Re: Guest post: Theranos

1

Who was it who reported that in the Bay VC world, Stanford grads are routinely given three chances to start a business before given up on?


Posted by: Minivet | Link to this comment | 04-18-16 12:51 PM
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I love this:

In an interview that aired Monday on NBC's TODAY show, Holmes took full responsibility for the problems, which largely involve inaccurate test results and the hiring of unqualified workers. However, she explained the failures by noting that she was unaware of them.

And the dog ate my homework.


Posted by: AcademicLurker | Link to this comment | 04-18-16 12:54 PM
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(Money received ???):(Company valuation 9G$) may be a very small ratio. Furthermore, money received may be in the form of overvalued shares of other companies.
Overvalued companies can use their own shares to buy other companies this way without having to sell the shares themselves, so there are no reports of insiders at the acquiring companies having sold equity stakes.

In other words, getting at the actual financials would take detective work. A headline blaring about a company's valuation does not mean much at all, I'm pretty sure.

There are insane transparent scam companies that last for years, maybe for tax purposes, who knows. Herbalife is another example, has been subject to legal squabbles between a pro-pyramid VC and an equally contemptible foe.

Getting reliable financial reporting is not that easy, IMO.


Posted by: lw | Link to this comment | 04-18-16 12:58 PM
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Threaten the widow of your former chief scientist with legal trouble after learning that she spoke to the Journal and said that her husband, who coauthored 23 patents during eight years with the company, repeatedly told her before he committed suicide that, "nothing was working."

Nice.


Posted by: Barry Freed | Link to this comment | 04-18-16 1:00 PM
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First comment on the story is great:

Holmes is not to blame for this outcome. On the other hand, there is no way the money got through the firewall against unverified technology, or this is collusion. Maybe this girl is really smart, and all this was to drive the shares down before a second round of funding. With this much money at stake, and given what has happened, if it was not the intent of the stakeholders to do this, then they will scramble to minimize losses, and the only way to do that is to keep whatever is valuable. If there is really the hyped tech and it can still get past FDA, no reason not to go back to incubation stage. Perhaps these are just minor setbacks, but don't be surprised if they turn this into a Phoenix project - back from the ashes. I don't hear news of stakeholders being too freaked out about this. Perhaps they have some aces. We'll see.


Posted by: Barry Freed | Link to this comment | 04-18-16 1:07 PM
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She's attractive, but there's an uncanny valley kinda thing going on with her eyes. I wouldn't say that she's exploited her attractiveness any more than anyone else on that stage.

I suspect part of the answer is that her father is rich and connected and so she was given the benefit of the doubt for far too long.


Posted by: F | Link to this comment | 04-18-16 1:08 PM
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6: She's exploited her attractiveness in a new and different way, by dressing like Steve Jobs. So this company is like Steve Jobs, but a hot babe? Where do I invest?


Posted by: Cryptic ned | Link to this comment | 04-18-16 1:12 PM
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I've always wondered what the private investors and board members were being told. Because a big part of the scam was "oh, it's proprietary, so we can't tell you, but trust us, it's pretty awesome". But that's not supposed to work on the internal decision makers.


Posted by: F | Link to this comment | 04-18-16 1:13 PM
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I clicked on the profile of the commenter in 5 to see what else they had written (move: mistaken af). Common or garden bigot+Trumpite, so I bet very willing to cheerlead executive salaries when that comes up.


Posted by: Minivet | Link to this comment | 04-18-16 1:15 PM
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I've always wondered what the private investors and board members were being told. Because a big part of the scam was "oh, it's proprietary, so we can't tell you, but trust us, it's pretty awesome". But that's not supposed to work on the internal decision makers.

"We've discovered a simple, innovative, and completely proprietary technique to avoid the need for FDA approval."


Posted by: Cryptic ned | Link to this comment | 04-18-16 1:19 PM
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I haven't looked into this, but I suspect 10 is the main reason for much of the interest. FDA-approving costs fucktons of money.


Posted by: Moby Hick | Link to this comment | 04-18-16 1:22 PM
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Stanford grads are routinely given three chances

According the the article, shes actually a Stanford dropout. Which possibly bought her more cred?

Except its not like "Bill Gates almost graduated but had better things to do;" she dropped out at 19.

For some reason I was under the impression some super genius with a medical degree or something. Apparently not.


Posted by: Spike | Link to this comment | 04-18-16 1:30 PM
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"We've discovered a simple, innovative, and completely proprietary technique to avoid the need for FDA approval."

This aspect of it reminds me of 23&me, who also tried to play the "We don't need no stinkin approval" game. When are the Disruptive Innovators going to learn that playing chicken with the FDA is a bad idea?

