Review: Bad Blood (Theranos)

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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.

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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.