Trusting the Kindness of Strangers

Silicon Valley gets stranger by the day. I recall my first start-up in the Fall of 1969. It was funded by EG&G whose main business at the time was photographing nuclear explosions. The company had a great idea, as many start ups do. In 1969 stores had credit cards but no computers and the printed every week a phone book size document containing all the bad cards in numerical order. When you wanted to charge something the cashier would first take your card and read through the book to see if it was a bad card. If not then you could charge.

Well these folks came up with the following idea. The could take the bad card numbers and put them on a 45 RPM record, and then when you came to the cashier they would type in the credit card number and if it was not bad the green light came on and if it were bad the red light lit. Now the 45 RPM was coded so that N grooves in were numbers n(N) which were in some range. This the unit knew if you entered a number it would be N grooves in so it dragged the record needle some N-M grooves and started reading the data until it went past your number. It was one of the first disk drives, but with a 45RPM record and dragging across grooves. Now the grooves would wear out but the solution was to coat the disk with some coating which allowed it to work for a couple of weeks. Great idea before any internet.

Well it worked for about a week. Then someone forgot to coat the records and Voila they all scratched out and so did the company. Details count. Lesson one.

Now in Scientific American there is a great piece on Theranos. The author notes:

Just a few weeks before regulators proposed banning Holmes and Theranos President Sunny Balwani from the blood-testing industry, the company tried to remedy this by bulking up its medical advisor board with well-qualified experts in chemistry, pathology and clinical chemistry. It’s hard to imagine these experts would have signed on amid all the bad publicity and allegations without demanding proof that the technology works, but who knows? It still remains possible that Theranos has discovered a breakthrough technology that can do hundreds of lab tests on a drop of fluid from a patient’s finger. But even if this increasingly unlikely prospect is a reality, Holmes' erstwhile acolytes need to remember the lessons learned from the pantheon of past pied pipers and summed up by statistician W. Edwards Deming:  In God we trust; all others must bring data.

 Now the lesson is that due diligence is essential, it means that you did enough work to determine if there are any fatal flaws. I have been through the process dozens of times. Often we find things. People have done it on my companies and I have done it on others. The first thing you must do is understand the validity of the offering. You must understand it. Second you must examine the team. In Silicon Valley having no experience is valued. I would not climb Mt Everest with a Guide who had never been outside of Florida! I want experience and I would due due diligence. Somehow major investors and major corporations just blew it. That may not be good for some careers but it is also not good for the industry.  However it may be great for the lawyers!