Maybe they're hoping that if they can just hang on until a republican president gets elected, the whole agency will be de-funded/dismantled and they'll be gloriously free to peddle whatever snake oil they want.


Posted by: AcademicLurker | Link to this comment | 04-18-16 1:31 PM
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Maybe I should go into farmering then.


Posted by: Moby Hick | Link to this comment | 04-18-16 1:34 PM
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23&me is IMO completely different. There, a working technology, the FDA problem was that they passed what amounted to exploratory research on SNPs to consumers without much guidance. They're still selling the same technology, which works well in many circumstances, but with differing explanatory material, I blieve just providing much less medical guidance. They're leaving buyers to figure it out with google, which is about what they were providing anyway.

The Theranos story is a combination of shitty financial reporting and a low-level scam company.


Posted by: lw | Link to this comment | 04-18-16 1:38 PM
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23&me's issues with approval trigger my usually-quiet (and often information-centric) libertarian sense of outrage. (1) It's fine to take a sample and find the SNPs in them (2) there are lots of databases and papers connecting SNPs to this or that. But presenting (1) and (2) together as a neat package is forbidden?

(My wife and I both did 23&me, and found it fascinating if not terribly actionable)


Posted by: Nathan Williams | Link to this comment | 04-18-16 1:40 PM
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Would it help if 23&me just suggested the consumers rub the diagnosis on their head?


Posted by: Moby Hick | Link to this comment | 04-18-16 1:42 PM
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How can so many investors get hoodwinked by such a blatant scam?

Massive metric fucktons of finance capital in a world of extreme overcapacity and very low risk and very low returns. You got 100 million in the bank earning 1% but no inflation or high taxes or social disorder in sight and the basketball teams are already bought. What does Apple have, a trillion it can't lose? Money has to be somewhere, doing something.

The interesting question is why there isn't more crazed gambling goin on.


Posted by: bob mcmanus | Link to this comment | 04-18-16 1:42 PM
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I've always wondered what the private investors and board members were being told.

The board members included Henry Kissinger, Sam Nunn, Bill Frist, George Shultz, a Navy Admiral and a Marine General. Average age: 80.

They were there for show and Pentagon connections, not actual governance.


Posted by: Spike | Link to this comment | 04-18-16 1:48 PM
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15: The 2 cases are definitely different. 23&me had a service that actually worked, but they tried to start advertising it to costumers as a tool to guide medical decisions (as opposed to tracing your ancestry) without giving any consideration to the fact that medical services are regulated. They wised up and are in compliance with FDA requirements and still in business, but their initial behavior was incredibly dumb. They seemed to think that because Uber gets away with ignoring regulations then so could they.

Theranos just had a BS technology that apparently never actually worked. Obviously different from 23&me in that respect, but their cavalier attitude toward the FDA was similar.


Posted by: AcademicLurker | Link to this comment | 04-18-16 1:50 PM
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Who the fuck invests $700m without a board seat? Also, I remembered what SNP stands for without googling. I think I'll reward myself with a cookie on the morrow.


Posted by: Mossy Character | Link to this comment | 04-18-16 1:56 PM
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I know some people close to this technology. One of them told me he read the few public technical documents describing what Theranos was proposing and would have given them a B as an undergrad thesis.


Posted by: SP | Link to this comment | 04-18-16 2:11 PM
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I thought undergrad theses were pass/fail.


Posted by: Moby Hick | Link to this comment | 04-18-16 2:16 PM
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A lot of people hate getting their blood drawn, so they went along because they wanted to believe.


Posted by: peep | Link to this comment | 04-18-16 2:16 PM
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I know when I'm trying to evaluate a medical technology, the first person I ask is Henry Kissinger.


Posted by: peep | Link to this comment | 04-18-16 2:18 PM
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18.2 is the great truth of the modern age.


Posted by: Walt Someguy | Link to this comment | 04-18-16 2:25 PM
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25: Something's got to be keeping him alive.


Posted by: LizardBreath | Link to this comment | 04-18-16 2:30 PM
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Pure Spite. At your neighborhood CVS.


Posted by: Moby Hick | Link to this comment | 04-18-16 2:31 PM
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Part of it is the same reason people continue invest in Amazon, right? The goal is to become a monopolist - in this case getting a deathgrip on a huge chunk of the syringe/blood-test market for as long as the patents hold out - and people are willing to put in a lot when that kind of fuck-you money is a prospect. (For Amazon the milk-everyone-dry point still hasn't come after 20 years, but they're not working on the same timeframe.)

Brings to mind dsquared's point that "high-risk" in terms of inherent difficulty of success should not be confused with "high-risk" due to deceptive practices, bad management, etc.


