Theranos Doesn’t Die… Yet
I’ll be honest, I caught wind of the Theranos story rather late. By the time I’ve even heard of this company, they were essentially dead to the public eye. But, yet, they’re still alive, thanks to a $100M loan from Fortress Investment Group, which was acquired by Softbank earlier this year. Theranos sought out the financing round after they withdrew their FDA approval application for their new Zika test.
For those who are unfamiliar with this saga, here’s the TL;DR version of it. Theranos touted they were able to conduct elaborate, and extensive blood tests using a single drop of blood. They raised nearly $900M of funding and were valued at $10B before it was uncovered that the whole thing was an elaborate ruse, making the whole thing come tumbling down. The company pivoted hard form that point, focusing their efforts on a blood test box for the Zika virus. When the test was found to have flaws in their patient safeguard measures, they withdrew their application. In the meanwhile, Elizabeth Holmes, founder and CEO, offered preferred shares (from her equity stake in the company) to investors to avoid potential litigation. All the while, the company shed 41% of its workforce, as a cost savings measure, to extend its runway.
Yet, all these efforts were not enough to keep the company financially afloat. Hence the $100M debt financing round.
What’s interesting are the conditions attached to this deal. First, the loan is condition to milestones for the company, which probably means that the Zika box is now a make or break for the company. But, perhaps even stranger, the deal gives Fortress Investment Group 4% equity stake in the company, along with claims on Theranos’s patents as collateral. There’s no linear equation to value the company from this deal (which is the nature of debt financing), but it does value them, based on the equity stake, at $2.5B at the very most.
But, considering how this is hedged by collaterals, the valuation of the company would probably be closer to half that, or just above $1B, which is very close to the amount raised to date, including this latest funding round.
But the question remains, why did Fortress agree to such a deal? Does it see value in Theranos as a business, or is this a play for its patents, which it plans to liquidate at the first sign of trouble? There’s little reason to believe Theranos will be able to sell its boxes after FDA approval is granted. Personally, I think it’s for the patents.
Apple’s Class Action Lawsuits
Apple may have dug itself into a grave on this one. They probably thought they were doing a PSA when they said, on December 21st, that they were slowing down older devices to maximize battery life. They’re facing now 8 class action lawsuits as a result.
This whole story is great and all, but one detail from Reuters’ report on this story really got me.
“Under French law, companies risk fines of up to 5 percent of their annual sales for deliberately shortening the life of their products to spur demand to replace them.”
There are a couple of questions that I have on this particular detail. A. Are the fines based on the total global sales of the mother corporation, regardless of nationality, or are they for overall sales domestically? B. What’s the threshold for evidence proving these charges? And C. How will this impact the other verdicts in Apple’s other cases?
There’s also the overarching question concerning corporate honesty. Apple, probably, were making the announcement to tell people, “Look, your phones are fine, you just have to replace the battery, and the performance will be back to normal. But in the meanwhile, we’re taking measures to make sure you can get the same battery life you had before.”
What most people ended up hearing was probably this:
Hey everyone. You know how you thought we were messing with the CPU to slow down your phone, so you upgrade sooner, rather than later? That’s true. Yes, we did that.
With the aftermath of such “honesty” from Apple, will other companies refrain from owning up to such honesty? Will companies be even more secretive in the future concerning their product management and support? Probably. But, hopefully, it teaches them to quit messing around with their products to improve sales.
Softbank’s Discount Uber Ride
Softbank and Uber finally have a deal. This deal is actually quite interesting in its details, and what it entails. First, it’s not just Softbank. It’s a consortium led by Softbank. Second, Softbank, as lead investor, will get 2 new seats on the board, expanding the board to 17. Third, the investment is coming in 2 separate rounds. The first round will be a $1B investment, at a valuation of $70B, in line with Uber’s valuation in its previous investment round. The second round is where things get far more interesting.
The round will be for 14% – 20% of Uber’s shares, with Quartz reporting a 15% stake, at a valuation of $48B, or just over a 30% discount to its peak valuation.
This is where this story gets interesting. Uber is no longer the most valuable startup by valuation. But this point is rather minute, considering startup valuation isn’t liquid like a public company, so Uber’s PR nightmare was never reflected in its valuation. But this deal is an admission to the fact that Uber is having problems, because Softbank isn’t buying new shares in the company — it’s buying up shares already issued.
Investors in Uber, along with employees with stock options, and restricted stock grants, are looking to cash in earlier, rather than later, despite Uber’s plans to go public in 2019. This demonstrates an overall lack of confidence in the company by its stakeholders, particularly concerning whether the company can maintain its valuation when it goes public. Startups suffering stock price issues is nothing new. In fact, Blue Apron is suffering one right now.
Here’s what to take from this story. Uber is now worth $48B, at least until its planned IPO in 2019. What’s more is that when that IPO does come, the stock price will probably take a hit, with most stakeholders jumping at the chance to liquidate their holdings. Unless Uber can turn things around in consumer sentiment, it’s hard to say Uber’s IPO will be a great success.