The Three Most Important Words? ‘I Don’t Know’
If you don’t understand an investment idea, you’re not alone. The hard part is admitting it.
Bloomberg, September 9, 2016
I don’t know what is going on at Theranos. I never had a clue.
I may be one of the few willing to admit it. This is a problem in both the technology and investment communities — the simple inability to say “I don’t know.”
There is plenty of evidence that many folks who claimed to understand the company and its founder — putting lots of money at risk while giving the company a multibillion-dollar valuation — didn’t have a clue either. The venture capitalists who funded this unicorn were unable to admit this. That blind spot is the focus of our attention today.
If you have read my musings before, you probably noticed a few themes that come up now and again: behavioral economics, the simple reality that no one really knows what the future will hold, the excessive costs and all too frequent underperformance of alternative investments. The Theranos story sits squarely in the middle of all that.
Recall our earlier discussion of how the narrative at Theranos failed. A biotech start-up whose young founder, Elizabeth Holmes, was afraid of needles, drops out of Stanford at age 19 to commercialize a blood test that relied on a finger prick instead of the dreaded needle to draw blood from a vein. So brilliant and innovative, a wonderful tale! Accolades follow, and she becomes the youngest person ever to win the Horatio Alger Award. Despite her obvious lack of medical or scientific training, she is appointed to the board of fellows at Harvard Medical School. Time magazine names her one of the world’s 100 most-influential people. Her company is valued, however briefly, at $9 billion, and she becomes the youngest self-made female billionaire in the world.
That all seems so long ago.
I find it hard to believe, given all we now know, that not a single person, group or organization behind these awards, tributes, fellowships and venture-capital funding did anything to check out the story. A fair guess is that many were relying on the next guy’s workwhen evaluating the company and its founder. But when everyone is relying on third-party validation, and no one is actually doing the heavy lifting, an entire company built on nonsense could easily slip through the cracks. In the post-Madoff era, it amazes this casual observer that such a thing could still occur.
I have been nursing my own simple theory for the crash and burn at Theranos. It is a function of the quirks of the human brain and our own psychology and insecurities.
My thesis is based on this simple formula: New technology + venture-capitalist claims of expertise = no one willing to admit they don’t understand what’s going on.
Let’s break that down so folks can understand the components, and how they combine to create an environment ripe for error.
It is an obvious truth of the modern era: Technology progresses so fast that no one can possibly keep up with all of it. This includes professors at Harvard, investors in Silicon Valley and everyone either geographically or technically in between. Changes are simply too fast, too complex, too broad and too specific for venture capitalists (or anyone else) to keep up with all of them. Sure, a venture investor can specialize, but that limits the ability to find and fund deals; besides, any one area can be hot for a while, and then cool off.
It is more than just not wanting to look stupid; successful venture investors cultivate an air of not only understanding the technology, but knowing where it is going in the future. That kind of reputation is a handy thing for a venture capitalist to have. Whether it reflects reality is almost beside the point; what’s important is that founders, bankers, employees, and the tech press believe you have the gift.
Haven’t we all seen this before? Of course we have. Let’s go back to an earlier era, when Enron, was riding high, before the gigantic energy trader turned out to be one big accounting fraud. The company’s chief executive officer, Jeffrey Skilling, used to berate analysts who questioned the company’s business model, telling them they were too stupid to get it. The same could be said of Bernie Madoff, whose multibillion dollar Ponzi scheme, had it been legitimate, would have required several times the number of equity options that actually existed in the world.
The basic lesson here is that when people are too embarrassed to say “I don’t know,” bad things happen.
It is a shame that the Theranos story didn’t check out. Perhaps the promise of the technology, and the personal appeal of its founder, led to a lot of wishful thinking on the part of all involved. The unwillingness to admit error is a consistent problem for investors — really for everyone. We need to get over it.
1. Just consider all the different tech sectors and subsectors: Biotech, telecom, graphene and nanotech, software, autonomous vehicles, 3-D printing, materials sciences, genomics, robotics, networking, semiconductors, drones, synthetic biology, quantum computing, automation, artificial intelligence, big data and cloud computing.
Originally: The Three Most Important Words? ‘I Don’t Know’