Posted by: Minivet | Link to this comment | 04-18-16 2:34 PM
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||

Long form link of the day

Bob Dylan explains who killed rock and roll. Alan Freed, race-mixing, British Invasion, Hendrix, Chuck Berry, payola.

You'll love it, but all these racial histories of R & R and the sixties always leave out 1/3 of the story: folk, country, bluegrass, and the Scots-Irish folk importation and tradition. Sandy Denny, Martin Carthy, and Jansch in England understood the protest underclass tradition that was taken up by Haggard and the Outlaws in Austin and was a major major component of the 60s and 70s, including the foundation of the San Francisco sound. Hippies were country.

(And of course the smaller factor of art music like Stockhausen and Krautrock that led to Prog and British New Wave and Shoegaze etc)


Posted by: bob mcmanus | Link to this comment | 04-18-16 2:38 PM
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There's a whole other thread that is actually about music.


Posted by: Moby Hick | Link to this comment | 04-18-16 2:42 PM
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3: the article says actual money invested in the company was a bit north of $750mm.


Posted by: urple | Link to this comment | 04-18-16 2:44 PM
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As far as I am concerned the most important political music event of 1968 was the simultaneous recording of "Pretty Polly" by the Byrds, and especially because she sold more records, Judy Collins rage scream feminist version with Stills guitar.

Louvin Bothers met O'Malley's Bar in Woodstock. Gonna be some killing tonight.


Posted by: bob mcmanus | Link to this comment | 04-18-16 2:47 PM
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"The minute you have a back-up plan, you've admitted you're not going to succeed," said the arrogant moron, before failing.


Posted by: | Link to this comment | 04-18-16 3:00 PM
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34

Yeah, that's an especially dumb statement. My friends who work in startups specifically say that it's 100% the opposite in that world. You have to be able to turn on a dime and completely abandon your original idea immediately if it turns out your business model isn't going to work.


Posted by: F | Link to this comment | 04-18-16 3:03 PM
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21: I had a board seat and still got fucked over...


Posted by: A/B | Link to this comment | 04-18-16 3:12 PM
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35:

Yep. Plans are nice, but if your goal is to make money you want to be able to re-tool quickly and move where the money is.


Posted by: Trivers | Link to this comment | 04-18-16 3:15 PM
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Thanks for posting, heebie!

I didn't understand that the $9 billion was just the valuation of the company, rather than the amount of money invested. $750 million is still an awful lot of money, though.

I've always wondered what the private investors and board members were being told. Because a big part of the scam was "oh, it's proprietary, so we can't tell you, but trust us, it's pretty awesome". But that's not supposed to work on the internal decision makers.

That's the part that confuses me. I am a board member on a teeny-tiny organization and I worry all the time about my responsibility for financial oversight. (It's a great organization; I don't think they're doing anything wrong. I just want to be a responsible board member.) And that's a situation where there is zero profit to be had for anyone! Why wouldn't people be especially diligent when it is their own money at stake?


Posted by: Witt | Link to this comment | 04-18-16 4:28 PM
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|| This isn't real, right? |>


Posted by: CharleyCarp | Link to this comment | 04-18-16 4:34 PM
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This is a shallow and horrible comment, but if that's the level of attractiveness needed to scam people out of billions of dollars as a Silicon Valley entrepreneur, I should get in a different line of work.


Posted by: Buttercup | Link to this comment | 04-18-16 4:39 PM
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BCup, I'm currently at a closed offshore military base, with an overwhelmingly male population. Guys used to refer to a grat many women as "a 282" -- e.g., 'who was that 282 I saw you with at the movie last night?' -- a 2 at home, an 8 here, a 2 when they get back home.

It's a shallow and horrible concept.


Posted by: CharleyCarp | Link to this comment | 04-18-16 4:50 PM
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40: You also need to be able to say things like "The minute you have a back-up plan, you've admitted you're not going to succeed" and not spontaneously combust from shame.


Posted by: AcademicLurker | Link to this comment | 04-18-16 4:52 PM
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I may have overdone the Big Bang Theory reruns the other night . . .


Posted by: CharleyCarp | Link to this comment | 04-18-16 4:55 PM
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41
Yeah... that's horrible but I was thinking something similar.

Also, googling her I think what makes her unusual for SV is she's mastered eye makeup in a way to mostly disguise her really asymmetrical eyes, if you don't really look closely.

42

Yeah that's a major problem. Getting rich off of being an attractive but not super model-stunning white woman usually involves selling your soul to repugnant causes.


Posted by: Buttercup | Link to this comment | 04-18-16 5:02 PM
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8:I've always wondered what the private investors and board members were being told. Because a big part of the scam was "oh, it's proprietary, so we can't tell you, but trust us, it's pretty awesome"

"Now, you won't get the same sound without the THX-1138 modification -- and we do that right here in the store, very small additional cost. But that, that's technical talk."


