How FOMO cost Walgreens $140 million
What is FOMO?
The Urban Dictionary describes it as a state of mental or emotional strain caused by the fear of missing out.
It’s very powerful, it can cause otherwise rational actors to act in a way that is not only harmful to themselves but to others as well.
Businesses and institutions are merely groups of humans collaborating to achieve an end, and therefore are susceptible to FOMO just like any individual human.
Walgreens FUBAR deal due to FOMO
We’re going to use Walgreens as an example of the danger of FOMO.
You’ve probably heard of Theranos and its founder Elizabeth Holmes, the first female founder of a billion dollar company in Silicon Valley, at one point she was worth a cool $4.5 billion and her company’s board was impeccable, odd though its members including former Secretary of State Henry Kissinger and General James N. Mattis were more suitable for planning an invasion than sitting on the board of a biotech company. That’s important and we’ll come to it later.
Now the other actor in this play is Walgreens which was founded over a century ago, and it’s the second largest pharmacy store-chain in the United States behind CVS Health. They don’t like this, in fact they really hate it - so much so that they’re going to be fixated on this to the exclusion of all else.
So it’s early 2010, and Elizabeth and her number two at Theranos Ramesh “Sunny” Balwani (who she’s in a secret relationship with) are claiming that their magical blood testing machine can do hundreds of tests on a drop of blood more cheaply and faster than current labs could do.
Their claim was and remains bs, in fact their last iteration of the device known as the MiniLab - they wouldn’t even start to work on until late 2010.
But Walgreens saw the iPhone of blood tests, if they could do blood tests more cheaply and quickly than traditional blood testing labs on their commercial premises, well they’d wipe the floor with the market and crush CVS.
They were excited and jumped on board but obviously being a blue chip company, and being well respected they were going to have to do some due diligence and verify the Theranos claims.
In order to do this they brought in laboratory consultant Kevin Hunter. He met both Elizabeth and Sunny in person twice in 2010 as well as being involved in often weekly video conferences.
The problem was though that Kevin wasn’t a team player, see he believed in testing and providing evidence for claims. Theranos on the other hand as later investigations would demonstrate believe in running tests again if they don’t fit the narrative and cherry picking data.
But back to Kevin, so he keeps asking annoying questions that frustrate Elizabeth, at one point he suggests that they do a 50 patient comparison study with Stanford to test the accuracy of the Theranos machines.
This was just too much for a genius like Elizabeth, she could not be questioned by a peon like Kevin, and so she tries to shut him out by subtly threatening to walk on the deal to his superiors at Walgreens.
Now here’s the kicker, so far their claims have not been verified and from the sounds of this they sound obstructionist and combative - it doesn’t breed trust so alarm bells should have been ringing at Walgreens right?
They were terrified that Theranos would walk on the deal and go to their rivals at CVS and then they’d spend the next 20 years regretting letting this slip through their fingers. They’d end up like the carriers who refused to give Apple a cut of the monthly service fees and so didn’t get the phone that launched the Smartphone age. Plus, Elizabeth wore clothes like Steve Jobs, and she even pitted teams against each other to get work done just like Jobs. Except for the little fact that the team that didn’t please her would be fired unlike Jobs.
But obviously if she looks the part she must be the part, right?
Let’s take apart one of their claims, the tiny nanotainer of blood taken from the finger pricking that they did to test Potassium levels in the blood, unfortunately doing this results in hemolysis which results in blood cells being ruptured and the release of more Potassium. This would then result with readings showing an elevated level of Potassium in the blood totally rendering the results of the test itself invalid. Not great when medical professionals are relying on these results to administer drugs and suggest treatments to real living breathing humans.
This isn’t like a bug that causes your app to fail and you get annoyed, these are people’s lives which were being treated with incredible callousness.
So anyway back to Walgreens, they freeze Kevin out and he can’t do his job and vet their “technology”. So Walgreens go ahead with the deal and start spending money on remodelling their stores to incorporate these wellness centres ready for the new Theranos blood testing machines that don’t actually work.
They rolled it out and commercialised the blood tests in 40 locations in Arizona because of the business friendly lax regulatory environment. In addition, in phoenix there were more price sensitive people who were uninsured (Its awesome taking advantage of the poor) - Theranos boasted about its low prices but that was a lie too their numbers weren’t real and they hadn’t lowered the cost of testing in any meaningful way.
In total, Walgreens would spend $140 million including a $40 million convertible debt-note on the entire scam.
But it gets worse, the disease of FOMO spread. All these investors see this 100 year old giant going to market with Theranos, they’ve obviously done their homework so it must work, and then just look at that board. This is a real company with real product. I’ve got to invest, I DON’T WANT TO MISS OUT!
It was lies, all lies and a lot of incompetence and wishful thinking too. So Partner Fund Management who put $96.1 million into Theranos in 2014 would have been better off burning it. It would have done them as much good.
Fast forward a few years, and genius founder Elizabeth Holmes is being feted by the media. She even gets the cover of Fortune which is read by many people including one John Carreyrou of the Wall Street Journal who didn’t suffer from FOMO, in fact his background reporting on health care related topics made him deeply suspicious of the story and of Holmes.
The college dropout who revolutionised blood testing. She was walking in the illustrious footsteps of other dropouts Jobs, Gates and Zuckerberg but medicine doesn’t work like software.
You have to go and complete your schooling, then spend years in research before you can add value. Many of the nobel laureates in this field aren’t honoured until their 60s. It seemed too good to be true and so he investigated but this time there was no one suffering FOMO to stand in the way.
Fear of missing out is a powerful force and it can make you do some really dumb things. Your decisions should never be driven by the crowd but always by the facts as best as you can know them.
Take the greatest investor of all time Warren Buffet.
Be fearful when others are greedy. Be greedy when others are fearful.
Often times people are driven by animal spirits rather than a well thought out rational calculation. When you make decisions in business and in life be only influenced by the evidence for and against as well as the logic of the thing you’re making a decision about, not the vagaries of the human spirit.
And when it comes to the fear of missing out - you have one body in life but you’ll get many opportunities, if you put in the effort to find more, to get into situations where they can present themselves you’ll increase the chance of finding one that pays off. Don’t be driven by the irrational fear that this will never come again. Something is always around the corner.
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