Or download the MP3
Saturday, August 25, 2018
If you prefer to listen rather than read, this blog is available as a podcast here. Or if you want to listen to just this post:
Or download the MP3
Or download the MP3
It is said that after General Burgoyne’s surrender at Saratoga during the Revolutionary War that a young nobleman, named Sinclair, came to Adam Smith, and declared that the surrender would be “the ruin of the nation.” To which Adam Smith reportedly responded, “There is a great deal of ruin in a nation.” Meaning, one supposes, that nations are sturdy things, and it takes more than you probably think to kill them off, or even cause them long term inconvenience. And certainly the UK remained a great power for many, many years after this.
In our own day we have a lot of Sinclairs running around saying that this or that will be the ruin of our nation. In the past I think it’s fair to say that most of the Sinclairs came from the right side of the political spectrum. But, lately, global warming and the election of Trump, among other things, have given the Sinclairs on the left greater visibility. Despite all this panic from both the right and left, I think Smith’s statement is still essentially correct, “There is a great deal of ruin in a nation.” And I think we’re a long way away from the US collapsing in spectacular fashion, if indeed it ever does. Most nations go out with a whimper, not a bang.
There is one possible exception to this: nuclear weapons. As usual they’re a huge wild card. I don’t think some limited exchange would cause the nation to collapse (though given the extreme reaction to 9/11 who knows.) But certainly if there was all out war between the US and Russia you’d be shocked if the US wasn’t fundamentally altered in some critical aspect. (Loss of territory, change in system of government, etc.) And to be fair to the people panicking over Trump, we have foolishly given the current president absolute control over the nuclear arsenal. All of this is to say, that I’m not going to rule it out, but that’s a subject for a different post (one I’ve already written.)
On top of this, there are also of course natural disasters, the eruption of the Yellowstone super volcano, a new Carrington Event, etc. But I want to talk about what might happen in the normal course of things, in fact I want to talk about what might happen without any huge black swans. Which is not to say there won’t be black swans, there definitely will be (positive and negative) but to look at how bad things can get even if without them.
I was prompted to write on this topic when I read a recent Bloomberg article by Tyler Cowen: The Decline and Fall of the American Empire, where he essentially takes the same approach. He lists numerous challenges America will soon be facing. None of these challenges are surprising, or especially dramatic, but neither are any of them simple to solve, or easy to avoid. I’ve decided to go through his list, make some of my own comments, and then, at the end, add a couple of my own items as well.
He starts off by assuming that we get through the Trump presidency without a major constitutional crisis. I think that’s the way to bet, but he’s already assuming a rosier outlook for the future than many people, who can’t see farther than 2020. And it’s after 2020 when things start to get difficult, because it’s only then that recent financial trends really start to reach a tipping point. Cowen’s summation of the problem is excellent:
In recent years, the underlying rate of productivity growth often has been about 1 percent, and rates of economic growth are not even half of what they used to be. Meanwhile, America will have to increase taxes or reduce spending by about $2,200 per taxpayer per year to keep the national debt-to-GDP ratio from rising ever higher, and that figure predates the Trump tax cuts. To fund that shortfall, the U.S. will cut back on infrastructure maintenance. At least one-third of this country will end up looking like — forgive the colloquial phrase — “a dump.” The racial wealth gap will not be narrowed.
This takes us back to the question of whether national debt matters. I have argued strongly that it does, and Cowen seems to think so as well. Though as he mentions, if economic growth was better this might not be a problem, and indeed GDP for the second quarter of this year was a blistering 4.1%. Which Trump took credit for of course, and maybe he should, I don’t see many other great explanations for it out there, and certainly it’s the opposite of what many economists predicted would happen after Trump was elected. But for the majority of people who don’t believe Trump is going to usher in a new era of consistently high growth, and who also believe that the debt does matter, then the problems Cowen point out appear to basically be inevitable.
What effect will this have? Well it depends on what ends up getting cut. Cowen already mentioned infrastructure maintenance, but even if we cut that to zero it wouldn’t get us very far. To make any significant dent you have to cut spending from military or entitlements. Cowen is of the opinion that entitlements will mostly survive, meaning most of the money will come from the military. I generally agree with this assessment, though I’m not sure it’s the right choice, at least from the perspective of avoiding big negative black swans. Allow me to explain.