Posted by: Natilo Paennim | Link to this comment | 04-18-16 5:04 PM
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There's a lot of money to be made in the area of not having one shred of empathy or ethical principle whatsoever if you're willing to put yourself out there.


Posted by: Trivers | Link to this comment | 04-18-16 5:30 PM
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Getting rich off of being an attractive but not super model-stunning white woman usually involves selling your soul to repugnant causes


Posted by: CharleyCarp | Link to this comment | 04-18-16 5:36 PM
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I was watching a bit of a talk Theranos gave a few years ago and unless she was sick, she has a surprisingly scratchy voice. I draw no conclusions from this observation.


Posted by: fake accent | Link to this comment | 04-18-16 6:13 PM
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48: The Today show was playing her interview with Maria Shriver while I was at the gym. At first, I thought it was a bad audio feed, then realized it was her actual voice. It's pretty deep as well as scratchy.


Posted by: ydnew | Link to this comment | 04-18-16 6:54 PM
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8: I've been following this story since the house of cards started to fall apart, and I don't think anyone's really sure whether this was a case where people had convinced themselves that since they had solved N problems, they could solve N+M and get the product to work, or whether it was intended to be offloaded onto the Department of Defense for gazillions, where its failure to work would be someone else's problems. I had been presuming the former, despite the presence of Kissinger, William Perry*, and Sam Nunn on the board, but this story is pretty damning, so maybe it's a little of both.

* Not the Fridge, pbuh.


Posted by: snarkout | Link to this comment | 04-18-16 7:43 PM
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On a related note, in other moods I would be infuriated by the waste this represents, but somehow tonight I am just amused by the sheer audacity of launching a company that doesn't even bother to explain -- may not even know -- what it does.


Posted by: Witt | Link to this comment | 04-18-16 7:58 PM
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Of course it knows what it does. It acts as a slush fund.


Posted by: nosflow | Link to this comment | 04-18-16 7:59 PM
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51: That's amazing. It's like they looked at Theranos and decided the real problem with their business model was pretending to have an actual product that does something.


Posted by: teofilo | Link to this comment | 04-18-16 8:18 PM
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If Emerson were here, he'd agree with me. It's a slush fund/tax dodge/empty credential fronted by an empty head.


Posted by: nosflow | Link to this comment | 04-18-16 8:21 PM
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That does seem like the most logical explanation.


Posted by: teofilo | Link to this comment | 04-18-16 8:23 PM
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fronted by an empty head.

With really large asymmetrical eyes and a scratchy voice*.

*Vocal fry? I haven't heard her voice.


Posted by: Barry Freed | Link to this comment | 04-18-16 8:32 PM
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I definitely did not catch the asymmetrical eyes until you all pointed them out. Now I can't un-see it.


Posted by: Witt | Link to this comment | 04-18-16 9:12 PM
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Interestingly, her picture now seems to be much less prominent on the Theranos website than it was in 2014.


Posted by: teofilo | Link to this comment | 04-18-16 9:22 PM
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And the board of directors link from that post is now dead.


Posted by: teofilo | Link to this comment | 04-18-16 9:22 PM
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That voice is pretty trippy too. I think she might be a robot guys.


Posted by: F | Link to this comment | 04-18-16 10:08 PM
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"A company for carrying out an undertaking of great advantage, but nobody to know what it is."


Posted by: Minivet | Link to this comment | 04-18-16 10:48 PM
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51, am I wrong or is that a non-profit foundation that won't say what it does? Rather than a company that won't say what it does.

Given that they specifically refuse to answer the question of how to pronounce the name, I think it's "Helena" to rhyme with "Selena", and the overarching mission is to help this Henry guy ask Selena Gomez on a date.


Posted by: Cryptic ned | Link to this comment | 04-18-16 10:58 PM
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I know when I'm trying to evaluate a medical technology, the first person I ask is Henry Kissinger.

Peep is Hillary Clinton. Who knew?

I have to say that my scam alarm started burning out the first article I read about Theranos, same as Witt. The question is whether Holmes goes to jail or everybody else just has to forget their money. I suspect she hasn't done anything illegal. I'm reminded of a story about Sydenham, who was arguing about medical ethics with a quack in a coffee house, and said something to the effect of, "Anyman of sense would consult me rather than you." To which the quack replied, "Look out of the window and tell me how many men of sense you see." Sydenham said perhaps one in four, and the quack said he was welcome to them; he would take the rest.

I can't see why Holmes is regarded as particularly attractive: run of the mill American android looks, female version; there are tens of millions of them.


