On Booms, Tulips & Blood Tests

For those who haven’t heard of “tulip mania”, I’ll give you a short recap. The time is the 1630s, the location the Netherlands. While the tulip had been imported to Europe in the mid-1500s, the interest in the flowering plant had only really started to grow around the turn of the century. This interest increased rapidly over the early decades of the 17th century as the Dutch merchant class increasingly coveted tulips as a status symbol for their growing wealth. Unfortunately there was a problem: tulips were a constrained resource, taking in some cases a decade to grow from bulb to seed.

What resulted was a rapid increase in demand for tulips in the Low Countries, with merchants trading and selling bulbs for higher and higher prices. For example, in 1635 40 tulip bulbs were sold for 100K guilders, over 600 times the annual wages of a skilled worker of the time. The frenzy reached its peak in the winter of 1636-37, and then collapsed suddenly in February of 1637.

The story of tulip mania has been covered in many books and articles over the years, including the fictional 2001 Tulip Fever by Deborah Moggach, which was popular tech reading at the end of the Dotcom Boom. While many of the details continue to be debated, it is a prescient reminder that the value of goods can change suddenly and dramatically based solely on perception.

So with this long introduction over, I’d like to finally get to the topic I want to talk about today: Theranos. Prior to October 16th, Theranos was a rapidly growing Silicon Valley darling who had turned its breakthrough technology for lab testing into a business valued at over $9B. Its investors included some of the top names of Silicon Valley, including DFJ and the Larry Ellison Trust. But that all changed on October 16th with the Wall Street Journal’s article Hot Startup Theranos Has Struggled With Its Blood-Test Technology. The article alleged that the disruptive / proprietary technology that made Theranos a highly valued unicorn was not even used in most of its tests, making the company effectively not much more than a run-of-the-mill testing lab. The company fired back the next week with its dispute of the WSJ article, which was followed by the WSJ issuing a press release backing the veracity of its reporting.

It’s too early to tell where the truth is in the back and forth debate between Theranos and the media. It is entirely possible that Theranos is in fact providing a disruptive technology that will fundamentally change lab testing. But it’s also entirely possible they have internal technology issues that if made public would fundamentally undermine the value of their company. But no matter which way it goes, this is the first example of the media lifting up the hood of one of the unicorns to see what is or is not inside.

Not long ago, the pinnacle of success for a technology company was taking a company public. While the Silicon Valley distaste for the Wall Street IPO gatekeepers was always present, technology companies continued to begrudgingly get in line to go public. But with a persistently constrained IPO market and what is seen as an undervaluing of the currently public tech companies, a small number of private companies found an alternative to going public: raising the hundreds of millions of dollars through private institutional investors hoping to achieve big pre-IPO returns. Combined with an increasing willingness of investors to provide employee liquidity with new rounds of investment, and the emergence of a grey mark for buying / selling private company options (e.g. Equidate), the new “private IPOs” provide many of the benefits to a company and few of the downsides of an actual public offering. The result: today we have over 140 private companies valued at over $1B (up from 43 in 2014).

As much as I like the bucking of the traditional IPO, there are of course downsides to the “private IPO”. There is no external oversight over these companies, the valuations are established by a small and private cabal of investors, and the future IPO gains will almost certainly be going almost exclusively to the investors who carried the risk of sustaining the high IPO-like valuations. But also, abuse within only a small number of the unicorns could potentially result in a fundamental collapse of the entire practice of "private IPO".

For the sake of all of us in the technology industry, I hope Theranos has been unfairly maligned by an overly aggressive press. But if this does not prove true, we may be realizing what the Dutch did centuries before us: that a tulip can be a fantastic source of wealth one day, and just a pretty flower the next.

Related posts: Where Are All the Unicorns?, In Search of a Tech Bubble, Coffee Talk from the Silicon Valley