying to understand the psychological implications, but ultimately the difference between something you buy and something you invest in (in the traditional sense) is a stark one. When you buy a thing, whether you realise it or not, you place a value to you on the thing which you have bought. That value is potentially unclear, perhaps it is something you think you will enjoy and you hold your enjoyment to be worth X dollars, pounds, euros, yen etc. Or perhaps it is something that you think will make you more money, in which case it could be considered an investment vehicle of some sort. The question is though, how do we know how much something is worth?

Traditional investment looks at the possible risks and possible rewards and tries to divine some sort of likelihood. Much like a game of chess, you analyse the landscape and try to prepare as best you can for what may come. This is what the investment industry tries to achieve, whether it’s your financial advisor recommending stocks to buy or a venture capitalist investing money into a startup.

The difficulty is that investors take some risk that the startup fails. This is inherent. But they should of course try to mitigate this risk as much as possible of course since nobody likes to lose money. So the basic idea is that they should research what they are investing in and try to figure out what its chances are of succeeding and what a possible or probable return on the initial investment is likely to be if it does succeed.

So professional investors employ all kinds of advice to attempt to divine the likelihood of success or failure. Comparisons to other similar companies or products, what kind of demand there is for these similar products, an assessment of the likelihood of any proposed innovation being able to be developed and approved etc.

BUT!

Even then, even with all the advice, all the expert opinions, all the research and everything professional investors do, sometimes it goes wrong. Sometimes, you just buy a lemon. And all the due diligence in the world didn’t prevent you from buying that lemon. This is why investing is a risky business. Even the pros get it wrong sometimes.

The Mental Breakdown

If I asked you would you be happy to spend $100 on an evening out, chances are many of you would be fine with that, but what about if I asked you to spend $100 on shares. Would you agree as easily as you did to the $100 for a night out? Probably not, or at least not without doing a bit of research yourself. This is the fundamental problem in crowd funding and it exists for a simple reason.

YOU THINK YOU’RE BUYING PRODUCT!

Kickstarter itself thinks this is an issue, enough of an issue to publish an entry on its block called “Kickstarter Is Not a Store”. I know a lot of people that have backed projects on Kickstarter or Indiegogo. Many of them realise that they are modern day patrons of the arts. Many more think that they’re pre-ordering a product.

As we’ve seen, you’re not buying, you’re investing. As much as the Norwegian or Abu Dhabi Sovereign Wealth Fund portfolio managers choosing stocks, choose wisely, for many a Theranos, Zano or potentially even a uBeam await. It doesn’t matter if your money is from a bank account as rich as Larry Ellison’s or Marissa Mayer’s or as humble as my own. Do your due diligence thoroughly and don’t just go on the basis of what a couple of tech journalists say. Particularly given this age of viral marketing and hype, it’s easy to get caught up in the extravaganza and lose money. As with gambling, only play with what you can afford to lose. Question everything you hear and above all (difficult for me to write this somehow!) Don't believe the hype!

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