Posted by: chris y | Link to this comment | 04-19-16 1:52 AM
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So they for real thought they could market a medical technology without the FDA getting involved? Fucking geniuses!

I've worked a startup and I've worked with startups. I've never encountered one that didn't have contingency plans, but then again they didn't think they were immune from the laws of gravity. Also didn't raise gazillions, so there's that.


Posted by: togolosh | Link to this comment | 04-19-16 4:44 AM
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62 is right, but you shouldn't underestimated the disruptive potential of some zillionaire 20-year-old also asking Chloe Grace Moretz or the Hauser Institute for Civil Society's Jennifer McCrea out on a date.


Posted by: snarkout | Link to this comment | 04-19-16 5:12 AM
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39

There are a bunch of these with different photos from November 2015


https://www.facebook.com/NJwomen4Bernie/photos/pcb.1673940989540806/1673940136207558/?type=3&theater

https://www.facebook.com/NJwomen4Bernie/photos/pcb.1673940989540806/1673940159540889/?type=3&theater

https://www.facebook.com/NJwomen4Bernie/photos/pcb.1673940989540806/1673940129540892/?type=3&theater

"berniecrat meme warehouse" is some sort of private facebook group


Posted by: lemmy caution | Link to this comment | 04-19-16 8:02 AM
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39

There are a bunch of these with different photos from November 2015


https://www.facebook.com/NJwomen4Bernie/photos/pcb.1673940989540806/1673940136207558/?type=3&theater

https://www.facebook.com/NJwomen4Bernie/photos/pcb.1673940989540806/1673940159540889/?type=3&theater

https://www.facebook.com/NJwomen4Bernie/photos/pcb.1673940989540806/1673940129540892/?type=3&theater

"berniecrat meme warehouse" is some sort of private facebook group


Posted by: lemmy caution | Link to this comment | 04-19-16 8:02 AM
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Right now I'm teleconferencing in on a speech by Mariana Mazzucato right now. It seems like she's moving towards a coherent leftish framework for the role of the public sector in investment. She had a good line that governments current role is seen as socializing the risks of innovation, but it should be socializing rewards as well.


Posted by: Spike | Link to this comment | 04-19-16 8:07 AM
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Are those for real? If yes, couldn't they find a better picture of Sanders?


Posted by: Moby Hick | Link to this comment | 04-19-16 8:07 AM
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Grimace for Bernie.


Posted by: heebie-geebie | Link to this comment | 04-19-16 8:16 AM
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It is done by a private facebook group whose members know how to use photoshop. It is real in the sense that at least some members of the private facebook group thought it was a good idea.


Posted by: lemmy caution | Link to this comment | 04-19-16 8:28 AM
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Somebody may need a self-criticism session or whatever the socialists are calling it these days.


Posted by: Moby Hick | Link to this comment | 04-19-16 8:34 AM
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TIL the CIA has its own venture capital fund. That's not creepy at all.


Posted by: Spike | Link to this comment | 04-19-16 8:38 AM
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73: "Under the right circumstances, Mr Bialystock, we could make more money from a coup that fails than from one that succeeds!"


Posted by: ajay | Link to this comment | 04-19-16 8:55 AM
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Interesting example from the teleconference: The US government invested hundreds of millions (billions?) in Tesla. The deal the government got was, if Tesla wasn't able to pay back the loan, the government would get 3 million shares of equity. Of course, under that scenario, Tesla is a worthless company. Meanwhile, the government doesn't get any benefit from what actually happened, when Tesla equity went through the roof.

Socialized risks, private rewards.


Posted by: Spike | Link to this comment | 04-19-16 9:13 AM
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75: not actually true. The US government lent Tesla $465 million. This loan was repaid in 2013, five years early, with the proceeds of a stock sale. Under the terms of the deal, the US government's warrants for the Tesla stock would have vested between 2018 and 2022 if the loan was still outstanding (whether Tesla was in default on the loan or not).


Posted by: ajay | Link to this comment | 04-19-16 9:31 AM
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If you think the US government should be taking equity stakes rather than lending money, fair enough, but a) bigger downside risk b) government minority shareholdings cause all sorts of problems.


Posted by: ajay | Link to this comment | 04-19-16 9:34 AM
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tonight I am just amused by the sheer audacity of launching a company that doesn't even bother to explain -- may not even know -- what it does.

That is remarkable. There's an element of shooting fish in a barrel to the article, but if you were trying to imagine a parody vacuous start-up it would be difficult to come up with something more absurd than stating, as a central pillar, "Equal Representation of Generations."


Posted by: NickS | Link to this comment | 04-19-16 10:03 AM
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73: In-Q-Tel was an investor in the last company I worked for. It did not seem all that creepy. "Hey, the private sector is turning out cooler toys than our labs. Let's make some of these happen."


