CFA Society Chicago Book Club:

Bad Blood: Secrets and Lies in a Silicon Valley Startup by John Carreyrou

Silicon Valley and venture capital (VC) in the technology sector always offended this Midwesterner’s conservative sensibilities.  Having come of age during the dotcom boom, I’m skeptical every time a technological shiny thing catches the public’s attention, which seems to happen with alarming frequency given the regularity of fads and corresponding losses to come out of the sector.  John Carreyrou’s masterfully written Bad Blood confirmed my biases.  In addition, he weaved together a highly readable tragedy involving a deceptive and manipulative villain in the form of Theranos’s founder and CEO Elizabeth Holmes; a board that emphasized prestige of its directors to the near complete exclusion of any relevant industry expertise or meaningful control; a media and public blinded by the desire to see women entrepreneurs and women in Science, Engineering, and Technology (STEM) fields; and a group of similarly gullible investors that included Walgreens, Safeway, and several of the Valley’s most prestigious VC firms.

My sentiments during the majority of the book were similar to that of a cynic observing drug dealers fighting over territory: there were no innocent bystanders and the only people who got hurt deserved it.  Unfortunately, though, there were innocent bystanders.  The first casualty is the realities of success succumbing to the Horatio Alger-type myth of the college dropout cum tech entrepreneur.  Elizabeth Holmes, whose family tree includes the founders of Fleischmann Yeast and the Cincinnati Medical School, used her family connections for her initial funding.  Although America is still the land of opportunity, it’ll always be easier to score runs when one is born on third base.  The second casualty is the line workers and main street investors in Safeway and Walgreens who suffered the consequences of poor decisions to partner with Theranos that they had no control over.  Last and most importantly, Theranos made defective medical equipment that hurt the people upon whom it was used without their informed consent—a tenant of ethical medical practice.

First, the villain of our story, Ms. Holmes.  Mr. Carreyrou paints a portrait of unbridled ambition starting from a very young age.  Despite her shortcomings, no one should doubt Ms. Holmes’s  drive.  From a very young age she declared her ambition to be a billionaire and worked tirelessly starting in early high school, studying hard, sleeping little, and earning straight As, a pattern that continued through her brief stint at Stanford and throughout her tenure at the helm of Theranos.  Ms. Holmes seemed determined to emulate Steve Jobs’s path, a point emphasized in the chapter “Apple Envy,” noting Ms. Holmes’s wardrobe, modeled after the Mr. Jobs’s signature black turtleneck, her desire to make “the iPod of healthcare,” and her hiring of TBWA/Chiat/Day, the same advertising agency responsible for the Apple Macintosh’s “Think Different” campaign.  Her infatuation went so far that while reading Walter Isaacson’s biography Steve Jobs, colleagues were able to guess which chapter she was on based on her attempts to emulate Mr. Jobs at different stages of his career.

There are at least two lessons from the Jobs story that Ms. Holmes would have benefited from learning.  First, CEO of Apple was not Mr. Jobs’s first role.  By the time he led Apple, he had served in other roles at Apple, Atari, and Pixar, as well as having founded NeXT, Inc.  Ms. Holmes shortcomings as a manager were apparent throughout the book and she most likely would’ve benefited from the humility and experience gained from working outside the C-suite.  Throughout the book Ms. Holmes comes across as a tyrant who managed through intimidation and ruthlessly eliminated any employee who tried to attenuate Ms. Holmes unrealistic expectations or call attention to her fraudulent business practices.  The second lesson is that Apple isn’t a technology company, a point often made by Rupal Bhansali of Ariel Investments.  Apple didn’t invent the integrated circuit chip or the MP3 format.  It achieved its success through innovative design, novel strategy, and superior marketing—not through any technological breakthrough.  Even Apple’s most distinctive feature, its operating system, was modeled after Xerox’s operating system (Bill Gates benefited from third-mover advantage when he then applied the model to IBM-compatible machines).  Ms. Holmes probably would’ve benefited from staying in school and acquiring the expertise necessary to achieve medical breakthroughs or at least listening to the experts who advised her to develop a minimally viable product instead of swinging for the fence with what was and still is a fictitious miracle machine that fits in a shoe box and can run hundreds of medical diagnostic tests with only a drop of blood.

A second theme in the tragedy involves Theranos’s ineffectual show pony board of directors.  Long on prestige and short on oversight and expertise, the list of directors included then General and future Secretary of Defense James Mattis, a Navy Admiral, and not one but two former Secretaries of State, George Shultz and Henry Kissinger.  Not only did their decades of experience in war and diplomacy, while laudable, have almost nothing to do with blood testing, their collective influence was negligible.  Mr. Carreyrou notes in the Epilogue that Ms. Holmes forced through a resolution giving her 100 votes per share, effectively 99.7 of the votes.  He quotes Secretary Shultz as saying, “’We never took any votes at Theranos.  It was pointless.  Elizabeth was going to decide whatever she decided.’”  Ms. Holmes contempt for corporate governance and board oversight came through in another story.  An interviewee asked Ms. Holmes about the board’s role, to which she shot back, “’The board is just a placeholder…I make all the decisions here.’”  The board failed to notice or act on, among other things, that Ms. Holmes appointed her boyfriend, a similarly flawed individual, as number two at the company.  In perhaps the only time the board came close to taking decisive action, four members of the board met to discuss Ms. Holmes’s financial projections that “weren’t grounded in reality” and were “impossible to reconcile with the unfinished state of the product.”  Having resolved to replace Ms. Holmes, the directors confronted Ms. Holmes.  Then in a two-hour bravura performance of deception and charm, a recurring theme throughout the book, Ms. Holmes convinced the directors that she should remain as CEO.  Mr. Carreyrou raises the question of potential sociopathy but defers to the psychologists for the final answer.  Regardless of the clinical diagnosis, there’s little question that Ms. Holmes was a master manipulator. The last theme that this author will address—also the most important and the one most overlooked in this debacle—was how Theranos flaunted regulation and used faulty equipment on patients without their informed consent.  Since the Nazi experiments on prisoners in during World War II, informed consent has been a core tenant of ethical medical practice.  Right now all over the U.S., researchers are pleading their case before human subjects review committees in order to get approval to use human subjects for experiments as mundane as surveying consumer preferences, yet Theranos was able to use untested and faulty equipment to conduct tests on medical patients, many with terminal conditions.  That last fact receives far too little attention.  What happened at Theranos wasn’t a tragedy—it was a crime.  The culprits should be held to account.

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