Forbes, the publisher of seemingly countless lists of the world's billionaires, is patting itself on the back for seeing through the hype about the blood-testing company Theranos and its glamorous 32-year-old founder, Elizabeth Holmes. In connection with the release Wednesday of its second annual list of America's richest self-made women, it cut the estimate of Holmes' net worth from $4.5 billion—the tally that placed her at the very summit of the list last year – to zero.
In doing so, however, Forbes unwittingly exposed the essential fatuousness of such lists.The question Forbes should answer is how Holmes got listed in the first place.
The magazine's estimate of Holmes' wealth was based then, as now, on the putative value of her company, of which she owns 50%. But Theranos is private, so the valuation of her company, which was pegged last year at $9 billion, always was suspect.
Forbes bought heavily into the hype until the Theranos story began to fray with an expose late last year by the Wall Street Journal. It now turns out that the finger-prick technology that Theranos claimed would revolutionize the blood-testing industry and healthcare in general hasn't been shown to work.
The company has withdrawn as potentially inaccurate thousands of patient tests it originally performed. Government investigators are swarming and commercial partners such as Walgreen's, which was starting to place Theranos testing kiosks in its drugstores, are fleeing. Investors are coming to the realization that the blood-laboratory business might not have been as ripe for "disruption" as Holmes boasted.
Forbes was among the many publications in and around the start-up world that took Holmes at her own level of valuation. In June 2014, it anointed Holmes as a newly minted billionaire, uncritically repeating her claim to having "developed a way to quickly diagnose a few drops of blood with minimal draw at a fraction of the price of commercial labs." Sounding like a press release, Forbes reported, "With its speed, low prices, and mission to improve the patient experience, Theranos has a shot at shaking things up."
Its method of calculating her net worth then is instructive. The magazine reported that Theranos had raised more than $400 million at a metric that placed the value of the whole company at $9 billion. But Theranos didn't have $9 billion; it only had the investment of $400 million-plus. How does the small number become the big number? By the magic of venture capital math: if I buy, say, a 4.4% stake in your company for $400 million, then 100% of it must be worth about $9 billion. Must be.
The flaw in this reasoning should be obvious: the putative $9-billion valuation could vanish like water vapor in the desert: If the next round of investors demands, say, 50% of the company for their $400 million, then suddenly the enterprise is worth only $800 million. And what if there are no new investors at all?
Nevertheless, Forbes accepted Holmes' net worth as gospel. In 2015, she appeared on the magazine's list of America's Richest Entrepreneurs Under 40, at No. 6; the "Forbes 400" billionaire's list (No. 121); its list of "Power Women" (No. 72); and of course America's Self-Made Women, at No. 1. As of this writing, Holmes is still listed on the magazine's 2016 ranking of the world's billionaires at No. 503, with $3.6 billion credited to her name. That list ought to talk to the self-made women list.
For the latter, the magazine says, it now figures "a more realistic value" for Theranos is $800 million, counting the company's intellectual property and $724 million in venture investments. Forbes reckons that Holmes' equity is junior to preferred shares held by investors, so she's effectively wiped out.
Forbes bases its doubts about the future of Theranos on three points: "[T]oo much is unknown" about a company that has kept its crucial data secret; "Theranos has not delivered"; and its "target market may not exist," because the existing lab companies do just fine.
But all three factors were the same last year. All that's changed is that the Theranos bubble has popped, and the joke's on Forbes.
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