If you cut entitlements, then you have a lot more poor people, and presumably these people suffer more than they would if they were not as poor. More alarmingly you might end up with people dying who otherwise wouldn’t have. So it is bad, potentially very bad. Though I think in the end it wouldn’t be quite as bad as people predict. And I would even predict there would be some long term positives in there as well.
If you cut the military, then suddenly rather than having the umbrella of US global hegemony keeping regional conflicts below a certain level, you end up with a re-ordering of regional spheres of influence. Here’s how Cowen imagines it playing out:
Over a period of less than five years, China will retake Taiwan and also bring much of East and Southeast Asia into a much tighter sphere of influence. Turkey and Saudi Arabia will build nuclear weapons and become dominant players in their regions. Russia will continue to nibble at the borders of neighboring states, including Latvia and Estonia, and NATO will lose its credibility, except for a few bilateral relationships, such as with the U.K. Parts of Eastern Europe will return to fascism. NAFTA will exist on paper, but it will be under perpetual renegotiation and hemispheric relations will fray.
I’m not sure where Cowen starts his five years. From today? From the minute we start cutting the military? Regardless, the China scenario he outlines is becoming increasingly likely regardless of what the US does, and a reduction in our military would only hasten it. But it’s his next claim that’s more alarming, that Turkey and Saudi Arabia will build nukes. Though, once you assume the decline of American hegemony, than the rise of regional powers would seem to naturally follow. And it’s hard to imagine how someone can be taken seriously as a regional power if they don’t have nukes, particularly if their rivals do. People always talk about India and Pakistan in the same breath and yet India is eight times as wealthy and has seven times as many people. Yet they both have nukes, which gives Pakistan an equality it could otherwise never hope to claim. On top of the two countries Cowen named, Turkey and Saudi Arabia, I would add the usual suspect of Iran, but there’s also a good possibility Japan would develop nukes.
Here, we can finally see why I’m not sure that cutting the military in preference to cutting entitlements is the right choice. Yes, cutting entitlements would almost certainly cause some suffering, but it’s hard to imagine how a nuclear war, even a limited one wouldn’t cause a lot more. Though in reality the end of American hegemony has to come eventually, I’m sympathetic to people who think it might be replaced with some kind of global government which will keep the peace. But nothing in the current geopolitical landscape leads me to think that has the remotest chance of happening. All of this is to say that there doesn’t appear to be a lot of good options.
Cowen moves on to talk about drugs, and while he thinks the opioid crisis will eventually abate, he worries a lot about drugs which can be whipped up in a “home lab”. I’m not sure I share his optimism about the opioid crisis, I agree it’s hard to imagine that it will continue at the same rate. Overdose deaths from Fentanyl increased at an annual rate of 88%(!!!) from 2013 to 2016. Were that rate to continue the entire country would be dead by 2030. But even if everything were to freeze where it is we’re still looking at 64,000 deaths from overdosing on drugs per year, which is now nearly twice as many as die in car accidents every year. As far as “home lab” drugs, also called designer drugs, I’m not sure how big of a problem they will be. Obviously I’m inclined to caution, but my initial impression is that so far they (fortunately) haven’t lived up to the hype. A search on designer drug danger turns up a lot of articles from 2013, and the number three hit is from 2003, so I’m not sure what to make of that. At a minimum it doesn’t seem like we’ve reached a crisis point yet.
There was an article just recently in the Atlantic claiming that marijuana is a lot more addictive than people claim. And I feel like I should mention it in this section. Though fortunately it’s basically impossible to overdose on marijuana, it does seem like when you pull all of this together that there’s a real danger that we’re turning into a nation of lotus eaters.
Cowen goes on to talk about technology, but rather than talking about benefits of it, he chooses to focus on the potential downsides. Many people are optimistic about the future precisely because of technology, but Cowen points out that in the near term we’re more likely to see technology being used to create a dystopian police state, than a transhumanist paradise. He doesn’t mention China in this context, but that’s an example worth considering.
Those, like me, who were around during the Tiananmen Square protests of 1989, can probably remember thinking that the fall of the Chinese communists seemed inevitable. Recall that 1989 also saw the beginning of the end for the Soviet Union, the fall of all Eastern European communist regimes and the tearing down of the Berlin Wall. Change was definitely in the air. (Negotiations to end South African apartheid began the next year in 1990). And yet amidst all that change the Chinese Communists hung on. How they did that is a post unto itself. (One I’m almost certainly not qualified to write.) The important point is that somehow, despite all the technology that has come along since 1989, in particular the world wide web, the Chinese communists have continued to hold on.
