Theranos and the Role of Narratives
Trust, but Verify.
This elegant expression lies at the heart of how our financial markets work. It also highlights the respective roles narratives and transparency have in these markets.
Everyone likes a good story. It is in our DNA. How we think is organized around narratives. So it is not surprising financial markets run on narratives. These narratives allow us to organize the massive amount of data these markets generate.
Wall Street understands this too. Wall Street recognizes people don’t buy and sell securities. They buy or sell the stories told about these securities.
Instinctively, because of how we think, we want to trust Wall Street’s stories.
But before buying or selling based on a Wall Street’s story, investors need to verify if the story Wall Street told is true or not. And the only way investors can verify if the story is true or not is if the information they need is disclosed.
By design, transparency is the antidote to Wall Street’s story telling prowess.
No place is this more vividly illustrated than with Silicon Valley and failed biotech start-up Theranos. As Nick Bolton observed,
In Silicon Valley, every company has an origin story—a fable, often slightly embellished, that humanizes its mission for the purpose of winning over investors, the press, and, if it ever gets to that point, customers, too. These origin stories can provide a unique, and uniquely powerful, lubricant in the Valley. After all, while Silicon Valley is responsible for some truly astounding companies, its business dealings can also replicate one big confidence game in which entrepreneurs, venture capitalists, and the tech media pretend to vet one another while, in reality, functioning as cogs in a machine that is designed to not question anything—and buoy one another all along the way.
It generally works like this: the venture capitalists (who are mostly white men) don’t really know what they’re doing with any certainty—it’s impossible, after all, to truly predict the next big thing—so they bet a little bit on every company that they can with the hope that one of them hits it big. The entrepreneurs (also mostly white men) often work on a lot of meaningless stuff, like using code to deliver frozen yogurt more expeditiously or apps that let you say “Yo!” (and only “Yo!”) to your friends. The entrepreneurs generally glorify their efforts by saying that their innovation could change the world, which tends to appease the venture capitalists, because they can also pretend they’re not there only to make money. And this also helps seduce the tech press (also largely comprised of white men), which is often ready to play a game of access in exchange for a few more page views of their story about the company that is trying to change the world by getting frozen yogurt to customers more expeditiously. The financial rewards speak for themselves. Silicon Valley, which is 50 square miles, has created more wealth than any place in human history. In the end, it isn’t in anyone’s interest to call bullshit.
Theranos had this story. Founded by a woman who dropped out of Stanford to change the world by using a single drop of blood to test for hundreds of diseases.
The question investors faced was could her story be verified.
The answer was no.
However, this did not stop many mutual funds and venture capital funds from investing $700 million based solely on trusting the story.