Gavin Baker+ Your Authors @GavinSBaker Husband, Becky Painter. CIO, Atreides Management. Former PM, Fidelity OTC fund. No investment advice, views all my own. Jul. 08, 2019 3 min read + Your Authors

1) Last person in the world to this book, but I read "Bad Blood" this weekend. It is amazing to me how the simplest diligence possible would have uncovered the basic fact that the product did not work.

Going to share my own Theranos story with some trepidation.

2) Trepidation because I avoid victory laps and/or dunking on companies that have failed out of basic decency, the knowledge that my own list of mistakes is long and distinguished and superstition (lightning bolts from the market gods seem to quickly follow victory laps).

3) But the book really resonated with me, so:

4) When Theranos was raising money in 2014, my cousin was graduating from UC Santa Cruz and Palo Alto was on the way(ish) from Santa Cruz to SFO so my parents and I stopped at the Walgreens in Palo Alto as I wanted to have the test done on myself.

5) I do not like needles, which contributed to my interest in Theranos along with a belief that precision medicine was inevitable, so was super dismayed when the nurse told me that they needed to do an IV blood draw in addition to the prick so that the test would be “accurate.”

6) I decided not to invest based on that alone – i.e. the product did not enable finger prick blood testing and at $9b premoney, the product had to work. Simple Peter Lynch style diligence was all that was necessary to reach the correct conclusion.

7) I had no idea the company was engaged in widespread fraud, I just knew the product didn’t work exactly as advertised, which was enough to prevent me from doing any more work on Theranos.

8) I had forgotten until reading the book that my doctor was appalled at the test results when they came in a few days later as they seemed wildly inaccurate. At his request I had another round of blood tests done, which confirmed the inaccuracy of the Theranos results.

9) I remember being annoyed that I had to do two IV blood draws in the space of a few weeks, but did not think at all about the larger consequences/risks of such inaccuracy – I had already moved on from Theranos intellectually and must have assumed the inaccuracy was a one-off.

10) Amazing and lucky that there was not more patient harm – the book suggests that only 10 people were harmed by inaccurate results, which is obviously too many but could have been much worse.

11) Really surprised that she was in discussions to raise money for a new venture before the criminal charges were filed – that is quite a reality distortion field. Super curious to see the HBO documentary to see if the charisma that must be there comes through on film.

12) My sister went to high school with her (Elizabeth Holmes) and says that she was completely normal in every way – not particularly charismatic or unusually smart. All so interesting.

13) It does seem to me that some public equity investors have been inspired by this book and convinced that there are other frauds hiding plain sight – I would just say that Theranos would not have lasted nearly as long as a public company.

14) Sarbanes-Oxley and personal liability really changed the game - fraud has declined in public mkts. And the demise of Arthur Andersen has led to significant incremental diligence from auditors when there is any question of impropriety. Audited financial results are powerful.

15) And I don’t think there is much read through to other high profile private co's where boards are much stronger and the investors are much more sophisticated. There is a big gap between being overly optimistic about the future and outright lying about present realities.

16) I had avoided reading the book because I felt like I had followed the reporting so closely and was a good reminder that it's usually worth reading the book - JD Vance's "Hillbilly Elegy" was the same experience - so am going to read "Red Notice" next based on this thought.

You can follow @GavinSBaker.


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