Bad Blood. Good Book. The Theranos Fraud.
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Bad Blood: Secrets and Lies in a Silicon Valley Startup documents the rise and fall of Theranos - the Silicon Valley unicorn that claimed to run many blood tests on just a small fingerpick of blood.
Theranos provides a stark reminder of why healthcare startups needs to be done properly. Why transparency and external validation is required. It also illustrates how easily it is to convince non-medical personal to invest and support medical claims that sound good.
I believed the hype of Theranos for many years. On camera Holmes comes across as a very truthful and honest individual. Unfortunately it turns out much of what she said was outright lies. This supports what Paul Graham has mentioned with regards to startups - that it is easy for smart people to identify other smart people, but it does not correlate that truthful people are able to identify other truthful people. In fact, often the reverse is the case.
In part I believed the Theranos story at the time because major corporations such as Walgreens were associated with Theranos. I assumed someone at Walgreens had done their due diligence. In the end nobody had.
I even went to the Theranos lab in Walgreens Palo Alto just to try the service, but was unable to have blood drawn there as the State of California requires a physician lab requisition.
Holmes claimed to have developed a revolutionary new technology after dropping out of Stanford at age 19 and going on to found Theranos in 2003 and title it the ‘Edison Machine’. The only problem was the machine never worked. Multiple tricks were used during demos to investors to give the impression that the machine worked. It did not. Fake printouts and fake error messages were used. Samples would secretly be removed from the device, and run on stock lab equipment. But even the stock lab equipment wasn't very good. The stock lab machines had been hacked, and their dilution process tampered. The lab's quality control was essentially non-existent. When the company did try to test the machine, 'outliers' were discarded from analysis.
Theranos achieved duel achievements. It was, for a few months, the largest company in Silicon Valley at a value of $9 billion. It also became the largest securities fraud in history. 2014 actual revenue was not the $100 million anticipated, but only $100,000. Around $1 billion worth of invested capital was lost.
Elizabeth Holmes and her former boyfriend ‘Sunny’ were charged in March 2018 with civil fraud charges by the Securities and Exchange Commission. In June 2018 they were indicted on federal wire fraud charges. (It is called ‘wire fraud’ because 'mail & wire fraud charges' have been illegal in United States since 1872).
The company announced last week (September 2018) that it is dissolving. It has voided two years worth (millions) of blood tests given inaccuracy of reports.
Bad Blood was written by The Wall Street Journal’s John Carreyrou. It draws on the research he used to published the 2015 Theranos WSJ articles that became the catalyst for brining the company down and exposing its fraud.
The book is very easy to summarize. The major lessons are:
Almost all of the problems of Theranos stem from the serial lies peddled by its founder. Interviewers have asked Carreyrou if he think’s Holmes intended to defraud investors from the beginning, and he suspects not. Over time the gap between what Holmes claimed her technology could do, and what it actually could deliver widened. This did not stop her from continuing to put it into patient use.
You may prefer to wait for the book to be turned into a movie staring Jennifer Lawrence. It is by the same director as The Big Short - Adam McKay.
If you can get behind The Wall Street Journal’s paywall the original 2015 articles are there.
A comprehensive summary (not behind a paywall) is found on this blog.
Some Random Interesting Facts
During the Thernaos period Elizabeth dated Sunny Balwani. He is a man 19 years her senior. He was appointed to many of the highest positions at the company (without the Board knowing he was in a relationship with Holmes).
The book describes Sunny as a human being you’d likely never want to spend time with. He arrived at the office in his Lamberguinie, top three shirt buttons undone, and reeking of cologne. He would spend the day shouting at and firing employees. He seemed to have no specific qualifications for the executive position he held at the company. Like Holmes, was also a serial liar.
The advertising company Chiat/Day was hired on a $6 million per year retainer to work for Theranos. They built the website and photography campaign we are familiar with. Elizabeth hired them because they previously worked with Apple.
The famous industrial designer, Yves Béhar was hired to design the Edison’s case.
The company had ridiculously high turn over; particularly of its board and management staff. Always a red flag.
Theranos moved into a more expensive office space in Palo Alto. This managed to convince both employees and outsiders that the company was doing well given the pricy real estate.
The fear-of-missing-out was a major driving force in the partnership with Walgreens. Even after it became apparent that Theranos may not be as advertised, Walgreens continued to work with Theranos. Walgreens worried if they dropped the Theranos project - and it later turned out Theranos could delivery what it claimed - that they'd then be too late and they’re competitor CVS would have cut a contract with Theranos.
The former Safeway CEO Steve Burd became enamoured by Holmes. He brought as a gift one day a toy private jet, telling her that the next one she has will be real. Burd failed to give due diligence to Theranos, and ended up pushing his company to spend $350 million in project “T-Rex” to renovate 800 Safeway stores for the anticipated Theranos lab space. The Safeway board sent Burd into 'retirement’ after his mishandling of Theranos.
Vaporware is the term for tech companies claiming to have software/products, that doesn’t exist. Everyone from startups to major companies like IBM, Microsoft, and Apple (think the first iPhone demo that wasn’t real) engaged in this. Vaporware is generally harmless, and disappoints consumers if they cannot purchase a new piece of tech they thought was demoed. It becomes a huge problem when a medical lab device demoed is vaporware. It is doubly bad when the same faulty product then is used in production on patients.
The Theranos storey underscores the importance of independent third-party assessments of medical technology. In addition the ability to review these assessments first-hand. Everyone else though that someone else had looked into Therano's validity; but in the end, nobody had.
Any good from Theranos?
Theranos successfully lobbied in Arizona for legislation to allow patients to order their own bloodwork without a physician requests. The legislation also protects physicians from the legal implications of patient's self-ordered blood work. This passed in 2015 as House Bill 2645. I recall doing quite a lot of research around this at the time, and continue to believe it is a significant step forward to improving patient care and breaking the medical cartel.
Future Questions: The Status of Whistleblowers?
The book shows the difficulty of being a whistleblower. Tyler Shultz ended up having half a million dollars in legal expenses that his parents paid. It is routine for companies to engage in hyper-aggressive non-disclosure contracts, and the enforcement of these has the potential to quash any complaints against a company before they can be investigated and potentially identify illegal activity. I look forward to read C Alford's book, Whistleblowers: Broken Lives and Organizational Power which has sat on my bookshelf since Glenn Greenwald's 2015 book on the Snowden revelations.