Posted by: Nathan Williams | Link to this comment | 04-19-16 10:20 AM
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a) bigger downside risk

Except not... the downside risk is the government not getting paid back, which happens whether its a debt or an equity stake. I mean, the deal was "we agree to take your equity once it proves worthless," and doesn't really insulate from downside risk. So, same downside risk, its the upside risk that gets thrown out.

Government as a minority shareholder is problematic, but presumably there are governance structures that could be found to manage it/keep Congress from fucking around with it.

In-Q-Tel apparently gets to play that game... but why is that good enough for the national intelligence apparatus, but not the Department of Energy?


Posted by: Spike | Link to this comment | 04-19-16 10:45 AM
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Except, in the case of Tesla, I think that a car that doesn't require fossil fuels is enough of a society-wide upside to justify $450 million.


Posted by: Moby Hick | Link to this comment | 04-19-16 10:48 AM
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I don't know the terms of the loan and this is corporate finance 101 but 80 is certainly wrong. If Tesla went bankrupt it is still a real company with many real assets in can liquidate. In that scenario the debt holders get paid some portion on the dollar up to 100 cents (and you can bet that the Government gets paid first) and the equity holders get nothing. That's how loans work.


Posted by: R Tigre | Link to this comment | 04-19-16 10:55 AM
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Except, in the case of Tesla, I think that a car that doesn't require fossil fuels is enough of a society-wide upside to justify $450 million.

Of course it is, which is why government involvement is an important part of the model. So a very nice spillover effect has been created. But why is it the only benefit to the public is spillover? Might the public also be entitled to a some portion of the vast new pool of wealth it played no small part in creating? If it was, maybe it could draw on those funds to help the next Tesla get on its feet.


Posted by: Spike | Link to this comment | 04-19-16 10:57 AM
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In that scenario the debt holders get paid some portion on the dollar up to 100 cents (and you can bet that the Government gets paid first) and the equity holders get nothing. That's how loans work.

Right, except in that scenario the government has gone from being a debt holder to an equity holder, so it gets nothing from the liquidation.


Posted by: Spike | Link to this comment | 04-19-16 10:58 AM
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I can't believe that the terms were that the debt converted to equity automatically in the case of a default (those would be uniquely terrible terms!) and 76 suggests that's wrong. Generally a warrant allows the holder the option to either treat the interest as debt or equity for its own benefit, not the benefit of the company -- so a vested warrant would allow the US to have equity benefits from upside while also having the ability to keep the loan as debt in case the company failed.


Posted by: R Tigre | Link to this comment | 04-19-16 11:04 AM
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And a little bit of research confirms. The warrants were for the government's benefit, but Tesla had the option to extinguish the warrants by fully repaying the loan early, which is what it did.


Posted by: R Tigre | Link to this comment | 04-19-16 11:08 AM
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Tesla had the option to extinguish the warrants by fully repaying the loan early, which is what it did.

Ok, I see your point, but this part of the terms also sucks. Basically, it means that if at any time in the early course of the loan Tesla is capable of refinancing its debt with someone who doesn't require equity, Tesla has the ability to cut Uncle Sam out of its upside and keep from having to dilute its ownership. On the other hand, if things aren't looking so good come 2018, they get to go lobby for the government to convert the loan into low-value equity, which probably they would do, because a) favor for a rich guy, and b) liquidation isn't such a hot option either.

My point is that Tesla is a triumph of socialism, and should be respected as such. By "respected as such," I mean, "get a piece of the action on the upside, dammit."


Posted by: Spike | Link to this comment | 04-19-16 11:24 AM
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But anyone who didn't require equity warrants would also require a much higher interest rate, especially since they would not be the U.S. government, which a) has a very low cost of funds and b) is deliberately lending at low rates in order to achieve wider benefits for society.


Posted by: ajay | Link to this comment | 04-19-16 11:33 AM
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The state can simply take the upside as taxes. That's what it does with other socialized risk like bonds for roads.


Posted by: Mossy Character | Link to this comment | 04-19-16 11:37 AM
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Ford and Nissan got the same loans. I think this counts more as ordinary, incremental government nudging than triumphing of anything.


Posted by: Moby Hick | Link to this comment | 04-19-16 11:37 AM
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In fairness, you folks do seem to have lots of trouble with the ordinary incremental government stuff.


Posted by: Mossy Character | Link to this comment | 04-19-16 11:41 AM
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Especially infrastructure and health care.


Posted by: Moby Hick | Link to this comment | 04-19-16 11:42 AM
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87: Allowing extinguishing the loan isn't that uncommon, though; I know Warren Buffett gouged Goldman Sachs and possibly Bank of America at the height of the 2008-2009 financial crisis by issuing then high-interest loans, which both companies repaid as soon as they were contractually allowed to. Buffett got equity warrants in addition to the 9% interest or whatever that he charged on the loans, and maybe the DoE should have done the same, but it seems likely that at some point Tesla would have found private lenders/investors instead.


