6 January 2022

Elizabeth Holmes is a product of her time – and its markets


You could deliver a five-act Shakespearean Tragedy in iambic pentameter about Elizabeth Holmes and the web of deceit that was Theranos. A good tragedy requires the protagonist to willingly make the choices leading to their destruction.

The environment that offered Holmes the opportunity to destroy herself is critical to the plot: A market running away with itself, fuelled by an abundance of easy money, desperate capital chasing any opportunity, a mood of infectious credulous belief, a supporting cast of enablers, and the market background of upwardly sloping charts. Elizabeth Holmes is a product of her times, who willingly chose her path and got caught when the grand vision she espoused proved a hollow sham.

But something deeper is at play. Whatever happened to our sense of honesty? The last few years have seen a grudging acceptance of folks like Trump and a host of other robber barons at the top of markets and politics. They exaggerate, tell massive lies, make unsupportable promises, and shout their lies louder and louder when we call them out. Their false truths come to dominate. Do we stop them? No. We enable them.

The funny thing is it’s kind of all happened before. The parallels with today’s markets and the dot com crash of 2000 are striking.

Back in September 1999, a wise fund manager, Brian Berghuis of T. Rowe Price, was being pilloried by the press and investors for saying he found ‘the speculation on the Internet a little worrisome’. Berghuis scaled back further investments in the new internet market stocks, sold anything unconvincing and watched the market soar ever higher. And in March 2000, he was proved right when the dot coms imploded.

The underlying theme driving the fervid dot com market in the late 1990s was the apparently unlimited upside of information technology. The then-recent innovation of the internet as a commercial medium was driving insane valuations of digital sellers, such as online pet stores and fashion companies, to stratospheric levels.

It was a time studded with newly invented buzzwords and jargon about the information age. We all manically bought into it, and punished the old fashioned dinosaurs missing the boat by enthusiastically embracing exuberant internet valuation metrics.

The Wall Street Journal questioned the ‘quaint idea’ of profits. Concepts like ‘mind share’ and phrases like ‘get large or get lost’ dominated the narrative. Employee stock options made founders instant paper millionaires. The tech-heavy Nasdaq surged 400% from 1995 to March 2000. In 1999 Qualcomm made Tesla look a lame snail, posting a 2600% price gain. But the really big gains were limited to a relatively small number of stocks. Most IPOs performed badly, and most firms on the Nasdaq underperformed.

What caused the dot com bubble to burst? Rising interest rates are one story, but the reality is the market woke up to the over-promised, under-delivered reality.

There is always a crescendo: a story I love is an educational software company called The Learning Company. For 15 years, it steadily built its brand and profitably sold its products before a hostile acquisition at the start of the bubble in 1995. The new owner sacked the staff and hyped the business, selling it to toy-company Mattel in 1999 for $4bn in stock. Mattel dumped the bits for less than $30m the following year – a massive mistake in expectation management and due diligence. You need to kiss a lot of frogs to marry a prince.

When the dot com bubble burst, 90% of companies imploded or vanished into the nether regions of penny stocks. Some dot coms, not least Amazon and Google, thrived – for the simple reason that they were profitable. There will always be winners.

The trick of good tech investment is to spot the winners and not get sucked in by the ultimate losers. It’s part great due diligence and part luck. Later, other firms emerged into the wrecked landscape and made the tech work for them. Everyone who was burnt by their dot com experience swore they’d never get caught again, but you can’t completely discount the future.

Today the buzz is all about ‘disruption’, which now means whatever a stock hawker wants it to mean. The valuations being put on innumerable profitless ‘disruptive’ technology concepts in the current fervid IPO and SPAC-driven tech feeding frenzy of start-up gristle (because most have zero meat on the bones) is much like 25 years ago. It’s just the jargon that has morphed a little.

The universal diagnostic tool that Theranos told investors was coming would be a marvellous thing. It could genuinely change health provision. But, raising billions by telling investors it worked when it didn’t is simply fraud. I’ve got this great business plan for a personal transporter beam that will disrupt every form of transport on the planet, but until it works I accept it’s worth nothing.

But what if it sort of worked…? Is ‘fake it until you make it’ really an acceptable way for tech to work? At what stage does the vision get replaced by an outright lie? That looks like a blurry line.

For 10-years, a leading EV company has promised autonomous driving tomorrow, but is apparently no closer to delivery. A tech firm (that simply rented office space) promised the extraordinary market returns and nearly folded, leaving the founder rich and his investors wounded. A former US media idol banned from Twitter has achieved a spectacular valuation on a new media empire, SPACed without even a cigarette packet business plan. I could go on. There are half a dozen other firms following Theranos to the courts. There will be more.

Where does that leave Elizabeth Holmes? Does she deserve our sympathy or contempt? Villain or victim? Just another shameless self-promoter? The stories emerging of her repression of internal dissent and a toxic workplace sound a pretty standard tale of a dysfunctional, greedy person. As the prosecutor said in his closing arguments: ‘She chose fraud over business failure. She chose to be dishonest with investors and patients. That choice was not only callous, it was criminal.’

The bottom line is she was found guilty, just like a string of other financial shysters since we invented markets. We will always have fraudsters. They are a regrettable factor in markets. Easy money, abundant capital and blithely unaware investors lend them credibility. To my mind, the blockchain is little more than a technobabble garnish that’s been seized on by the crypto-mafia as suitable hi-sounding jargon to spin their Ponzi-con around.

The only way to avoid the frauds is to be smart and spot them early through due diligence and not let the market’s crazy exuberance and acceptance of the glib lie suck you in.

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Bill Blain is market strategist and head of alternative assets at Shard Capital

Columns are the author's own opinion and do not necessarily reflect the views of CapX.