IEX #192: A Study of 3 Failures
Boo, Theranos, and WeWork all failed, but in different ways, with varying lessons.
In 1998, three Swedish Entrepreneurs - Ernst Malmsten, Kajsa Leander, and Patrik Hedelin launched Boo.com, an ambitious fashion eCommerce business based out of London. Full of innovative ideas and forward thinking plans, the story of Boo.com is captured in Malmsten's book titled "Boo Hoo: From Concept to Catastrophe". The most notable thing about the venture is that it burned through $135m of venture funding in 18 months before being liquidated. Boo Hoo is a fascinating read as it written by the founder and CEO, and tells the story largely without trying to defend or vilify any decisions or people. It's an ungarnished story of a series of choices and decisions that were made in the best wisdom of the founders. Reading the book, you can see the wheels coming off, where the benefit of hindsight is all too apparent. Decisions about the business are being made far ahead of the technological capability to deliver.
Just five years after Boo began, another ambitious start up looking to push the technology frontier was set up in Palo Alto, California. They promised to revolutionise blood testing by extracting unprecedented amounts of data from just one drop of blood. Headed by Elizabeth Holmes, they raised $700m of funding at a $10bn valuation. You know the story. For a decade, Theranos was the talk of town and Holmes was celebrated as one of the world's most recognisable CEOs. But they made promises they couldn't keep, and their world came crashing down in 2015. Unlike Boo, the Theranos founder and her team signed contracts which were based on false claims of the technical ability of the company. And the lies kept piling up, including, for instance, a fake lab set up to impress Vice President Biden, in 2015, when a couple of academics criticised their lack of peer reviewed and verifiable research. John Carreyrou, a WSJ journalist was instrumental at exposing the fraud at Theranos, and he later wrote the book 'Bad Blood' telling the story in detail. Netflix also launched a documentary about Holmes and Theranos. As an epilogue to the story, in early 2022, Elizabeth Holmes was found guilty on four out of twelve charges of fraud in a US Court. In July, Sunny Balwani, a co-conspirator was found guilty of all twelve counts of fraud and faces up to 20 years in prison.
Around the time that the Theranos story was unravelling, across the US on the east coast, yet another fast growing start up was being named to Fast Company's top 50 Most Innovative Companies list. WeWork already had JP Morgan Chase, and Goldman Sachs as investors. Adam Neumann, the charismatic founder of WeWork would, in the following 4 years, go on to raise successive rounds of funding, each one dramatically improving the valuation of the company, culminating in a $2bn funding from Softbank at a valuation of $47bn in 2019. Through much of that time WeWork was feted globally for being one of the most exciting start ups. And Neumann managed to persuade the investors to value the company like a technology company although there was very little technology in the WeWork model. Along the way he explored far more grandiose plans involving education, housing, and more.
The book "The Cult of We" by Elliot Brown and Maureen Farrell tells the Icarus like story of Adam Neumann and his wife Rebekah, who wanted WeWork to "elevate the world's consciousness". All the while the Neumanns splurged money on themselves, and their lavish lifestyles, and Adam Neumann consistently demonstrated a habit of putting personal gain ahead of company performance, such as investing personally in properties which were then leased by WeWork, in a clear flouting of governance principles. It was only when We Work ran out of private funding options and was forced to go public for further funding, that the scale of its troubles came to light, and it was largely exposed as a loss making property leasing company, with poor governance, extensive commitments ($47bn), and an inadequate order book ($4bn) to sustain its business model. Neumann had by then already sold $700m of his own stock. In September 2019, he resigned as CEO. Since then, the company has been overhauled but has also had to deal with a litany of problems from discrimination lawsuits for from former employees, to contract breach allegations from landlords. Softbank has written off almost all of its investment, and We Work now functions as a provider of leased offices with a valuation of $3bn at the time of writing this.
How Do These 3 Stories Compare?
These are 3 stories of failures, with the common thread that each of them burnt through a lot of capital and destroyed value. Yet, they are quite distinct in some very important ways. Boo Hoo was a story of naïveté more than anything else. Malmstein and co had started and sold an online book retailing business in Sweden, and could consider themselves to be amongst the successful entrepreneurs of their times. Boo had a grand vision but lacked the grasp of the technical complexity to pull it off. The management and leadership may have lacked maturity, but there is no suggestion at any point of impropriety. Compared to this, the Theranos and WeWork stories provide different views of how far you can push the 'fake it till you make it' credo.