Posted by: snarkout | Link to this comment | 04-19-16 11:46 AM
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Why wouldn't people be especially diligent when it is their own money at stake?

Because they are insured against consequences, potentially:
https://en.wikipedia.org/wiki/Directors_and_officers_liability_insurance


Posted by: | Link to this comment | 04-19-16 11:53 AM
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94 is me


Posted by: lw | Link to this comment | 04-19-16 11:54 AM
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As long as the government doesn't finance Musk's people-size pneumatic cash tubes.


Posted by: SP | Link to this comment | 04-19-16 11:57 AM
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The state can simply take the upside as taxes.

It can I don't think that's good enough. The government made a high-risk, low return investment providing early funding to what is today a $700 billion company. Any VC who would have invested as much as the government did, when they did it, would have made an astronomical return.

But its the public sector, so the reward is that they moved forward on green policy initiatives and at some point in the future the people that have been made rich will have to pay 15% on whatever capital gains they don't manage to shelter.

Meanwhile, Uncle Sam will still chip in $7500 if you want to buy one of their cars, but there's no more money in the kitty for new investments, because that shit's sequestered, yo.


Posted by: Spike | Link to this comment | 04-19-16 12:11 PM
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Buffett got equity warrants in addition to the 9% interest or whatever that he charged on the loans, and maybe the DoE should have done the same

Right, that's what I'm arguing for: The DoE should have done the same.


Posted by: Spike | Link to this comment | 04-19-16 12:14 PM
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The thing is that actual VCs make money by making 50 losing bets for every winning one, and then getting an absolute shit-ton of money for the winning ones. And they limit their risk and increase their upside by doing all sorts of crazy things to control companies and take seats on boards and move out founders etc etc etc. It's certainly possible to argue that the government should be acting more like a pure VC, but especially in the environmental sector there are enormous political risks both in (a) losing money on bad bets and (b) being deeply involved in private companies whose success is itself ultimately dependent on bureaucratic and regulatory choices made by the same government that's investing in the company. So you can see why the DOE might be more interested in getting repaid on low-cost loans than it would be in acting like a venture capitalist and actually having to sort-of manage a whole bunch of private companies.


Posted by: R Tigre | Link to this comment | 04-19-16 12:17 PM
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97 and 99 are both fair. They can maybe be reconciled if the government isn't required to act like an investor. ie. The state takes its share of whatever profits are to be taken, but doesn't have any obligation to attempt to maximise profits. If there is that obligation, then Tigre's problems arise.


Posted by: Mossy Character | Link to this comment | 04-19-16 12:26 PM
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Typical VC success rates are more like 1 in 4 companies. (Though most of the "winners" aren't blockbusters in any sense--just positive returns.) Very early stage investors (looking at startups that couldn't yet attract VC money) are more like 1 in 10. Anyone only winning on 1 in 50 investments is almost certainly losing badly.


Posted by: urple | Link to this comment | 04-19-16 12:34 PM
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Probably the DoE itself shouldn't be managing that kind of portfolio, but there is a model for national development banks that seems to stay clear of the deprivation of venture capitalism. Basically, they are mechanisms that enable the public sector to make loans or quasi-equity deals with private companies, make a tidy profit, and reinvest those profits back into other ventures. So they can promote economic growth while also pursing a mission consistent with achieving public policy goals - like promoting green energy.

Japan, Germany, and China all have them. I've worked with the one in Brazil, which seemed pretty good, although Brazil's got other problems.


Posted by: Spike | Link to this comment | 04-19-16 12:37 PM
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101 - yes, that was a deliberate exaggeration. To squeeze out even those positive returns they have to do a lot of active management of their interests that one almost certainly doesn't want the government doing.

That doesn't mean that there is only one way for the government to invest in the private sector, just that the right point of comparison for a government investment probably shouldn't be "why didn't you do as well [on the investment that paid off] as a VC firm would have."


Posted by: R Tigre | Link to this comment | 04-19-16 12:44 PM
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"why didn't you do as well [on the investment that paid off] as a VC firm would have."

Sorry, I made the VC comparison because they were mentioned upthread and are kind of a stand in for "private investment" these days... trying to stay on topic here.


Posted by: Spike | Link to this comment | 04-19-16 12:54 PM
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Tesla appears to be worth 34b, not 700b.


Posted by: X.Trapnel | Link to this comment | 04-19-16 1:03 PM
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That's a pretty big difference, except to Theranos investors.