It’s unclear how much technology has hindered the ability of the Chinese communists to hang on to control up until this point, but going forward there is a lot of technology which promises to greatly assist them in that endeavor. And here we turn back to Cowen:
Artificial intelligence and facial and gait surveillance will lead to unprecedented invasions of privacy, causing another 1 or 2 percent of Americans to decide to “live off the grid.” The impact of assassin drones will be curbed — by filling the skies with police drones. Public crimes will plummet, but public spaces in major cities will have a depressing sameness, due to the near-total absence of spontaneous behavior. Advances in recording technologies will make most conversations in public, and many in private, remarkably bland.
As you may have noticed, he’s talking about America, but you know that however bad it is here, it will be ten times as bad in China.
From there he goes on to touch on global warming, and much like myself, argues that “The very worst fears about climate change won’t come true.” Though, he argues that it will still be a significant drag on the economy, making the growth necessary to avoid cutting the military (or, less likely, entitlements) that much harder to achieve.
Cowen decides to end the article by tossing in some of his own petty gripes. Which include the fact that as more and more of current media is being driven by what is or isn’t available to stream, that fewer people are going to end up seeing classic movies. (Though one would think that once the copyright expires everyone will have old movies available for streaming, but maybe the cost of digitizing say, Battleship Potemkin, is prohibitive.) He also predicts that live performance of classical music will become less and less common. I can certainly sympathize with both of these complaints, though if I were to list my own petty annoyances I would probably come up with something like the proliferation giant ear gauging, or the vacuity of social media, or how the hollywood regurgitation loop just keeps getting smaller and smaller. But that’s just off the top of my head (and my first annoyance is almost certainly due to some giant gauging I saw just yesterday.)
The point of all of this, as I mentioned at the beginning, is that there are a lot of current trends which suggest ways in which the future could go poorly, without being catastrophic, and Cowen has done an admirable job of explaining many of the ways this could happen, but he did miss a few. This is entirely understandable. He made no claim to being comprehensive. But there’s one in particular that I think deserves a mention, and it’s one which might end up being as, if not more consequential than the things he did mention.
This is the population growth trend in Africa. Most people will automatically translate this into a a claim that there are “too many Africans”, which is not the sort of thing one talks about in polite society (and probably one of the reasons why Cowen didn’t mention it.) For myself, I certainly hope that how ever many people there end up being, both living in Africa and elsewhere, that they will grow up happy and well fed, and that they will all be blessed with the same opportunities and advantages as people born in the United States or Europe. But, I also hope that I’m wrong about the dangers of the national debt and that medicare and social security and Pax Americana will last forever. And, unfortunately, just because I hope for all these things doesn’t mean they’ll happen, though of course they might.
All of this is to say that Africa might have problems with overpopulation, just as all the things Cowen mentioned might happen as well. And this is certainly the way the trend is pointing. if you look at the official UN predictions for the population of Africa their most conservative estimate still has Africa reaching a population of just over 3 billion (up from 1.2 billion right now) with the most extreme estimate being that it will north of 5.5 billion (both estimates are for 2100). Now there has already been a lot of panic about overpopulation which didn’t end up coming to pass. And I hope that my fears will prove to be overblown again, but there are a lot of ways for things to go wrong and only one way for them to go right.
As far as ways for things to go wrong, well we’ve already gotten a first taste of one way they could go poorly with the recent European refugee crisis. Whether the Europeans should have been more welcoming is somewhat beside the point. Their welcome was what it was, which was somewhat mixed to say the least. And if that’s their reaction to the flow of refugees when the population of Africa is 1.2 billion what will it be like in 30 years when the best guess of the UN is that it will be twice that?
The reaction of Europeans and other people in the developed world to the refugees is what many people are focused on at the moment, and will probably be the thing most people are interested in for the foreseeable future, but in the long term what I’m really just trying to show is that we probably can’t assume that the “riches” of the developed world will be redistributed in such a fashion that all of the additional people will be taken care of. It might be nice if they could all come to America and Europe, find a place to live and a job, or if we could just increase our foreign aid, but that seems very unlikely. The people living in Africa are going to have to figure out a way to support themselves, specifically they’re going to have to figure out how to grow enough food to feed a lot more people, potentially three or four times as many people. I’m going to be honest, that seems like a hard problem, even if all of the energy of science and technology is brought to bear on the problem.