WeWork is a story of egregious expenditure driven by the personality of the founder. According to the 'Cult of We' book, Neuman saw himself almost as a messiah and above the rules he was setting for the company. These are illustrated in small but telling examples - the Neumanns banned the serving of meat at all WeWork offices because of environmental concerns but continued to consume it themselves when meals were made for them in the same offices. Many of the senior positions at WeWork were held by friends and family members of the Neumann couple. Neumann travelled by private jet. He partied hard, and was late and hungover for meetings (all according to the book). And he was constantly looking to pay himself in more and more creative ways. This included changing the company name to We Company and leasing the brand name from an entity set up by the Neumanns for $5m (which was paid back when the poor governance of the company came under the spotlight). Yet, Neumann and WeWork were never accused of any criminal wrongdoing. Which suggests that everything that he did, he did "legally". He did not misrepresent company information to his investors, or commit fraud with his customers. To be fair very few WeWork customers really complained about WeWork. He managed to consistently persuade his investors that even though his company was a loss making office leasing business at heart, they should view (and value) it like a technology company. In this sense, there is little difference between WeWork and Boo. Investors need to do their own due diligence when it comes to their investment. For any founder or start up looking to sell a dream that doesn't exist, there is a clear and indelible line between a promise of the future, and the reality of the present. Usually spelt out in a contract.
Theranos, on the other hand, did cross that line. They sold customers a product, and raised money from investors, in the process signing contracts based on falsehoods. They ran a series of cover up operations to mask what was really happening, in the hope that they would be able to deliver what was promised before the truth emerged. That's probably the kindest sentiment we can proffer.
Yet another difference lies in the core product. The Boo product never did all that they envisioned but they didn't falsify this information. The WeWork product in itself was fine but the founder(s) created a much grander view of the future and the potential for growth, and the promise of technology. There was no need to lie about the product itself. The Theranos product failed on its core promise but the founders didn't or couldn't face up to the reality.
These are all different kinds of failures and varying reactions to them. This is the reason why Malmsten lives in relative obscurity, why Neumann revived billions as a severance payment and is currently being funded for a new start up (despite the ethical questions surrounding him), and why Elizabeth Holmes - academically and scientifically the most accomplished of the three is facing a prison sentence.
Reading List
Space Tech
Artemis launch - the NASA team twice failed to launch the unmanned spacecraft Artemis 1 to the moon, despite all that is riding on it, and it looks like it might need to bide its time till it’s really ready. (QZ/ Mashable)
Meanwhile we’re still searching for life on Venue, and there are some astronomical data challenges that the JWST is having to solve for, to continue its discovery work.
Climate Change
Sinking Museum: The Rijks museum is sinking, and climate change is to blame. The building stands on wooden beam foundations, which are designed to withstand water, a well documented challenge for the Netherlands. But its the dry weather and drought that is causing the foundations to rot.
Drought conditions may also have an adverse impact on EV Charging resulting in shortage of hydro-electricity and long term energy shortage issues.
Genetics
A fabulous and deep discussion about what actually drives genetics, if all cells and components are actually the same. Why does one set of cells become a fox and another one a cat? The story of Xenobots. (Aeon Essays).
Meanwhile, we are making progress in growing mouse brain embryos in the lab, and LyGenesis meanwhile is helping grow new organs in humans.
Economics
UK vs US living standards are diverging, in favour of the US. The war and gas prices aren’t helping. (Bloomberg)
Tech and self interest: Branko Milanovic was famous for the ‘elephant curve’ which tracks global growth against income distribution. In this discussion he talks about where and how the forces driving inequality will grow and shrink. (FT)
Crypto
Crypto Milestone: this is a massive month for crypto. It’s when Ethereum switches from proof of work, to proof of stake to complete transactions in the blockchain. In real terms this means a 99% reduction in energy consumption, and eschewing the resource intensive grunt work based mining model in favour of a lottery based approach. This happens through a ‘merge’ process on the 15th of September, in a process as complicated as changing a jet engine in the sky. (Economist/ NYT)
Cryptokitties - remember them? (I had forgotten). It was a fun game on NFT which was a part of the early NFT craze. Cryptokitties was the ‘worlds first Ethereum game’, and definitely helped drive up the price of NFTs and games. (IEEE)
Crypto Real Estate: the emerging opportunities for buying and selling real-world real estate via a completely cryptocurrency based transaction. No exchange rates for cross border transactions, and no unnecessary fees. (FT)
Eclectic
McKinsey for kids: sounds like an oxymoron, but in a particularly creative interactive series, McKinsey answers complex questions for kids. For example, in this piece, why computers learn faster and game better. (McKinsey)
The end of D2C? This piece explores why D2C models like Casper and Peloton are floundering. Despite the lure of the model, it turns out there’s huge value in being in a retail location with assured footfalls. (NYT)
Endangered minerals: you may have seen this before, but this is a lovely visual representation of the abundance/ scarcity of minerals on the periodic table. (Visual Capitalist)
Value maps: another great visualisation which shows the relative positions on values across the world. Who values freedom of speech? Who values inequality? Which values show the widest range of importance? You wouldn’t think morality was one of them! (Visual Capitalist)
Have a great week!