Posted by: Moby Hick | Link to this comment | 04-19-16 1:05 PM
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Right, you can't have the government actively managing the investment. That would be a disaster. So the only options are that you either have the government give pure "market" investment terms, which is usually accomplished by having the government invest passively pro rata alongside private investors (who are making at least as large investments themselves, and will do their managing), or you structure a loan like this, which isn't something that the private market would duplicate. That means almost by definition that it's worse terms than private investors would get, but that's also the whole point--the disadvantage of the passive pro rata investment is that it's only furthering investments the private market would already be willing to make. If the gov't is wanting to push investment in a direction that private markets aren't yet willing to go, it doesn't really work.


Posted by: urple | Link to this comment | 04-19-16 1:11 PM
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Yeah, $700 billion sounds high but its what I saw when I googled "Tesla Valuation".... turns out that number is just Elon Musk's "planned" valuation, which is nice. My bad.


Posted by: Spike | Link to this comment | 04-19-16 1:26 PM
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Right, you can't have the government actively managing the investment. That would be a disaster.

I think part of the problem is that this is taken as axiomatic, but its kind of bullshit. Yes, there are certainly risks of politicians throwing their weight around, or cases where insufficient firewalls between regulators and whatever agency is managing the investment can lead to conflicts of interest. But there can be governance mechanisms that contain the risks from that kind of thing.

Or maybe the concern is that government involvement will lead the invisible hand of the market to decide to grant us somewhat lower efficiency outcomes according to some particular indicator, in which case I probably don't give a shit as long as the other indicators are in line with the public interest.

But government involves itself in the private sector all the time, and governments around the world can and do take ownership stakes in companies without the world falling to pieces. In the United States we do it with Amtrak, and we nationalized GM when that became necessary. But somehow, the public sector is only supposed to involve itself with the losers. It takes on the risks. But, if there is reward to be had, well, generating wealth is for the private sector, don't you know?



Posted by: Spike | Link to this comment | 04-19-16 1:46 PM
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It's not all bad for the public sector in the investment world, is it? Aren't they making money on student loans?


Posted by: fake accent | Link to this comment | 04-19-16 11:00 PM
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109: there is also the political angle. The thing about taking equity stakes rather than debt plus warrants is that yes, you get more upside, but you also get more risk, and every time one of your equity investments goes under, you don't get to point at how well the others are doing, and you don't get to point at your overall public-good objectives; you just get slaughtered in the media from the right (because you've been throwing away public money on your weird hippie friends) and from the left (because you've been subsidising millionaires).

And, as the last few comments have shown, the general public - even those bits of it that are interested enough to listen to teleconferences about it, which is probably about the top 0.1% in terms of interest and awareness - doesn't really understand much about things like debt and warrants and investments and even bankruptcy law, and will be quite ready to leap on even the most unlikely misinterpretation as proof, PROOF! that Obama is a spendthrift socialist backing his wild-haired druggie friends in their lunatic schemes for recycling free-range lesbian granola/ a neoconservative tool of Wall Street funnelling public money into the pockets of his rich friends at Goldman Sachs (delete where applicable).


Posted by: ajay | Link to this comment | 04-20-16 1:46 AM
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Warren Buffett gouged Goldman Sachs and possibly Bank of America at the height of the 2008-2009 financial crisis by issuing then high-interest loans, which both companies repaid as soon as they were contractually allowed to. Buffett got equity warrants in addition to the 9% interest or whatever that he charged on the loans, and maybe the DoE should have done the same, but it seems likely that at some point Tesla would have found private lenders/investors instead.


Technically they weren't loans, they were preference shares, but other than the lack of maturity there's not a huge difference from Buffett's perspective while Goldman is solvent. Also they could have "repaid" them at any time, so it was more when they were out of the woods than when they were contractually able. The warrants, though, had to be exercised within five years.


Posted by: Ginger Yellow | Link to this comment | 04-20-16 5:41 AM
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The video from yesterday is now on line. Mariana Mazzucato can make a better case for her ideas than I can, if you have the time.


Posted by: Spike | Link to this comment | 04-20-16 8:13 AM
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Theranos was so bad, they screwed up other companies' blood tests.

Theranos Inc. has told federal health regulators that the company voided two years of results from its Edison blood-testing devices, according to a person familiar with the matter.

The Edison machines were touted as revolutionary and were the main basis for the $9 billion valuation attained by the Palo Alto, Calif., company in a funding round in 2014. But Theranos has now told regulators that it threw out all Edison test results from 2014 and 2015.

...

The corrected reports include the voided Edison results and many tests run on traditional laboratory machines, the person said.

Disruptive!


Posted by: Ginger Yellow | Link to this comment | 05-19-16 10:10 AM
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