Accordingly, another way in which the future could go poorly just based on current trends (though catastrophic may be a better word) is for there to be widespread famine in Africa. As I said, it may not happen, everyone thought there would be widespread famine in India before the Green Revolution and there wasn’t. I hope that essentially the same thing happens with Africa.
It’d be nice if at the end of it all I could point out some simple things that we could do to solve the problems Cowen mentioned, but there aren’t any, which is of course why he’s worried about them. In fact one would be inclined to think they’re unavoidable. They may be.
I can offer only two pieces of consolation. First, there is of course the advice of Adam Smith, which I started the post with. There is a lot of ruin in a nation, or in a continent or in a civilization, and I’m sure we’re all farther away from catastrophe than people think. Though that’s part of the point, catastrophe may be far away, but a situation where things are just kind of “sucky” (if you need an example think, the 70s) might not be that far away.
Second, the technology optimists, of whom Steven Pinker is the best example (particularly his book Enlightenment Now, which I talked about in a previous post) will argue that technology has solved all of the problems we’ve had so far (this is debatable, but also not the time to get picky.) This has often happened through means we couldn’t even imagine a few years beforehand, and there’s every reason to think that technology will do so again. I certainly hope that it creates another Green Revolution and that there isn’t widespread famine in Africa or anywhere else. I’m less clear how technology will solve regional conflict in the absence of American power, or the related problem of US government spending, but despite that I hope it solves those problems as well. As I have often said, I hope I’m wrong, but I fear that I’m not. Or as Cowen says in closing his article:
So what in this description sounds so implausible? Is it that you think productivity growth will come in at 3 percent? That it will all be worth it because advances in medicine will allow us to stick around in decent form until age 135? That technological breakthroughs will extend the reach of the U.S. military further yet? That the Mars colony will be awesome?
Just how lucky are you feeling?
In answer I would say, I think our luck might be running out. Or to put it a different way. The harvest is past, the summer is ended, and we are not saved.
You may be thinking, “But there must be something I can do? Maybe I could contribute to something? Maybe something which calls attention to these problems? Maybe a blog or something like that?” Well you’re in luck. You may not have heard, but I just drew attention to it, and I accept donations!
Saturday, August 18, 2018
If you prefer to listen rather than read, this blog is available as a podcast here. Or if you want to listen to just this post:
Or download the MP3
Or download the MP3
I just finished reading Bad Blood: Secrets and Lies in a Silicon Valley Startup by John Carreyrou. Actually, I should correct that, I didn’t read it, I listened to the audiobook. Which, now that I’ve decided to do a review, is kind of unfortunate, because it makes it a lot more difficult to go back and find passages I might want to quote. For that reason, and others, the review I’m going to write will be more focused on the broad lessons of Theranos, than a recap of the story or an examination of specific events. If you’re looking for that, here are some other excellent reviews which you might want to check out.
One of the reviews I just linked to starts off by mentioning a quote from the back of the book, “No matter how bad you think the Theranos story was, you’ll learn that the reality was actually far worse.” I can say, having finished the book, that was definitely my impression as well. I first heard about Theranos in 2015 from of friend of mine who works at a clinical laboratory (ARUP, which was actually mentioned in the book.) He was very suspicious of Theranos’ claims, but it was still several months before the scandal broke. Still, his suspicions stuck with me, so when the story did break, I followed along as it happened. What I’m trying to get at, is that I already thought I had a pretty good idea of what Theranos had done. But no, the quote is right, in reality it was “far worse”.
So the book paints a disturbing picture, but to truly know how disturbed we should be we need to know whether Theranos was some kind of extreme outlier. Something entirely unique, and not similar at all to other Silicon Valley startups, or if it was broadly similar to every other startup, and it was unique just in that it happened to be the one that got caught. The fact that Theranos was more of a healthcare company than a software company, certainly contributed to the way things played out, but this shouldn’t make us complacent, there are more and more non-software startups, for example Uber and Airbnb.
At this point, I should mention that I do have some experience in the startup world. I spent over a year trying to raise money for my own startup, and I worked for three years in a startup that had raised several million dollars.
In the first case, we were 16 hours away from signing the paperwork on our initial round of funding when a key angel dropped out and the deal collapsed. This was in the middle of 2008, a couple of months before the collapse of Lehman Brothers, when the country was already in a recession, so I’ll let you guess how well things went after that.
