John Kenneth Galbraith's brilliant book on the Great Depression features an extended and seemingly out-of-place discussion of "the bezzle". A fraudster using the cover of the wealth, good sentiment, and naked greed that froths during heady times can steal a lot of money. But for an extended period of time, until the fraud is revealed, society suffers no apparent loss whatsoever (Galbraith describes this as a "net increase in psychic wealth").* Bezzles are those frauds.
With the downfall of Hampton Creek and Theranos, it appears the bezzle of "Science Unicorns" is shrinking precipitously. But the bezzle's subtlety is best expressed as a dual role: First, that the collapse of the bezzle is a marker of a significant shift in investor sentiment, from good times to bad. The bezzle relies on a general buoyancy of feeling, and the ventures it supports wobble and collapse in the slightest turbulence. But second, that these frauds are, until the great reveal, strong, vital, and going concerns. The bezzle is only really obvious in retrospect, because it is a funny form of stealing where the robbed party can feel richer for years.
I first saw Elizabeth Holmes at what turned out to be her high-water mark: at the Forbes "Under 30" conference last October where she was given a special award. She was introduced in grand terms by a researcher at the Cleveland Clinic, and proceeded to give an interview that I found to be quite stilted, although the fullness of time has revealed that to be her typical demeanor. Here, watch the interview with me**:
Seeing this live made me immediately suspicious. There was simply a huge mismatch between Holmes's narrative and Theranos's results at the time. Of course, it is extraordinarily hard to build anything. But it's not that hard. Someone with a great idea, hundreds of millions of dollars of VC, more than a decade of engineering time, and the support of Holmes's well-connected network, should at least be able to field a working prototype and publish a paper.
But I had never heard of Theranos before, had never seen Theranos technology in my daily life, and I couldn't figure out what the obstacle holding Holmes's company back was. It certainly wasn't a marketing issue or a funding issue. Holmes claimed the holdup stemmed from overcoming legal/institutional inertia -- but it's hard for me to believe that you're fighting against the system when the Vice President visits your offices and hails you as "inspirational". It had to have been a technology issue, and it was.
I had coffee with Ali Partovi once. He struck me as the kind of wealthy person that makes being a wealthy person an aspirational goal: intelligent, cultured, empathetic, and savvy. Not an asshole, not a grifter, not a flake. To have him leave Hampton Creek and conspicuously reject an "advisory" sinecure only made sense if he had uncovered practices so despicable that he wanted no association with the company. The Bloomberg article makes clear that's exactly what happened.
While the specifics of their frauds differ, Theranos and Hampton Creek share a deep similarity: Their founders are both excellent marketers trying to wear the mantle of scientists. The story that these marketers spun is one that people wanted to be true (T: "No more needles", HC: "Vegan can taste better"). And they aimed to build personality cults instead of companies, aggressively gunning for feature stories that mostly centered on themselves. Anyone that has interacted with the media knows that getting coverage like Holmes and Tetrick did*** requires a single-minded, narcissistic drive for publicity.
Both Holmes and Tetrick perpetuated their frauds in a specific way: by arrogating the rational language of scientific advances despite having no specific training or expertise in science. Technology companies can be successfully led by non-technologists, but very few scientists find value in perpetuating a fraud.
Ultimately Theranos and Hampton Creek are small potatoes. What's the big potato we should see getting cooked? From above:
1) It should be a company trying to make a radical, seemingly impossible technology leap forward.
2) The founder-CEO of the company should be messianic figure that, strangely enough, has no particular expertise in that technology.
3) The company should be hemorrhaging money and should exist only on the cult-like goodwill generated by the founder and their dream of a glorious future.
Does That Sound Like Anyone?
I love Tesla's brand; I don't have a car, but if I did, it would be a Tesla. On a strong emotional level I don't want them to be a fraud. But on the other hand, Tesla may have already committed fraud. Look at their recent shenanigans---the Model 3 pre-sale, the additional stock issuance, Musk's stock sales, the Solar City merger, the plans for more stock issuance---there are legitimate explanations for all of them (okay, maybe not the SCTY merger, but at least that's going to a shareholder vote). If TSLA were to collapse, this chain of ripoffs would be easy to align into a clear retrospective narrative.
Despite my recoiling at the idea, it's ultimately inconsistent to be suspicious of Theranos and Hampton Creek but not the Musk empire. I don't want the collapse of the bezzle to take out the world's best car. I just think that it will.
* The consequences of the increase in "psychic wealth" from the bezzle are represented by the more than one million dollars the New York Mets continue pay to Bobby Bonilla each year in salary. Bonilla was a talented but obstreperous right fielder who has not played since 2001. The Mets' owners intended to pay off Bonilla with their earnings from, you guessed it, Bernie Madoff.