Events
- The S&P returned 1.72% for the week, the OMX Water index returned 0.75% while the Clean Tech Index eked out an 0.08% gain; the Russell 2000 was up 2.04% indicating the market advance was broader and not confined to mega cap stocks. Infer what you will. Year to date returns for these 4 indices now stand at 16.49%, 17.68%, 39.91% and 14.81% respectively.[i]
- Tesla stock advanced another 5.6% whereas most firms in the EV, solar and hydrogen space fell by varying degrees. Water equipment stocks such as Xylem, Mueller Water and Advanced Drainage advanced; water utilities were mixed with American Water declining vs advances in other names.
Is Nikola the Theranos of Clean Tech?
It is far beyond the scope of this missive to offer a complete history on either company, but the similarities are unnerving. Both firms were founded by people who dropped out of college, driven to be entrepreneurs, both did not develop new technology – despite claims to the contrary – as much as attempt to integrate existing technology to disrupt their end markets. Each attained acceptance by leveraging relationships with existing players in their industries and engaging in fraudulent behavior. Admission: in the course of researching this piece I read the report by Hindenburg Research Report which drew the same analogy; this was after I had come up with the idea perhaps independently or maybe subconsciously, no matter. Good artists copy, great artists steal – Picasso. What follows below is a brief summary of each concern and my subsequent conclusions.
Elizabeth Holmes founded Theranos, originally named Real-Time Cures, while a sophomore at Stanford in 2003. Holmes claimed to be on a crusade to make blood testing, faster, cheaper, more accessible, and less invasive thus enabling people to obtain real time information, catch disease faster and, ultimately, extend lives. At the time, the lab testing industry was dominated by two players, Labcorp and Quest Diagnostics which had a combined 80% market share[ii]; Theranos was to be the ultimate disruptor.
Theranos raised money from notable investors such as Larry Ellison and Rupert Murdoch; the company’s board included luminaries such as George Schultz, Henry Kissinger, David Bois and James Mathis. Theranos entered an agreement in 2012 with Safeway to provide locations for testing centers. In 2015 Holmes and Theranos successfully lobbied the state of Arizona to allow individuals to order their own blood tests and partnered with Walgreens to roll out their testing machines.
Despite notable VC Investors such as Draper Fisher Jurvetson that should have performed some due diligence, prominent board members, a sizable staff, and partnerships with well-known firms, Theranos’s technology never worked. The Edison machine, the flagship product, was incapable of automating and replicating the work of lab technicians mixing reagents and blood into multiple vials and performing the necessary analysis.
Holmes, often interviewed and filmed touting the technology, engaged in a years long campaign of secrecy and fraud. She also really played the part, leveraging her fame as the youngest woman to achieve the success she claimed and comparing herself, or letting others compare her to, Steve Jobs and Bill Gates[iii].
Nikola Motor Company was formed in 2014 by Trevor Milton who had left Utah State before graduating. Nikola’s mission was to revolutionize long range transport; it’s first stated product was the Nikola One – a class eight truck hydrogen powered truck. The Nikola One was to be built on an existing truck chassis fabricated with a hydrogen fuel cell developed by the company. In this respect Nikola was not differentiated from other industry players such as Tesla[iv], though Nikola claimed success whereas other concerns only claimed to be working on the issue. Nikola has also unveiled a host of other concept vehicles including another Class 8 Truck, an off-road vehicle and the Badger hydrogen powered pickup truck. Nikola has yet sell anything though it did announce a pre order from Republic Services.
In March of this year Vector IQ, a SPAC run by former GM Executive Steve Girsky, announced its intention to acquire Nikola and take the company public. Girsky, an executive with considerable experience at General Motors, became chairman of the newly formed company. Shares of Vector IQ converted to NKLA on June 4 and by June 9th the company had a market cap of $28.7 billion. Confession: my fund, Loughlin Water Partners, briefly held stock in Vector IQ in June for a very brief though profitable interlude.[v]
Nikola’s board presently includes Steve Girsky as well as prominent activist investor Jeff Uben and Steve Schindler the former CEO of Nextel.
On September 8th Nikola announced a strategic investment by General Motors whereby GM would acquire an 11% stake in Nikola and in turn manufacture the Badger Pickup Truck as well as supply fuel cells and batteries. The transaction did not involve any cash on the part of General Motors.
On September 10th Hindenburg Research published a 67-page report detailing multiple instances of fraud and deception on the part of Nikola Motor Company including evidence that a promotional video of the Nikola One Truck on the highway was staged as it rolled down hill in neutral and that Trevor Milton’s claims of solar power at company facilities were proven false by aerial photographs. Milton left the Nikola, GM has rescinded its agreement and the company and executives are subject to numerous investigations including those by Department of Justice and the Securities Exchange Commission.
Commonalities
- Each company evoked a grand mission to make the world a better place.
- Both leveraged a network of renowned investors or connected board members to make introductions and subsequently form alliances with prominent industry players thus eliciting confidence.
- Theranos and Nikola positioned themselves as disruptors vs larger industry players that actually had little incentive to directly counter the new disruptive innovation or – in the case of transportation – could not do so quickly.
- Both engaged in fraud.
- Theranos and Nikola remind us that in many instances people believe what they want to believe, outweighing ideals over facts or analysis. They also remind that periodically there are those only too willing take advantage of our better angels.
In doing this I am of the conclusion that Milton and Holmes set out to initially defraud people; but I am willing to entertain the notion that Elizabeth Holmes may have genuinely believed what she was doing and subsequently been swept away by events much like Tolstoy’s conclusion in War and Peace about Generals being History’s Slaves[vi]. Perhaps I am wrongly influenced by the story of her childhood and her supposed single mindedness. I welcome any feedback on this topic.
Opinions are expressed are solely my own. Any investments mentioned do not constitute a recommendation to buy or sell anything. If you do act on the opinions of errant writings without doing your own research you might consider talking to an investment advisor, a psychologist, foregoing that third drink or reexamining your decision-making process. I do cite sources and use end notes but amidst other responsibilities and foci I apologize for any plagiarism or regurgitation of other’s ideas though we all know there are not many original ideas. If you disagree with my content or opinion don’t read it.
[i] Bloomberg; Index returns include imputed dividends not just price return.
[ii] HBO, The Inventor.
[iii] On a personal note: I find anyone comparing themselves or letting themselves be compared to an established genius to be really unctuous. In Holmes case this was particularly egregious since there was no proof of concept, not even a working prototype.
[iv] Can’t resist a comment about Tesla. Tesla has claimed their Class 8 Truck will be battery run. Most experts doubt this will work in the near future since the weight to power ratio is too high for long haul trucks and the charge times of several hours make the endeavor too impractical. Nikola at least proposed a hydrogen fueled vehicle which is closer to what most knowledgeable observers believe is feasible for low, or zero emission trucking.
[v] We held shares for a few days and enjoyed a couple of point gain in Vector IQ in the run up to the conversion. We sold after a 30% gain on a small position before even completing half our normal research process. I noted that significant revenues were not expected until deliveries occurred in 2021, recalling similar instances of pushouts with other companies, ensuing convexity, the competitive nature of the space vs established truck makers, and the regulatory hurdles of getting trucks approved for the road, we sold. I had no idea the company was a fraud nor any notion the stock would rocket to 80 from the teens within days. Notably this reminds me of my experience with Enron: I read and read and read their 10Ks but despite prior banking experience in the energy space I couldn’t begin to understand what they were doing. I passed and missed a substantial potential gain followed by a potential 100% loss.
[vi] War and Peace, Leo Tolstoy, Book Nine: Generals are History’s Slaves.