As disappointing as it was to work like crazy on something for a year only to have it ultimately amount to nothing, the experience of working at a startup which had actually raised money was a hundred times worse. It was bad for basically all the reasons Theranos was bad, enough so that reading the book (okay technically listening) was somewhat uncomfortable. Now this is not to say that the startup I worked for was anywhere near as big as Theranos. Also, as I said, Theranos was a healthcare startup, which added a level of craziness and potential harm above and beyond the craziness of a software startup. But I would nevertheless say that the difference between the startup I worked for and Theranos was more a matter of scale than of kind. (Don’t worry, there will be examples.)
On top of this, I’ve had friends who did startups and their experiences were also broadly similar (i.e. horrible). When all of this is put together (and I admit it’s not a huge dataset) it’s hard to avoid the conclusion that Theranos was not unique. That there are lots of companies operating in a very similar fashion. That if, as Mark Zuckerberg said, startups should move fast and break stuff, that Theranos’ mistake may have just been moving slightly faster and breaking slightly more stuff (and, being in healthcare, the stuff they did break was more consequential.)
Determining an answer to this question is important, because if Theranos was unique than we can marvel at the story of their mendacity and subsequent downfall and then go back to business as usual. But if Theranos was not unique then there are probably other startups who are similarly playing fast and loose with the law, and most especially the truth, and we need to worry about what the consequences will be when it eventually comes to light. In support of the argument that it’s a broader problem, in addition to the points I’ve already made, there is a history of corporate hubris occurring in clusters. I’m sure everyone’s familiar with the hubris which lead to the 2007-2008 crash, and the hubris associated with the dotcom bubble. Going farther back you have junk bonds in 1989, and the savings and loans crisis in the early 80s.
By this am I implying that Theranos is just the first taste of an eventual startup apocalypse? Perhaps, and if you’re in a position to do so I would recommend making financial hedges against that possibility, but that’s as far as my prediction extends. Rather what I’m more interested in is how the various, what you might call, hubris failsafes, built up in response to past blow-ups and crashes, performed in the case of Theranos.
To begin with you would assume that the founders and company executives themselves act as a failsafe on things, at least to a certain degree. You might expect that they’d be concerned with whether they actually have a product that will work. You might further expect that they would be wary of lying or doing something illegal, because they don’t want to get caught in those lies and they definitely don’t want to go to jail. And as it turns out both of those things did happen with Theranos, not only were the lies eventually exposed, but Elizabeth Holmes and Sunny Balwani (Theranos President and Holmes’ boyfriend) have been charged with wire fraud, and could conceivably spend 20 years in jail. And yet this possibility seemed to have not deterred them in the slightest. This seems to be the trend recently and maybe I’m imagining that it used to be different, that leaders used to admit wrongdoing, even if they weren’t directly involved, and resign. But now everyone seems to fight in the most vicious fashion possible and to the bitter end. Certainly Trump would appear to be an excellent example of this.
Speaking of politics, I think founders and politicians suffer from a similar problem, in that the type of people who are attracted to being a startup founder or executive, are not necessarily the kind of people you want to be a startup founder or executive. It takes a level of rapacious greed and delusional confidence to believe that you’re going to be the next Steve Jobs, as Elizabeth Holmes clearly did. And, of course, Holmes’ story is the heart of the book, but Balwani’s involvement is, if anything even more interesting, and where things resonated the most with my experience.
One of the most interesting things about Balwani’s involvement, which I already mentioned, but which basically very few people knew about (not the board, not the investors, and not even many of the employees) was that he was Holmes' boyfriend. This is in spite of a 20 year age gap (and recall Holmes was pretty young). This is creepy on its face and many people have tried to spin the narrative that Balwani was some sort of svengali figure for Holmes, but Carreyrou points out that many of the most egregious acts committed by Holmes were committed before Balwani came on the scene. In any event, a creepy May-December romance is not something I experienced during my time in startup land. But Balwani did remind me of some other things I encountered.
First, you’re going to run into a lot of people with money in the startup world: Angels, VCs, entrepreneurs with a previous successful exit, etc. And most of them are going to assume that they got that money by being skilled. Sometimes that’s the case, more often they got it by being in the right place at the right time, or as most people would say, they got it by being lucky. As you might imagine those who were lucky tend not to think of it that way. They assume their money is a direct result of their skills, skills which other people don’t possess. Balwani was apparently a great example of this and the CEO of the startup I worked for also fit this profile, and based on the stories I’ve heard from others it’s pretty widespread. I won’t go into the details of my CEO lest I get sued (again, but I’ll get to that.) But Balwani made his money by creating an unremarkable company and selling it for a bunch of money at the height of the dotcom boom. That’s luck, not skill.
