50K Insights: Theranos and Bad Blood — A Lesson For Investors

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The HBO documentary “The Inventor: Out for Blood in Silicon Valley” outlines the story of ‘Theranos’ — the blood-testing startup whose founder Elizabeth Holmes’ net worth rose to USD 4.7 Billion released this Monday in the US. Theranos was founded in 2003 and by 2014 had attained a valuation of USD 9 Billion.

In 2015, questions started being raised about the disruptive & revolutionary blood testing technology that Theranos claimed to have developed. The SEC, in early 2018, charged Theranos with ‘massive fraud’ and initiated fraud investigations based on complaints it received and based on articles published in the Wall Street Journal by its Journalist John Carreyrou. Theranos shut operations in end 2018 and the trials of its founder and former company President Ramesh ‘Sunny’ Balwani are currently ongoing.

Theranos’ story of a meteoric rise and spectacular fall was captured in the book, ‘Bad Blood: Secrets & Lies in a Silicon Valley Start-Up’, by John Carreyrou, who is a two-time Pulitzer Prize-winning journalist. The story reads like a thriller and lays out the details of personal ambition & greed gone awry.

Bill Gates, while reviewing ‘Bad Blood’ wrote, “I don’t read a lot of page-turners. I often find myself unable to put a book down — but they’re not the kinds of books that would keep most people glued to their chairs. Still, I recently found myself reading a book so compelling that I couldn’t turn away.”

Bill Gates is right, Bad Blood does read like a thriller.

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Carreyrou clearly intends ‘Bad Blood’ to be more than a story about just one startup — it is a commentary on the ‘move fast and break things’ and the ‘success at any cost’ creed. To be young, gifted and blonde never hurt anyone hoping to make their way through the world. The story of Elizabeth Holmes, the founder of ‘Theranos’ (a portmanteau of the words ‘Therapy’ & ‘Diagnostics’), who dropped out of Stanford at 19 to found Theranos, exemplified this.

She claimed she had developed technology that would revolutionise blood testing by replicating laboratory tests in a desktop machine. Instead of drawing blood from people’s veins, Theranos claimed to have developed a technique for testing on a much smaller volume of blood drawn from a finger prick. Theranos’ technology, Holmes said, would ensure that less fear, less pain and less specialised knowledge was required to carry out blood tests. People would be able to do their own blood tests, in their homes, and have the results uploaded to their doctor for interpretation.

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Theranos was also caught in the controversy of incorrect results.

However, behind the scenes, Holmes was running tests using conventional lab methods and commercially available lab equipment while attracting high-profile investors and board members in droves. On Theranos’ board were Henry Kissinger & George Shultz — both former US Secretaries of State and several other former senators and political bigwigs. Holmes had all these people under her spell.

The investors, in turn, were in the thrall of these big names on the board and did not ask the obvious questions. Rupert Murdoch invested $125 million of his own money. Backed by other investors such as Larry Ellison and Tim Draper, Theranos sold shares in a fundraising round that valued the company at more than $9 billion taking Holmes’ worth to an estimated $4.7 billion.

There is an interesting India connect too in the story. Carreyrou suggests that Holmes’ number two and Theranos’ COO, Ramesh ‘Sunny’ Balwani (20 years her senior and her romantic partner), was responsible for many of the dodgy practices at Theranos. Although unflattering to read, some aspects of the work culture he is believed to have insisted on, as the COO, are reminiscent of work practices at many Indian firms.

The book does not explore whether Holmes intended to eventually make the technology work or if she was just lying through her teeth; it keeps to the facts and lets the readers reach their own conclusions.

Those close to the story believe the Holmes persuaded herself that the technology would eventually work — the same way she also persuaded herself that she would be more successful if she modelled herself on Steve Jobs (just like her idol, she began exclusively wearing black turtle necks). She also adopted a deeper, male voice for her public appearances because she felt it would help her be taken more seriously.

Holmes and Balwani were charged by the Securities and Exchange Commission (SEC) in Mar 2018 with “massive fraud” for raising $700mn from investors by allegedly deceiving them about their supposedly groundbreaking blood-testing technology.

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The news sentiment for Theranos fluctuated as more and more about the lie was disclosed.

The book, a sordid tale of Silicon Valley excess, won the 2018 Financial Times and McKinsey Business Book of the Year Award. An adaptation of the book for the screen is in production being directed by Adam McKay and starring Jennifer Lawrence.

There are several lessons for startup founders to draw from the Theranos’ story:

• Assembling an all-star board is of little value if one is not transparent with them about the happenings in the company. It is in the best interest of the organisation, for entrepreneurs to discuss difficulties & failures with the board and benefit from their experience & wisdom. None of the board members or the investors at Theranos had any experience in or knowledge of the healthcare industry: it is in your interest to have some board members who know your business.

• Raising capital does not serve any purpose if the product is flawed and the work culture drives good talent away.

• Exaggerating the capabilities of your product (within reasonable limits) is standard practice when marketing or selling; however, lying to misrepresent your product and your organisation is ethically wrong and will pull you down sooner rather than later.

• Create a healthy work culture. Allow space for the leadership’s actions and decisions to be questioned. At Theranos any dissenters were fired or marginalised. When you see good talent fleeing your organisation — stop & think why.

Happy Reading!

- Guest-author Shrikumar Sangiah

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50K Ventures strives to provide early stage startups with funding, go to market support and strategic advisory.

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