For the people I’m talking about, imagining that they acquired all this wealth via skill rather than luck goes a long way towards creating the delusional confidence I mentioned earlier. As far as the greed part of it, while you might expect having a lot of money to reduce that, on the contrary it appears, rather, to inflame it. If they made 10 million in a single year, then surely, someone of their evident talent can be a billionaire, if they just put in a few more years.
As I said, you might hope the founders or the executives themselves would be one of the failsafes, but clearly we have created a process which basically selects, as founders, the people least likely to have any inherent checks on their ambition. This is not to say all founders are bad, but we should be more surprised when they’re not than when they are.
Of course, the company is more than it’s founders and executives. There is also the board of directors, who have, as their primary job, keeping an eye on the, aforementioned, executives and founders. In other words they are designed to be yet another failsafe. How did they do in the case of Theranos? Not great. The story of George Shultz, the former Secretary of State and his grandson Tyler was particularly fascinating. Tyler went to work at Theranos, saw how bad it was and tried to become a whistleblower, his initial hope being that his grandfather would back him up. But in the end, the elder Shultz essentially took Holmes’ side over his grandson’s. As an aside this does illustrate Holmes’ significant charisma, which as long as we’re talking about the board of directors, allowed her to change corporate by-laws to give the shares she held 100x the voting power of normal shares. Meaning, even if by some miracle the board had turned against her they would have had no power to do anything even then.
As you may have already heard, George Shultz was not the only former politician, or politically connected individual on Theranos’ board. Here’s how Fortunate Magazine described it:
We have former Secretary of State Henry Kissinger, former Secretary of Defense Bill Perry, former Secretary of State George Shultz, former Senators Sam Nunn and Bill Frist (who, it should be noted, is a surgeon), former Navy Admiral Gary Roughead, former Marine Corps General James Mattis, and former CEOs Dick Kovacevich of Wells Fargo and Riley Bechtel of Bechtel. There is also one former epidemiologist—William Foege, and, in addition to Holmes, one current executive, Sunny Balwani, who is Theranos’ president and CEO.
It’s quite an impressive group, isn’t it? But here’s what it’s not: an appropriate board of directors for a company that is valued at $9 billion. There are no sitting chief executives at other companies—a basic tenet of board best practices. There is but one still-licensed medical expert, Bill Frist (Foege, age 79, is retired). And while it’s probably useful to have a retired government official or two to teach and offer good leadership skills, when there are six with no medical or technology experience—with an average age, get this, of 80—one wonders just how plugged in they are to Theranos’ day-to-day activities.
Interestingly Fortune was the same magazine who put Holmes’ on their cover the year before this. And at that point they called the Theranos board of directors, “the single most accomplished board in U.S. corporate history.” And this illustrates the problem, not only was the board not equipped to act as a failsafe on Holmes’ and Theranos, but until Carreyrou broke the story, no one took the obvious step of pointing out that Holmes’ board was great if you wanted to skirt regulation and intimidate people, but awful if you were actually interested in designing an effective medical device. The article I just quoted from was only published after Carreyrou’s initial WSJ Piece. But it is only in light of that reporting that Fortune finally makes the same point I just made.
[The Theranos board] was assembled for its regulatory and governmental connections, not for its understanding of the company or its technology.
Of course now it’s arguably far too late. Interesting how quickly people decided that what was once thought of as a major strength of the company should have been regarded as an early warning sign that something was very wrong.
To be fair, there wasn’t much evidence of Holmes using the board to directly subvert regulations. (Though I suspect indirect influence played a large role.) But regulations are, of course, another failsafe, and eventually laws and regulations are what killed Theranos, the question is should they have done that sooner? A discussion of regulations will often devolve into a partisan fight over whether Republican antipathy towards regulation is really at the root of the whole problem. I don’t think that argument can be made here. Lots of very prominent Democrats were big supporters of Theranos, and this support extends beyond the board of directors. (Obama made Holmes one of his business ambassadors and Biden was visiting and praising the Theranos facilities just a few months before the scandal broke.) Meaning I don’t think it would have made any difference which party was in power, nor is there some repealed law one could point to as a smoking gun which enabled the whole disaster.
Actually if there was any single thing which empowered Theranos to continue for as long as it did, that thing was lawsuits, and more broadly the threat of lawsuits. And if there was any person to hold responsible for that it was David Boies, known for Bush v. Gore (he was on Gore’s side) and US v. Microsoft. For my money Boies is easily number three on the Theranos villain list and given that he escaped relatively unscathed (his role at Theranos is barely mentioned in his Wikipedia article.) And that of all the people involved he’s the one who really should have known better. Perhaps he deserves to be number one on that list.
As I alluded to earlier, my experience working for a startup also led to me being sued. The case has been settled and dismissed with prejudice. Also you can see I’ve tried to be careful to not mention any names, but it still makes me nervous to talk about. At the time I was sued I kind of figured that it was exceptional, that the guy paying for the lawsuit had made a bad decision based on bad information. But having read the story of Theranos, I get the feeling that lawsuits are more common than I thought in Silicon Valley.
The lawsuit side of the equation is interesting for several reasons. First it’s interesting to speculate how it interacts with the failsafe of government regulation. Would having more laws just give Boies more laws to sue people under? Or would it have made it easier for the government to crack down on Theranos. I strongly suspect the former, particularly given that once the appropriate agencies were made aware of what was happening, they had no problem shutting them down via the laws that were already on the books. But getting to the point where they were aware of the problems took a lot longer than it should have because of Theranos lawyers. Second, as far as I can tell, lawsuits have way more to do with how much money you have than whether you’re right or wrong. This is not to say that the side with the most money always wins, but to even play the game costs tens of thousands of dollars (in my case) and hundreds of thousands of dollars (in Tyler Shultz’s case).
Finally lawsuits, as I already alluded to, act as the opposite of a failsafe. In that they make all the other failsafes more difficult to trigger. As it turns out, despite however unethical the people at the top of Theranos were, Carreyrou tells the story of dozens of employees who wanted to make the world aware of what was happening, but were kept from doing so by the fear of a potential lawsuit. The story of Tyler Shultz facing down David Boies was one of the most gripping parts of the whole book, and if he hadn’t been the grandson of a member of the board and had parents who were willing to spend $400k to keep them at bay, it’s unlikely that he would have persisted either. Also once Boies turned on Tyler, even $400k was not enough to allow him to continue to talking to Carreyrou. He had to immediately shut up AND pay $400k.
This takes us to the failsafe which finally brought Theranos down, the press. One would imagine that once the Wall Street Journal got ahold of the story that it was all over. But it’s surprising how much effort Holmes, Balwani and Boies put into trying to quash the story even then. Carreyrou was constantly hounded by attorneys (and followed everywhere he went by private investigators). More interestingly, Holmes, aware of the story, managed to convince Rupert Murdoch (the owner of the WSJ) to invest $125 million in Theranos, and then proceeded to use that to try to leverage him into killing the story. I know lots of people don’t like Murdoch, but to his credit he apparently not only refused to kill the story, but refused to involve himself at all, and eventually lost the entirety of his investment (a drop in the bucket for him, but still.)
The final failsafe is supposed to be the most reliable of all, money, and by extension self-interest. How did Theranos raise $700 million dollars, and secure lucrative contracts with both Walgreens and Safeway despite not having anything close to the technology they claimed? Carreyrou’s answer was FOMO, or fear of missing out, which of everything I’ve mentioned so far may be the most modern phenomenon of all. And also the one I’m the least sure how to solve. It’s clear that FOMO is a major driver of bubbles, as everyone sees the upward spike and rushes in, never pausing to think if the growth is sustainable or if they’re just the greater fools. But what should be done about it? It’s a big problem, but in the very specific case of startups, I think it needs to be much easier to bet against them. And one of the things that has made that harder is the decline of the IPO.
All of this is a fairly large topic, and I’m out of space, but I will say that if I was one of the investors in Theranos, or one of it’s board members, or Walgreens or Safeway, that I would be taking a long hard look at how I ended up being so thoroughly duped and how to prevent it in the future.
As I said in the beginning, it’s not clear if Theranos is an extreme outlier, but I suspect it’s not, and I further suspect that if the many lessons of Theranos are not learned, we’re in for a lot more of this sort of thing, and I predict some of it will make Theranos seem quaint by comparison.
Much like Theranos, there are many areas where I’m incompetent. In their case it was worth $700 million. I’m not expecting my incompetence to be worth that much, but if you think it’s worth anything consider donating.