Mar 20, 2019
Moral lessons from a Silicon Valley scandal
Until John Carreyrou of the Wall Street Journal started to dig deeply and ask the difficult questions, Theranos stood out as an exemplar of Silicon Valley at its very best. The company had everything — a smart, charismatic CEO with a compelling vision for how advanced digital technology could revolutionize medicine with instant, easy blood tests that would enable early detection of cancer and other diseases. What a noble mission. What an amazing accomplishment. What a promising young leader. This was Silicon Valley at its best.
Except it wasn’t. John’s reporting revealed that Theranos was nothing more than a con. The company’s vaunted technological breakthroughs had been faked. Theranos has collapsed, wiping out investors and triggering civil and criminal lawsuits. It’s been called the biggest fraud since Bernie Madoff — but it’s far worse because Theranos wound up faking blood test results to sustain the fraud, potentially putting lives in danger. Instead of being an exemplar of Silicon Valley’s best and brightest, Theranos has become a cautionary tale about the dark side of the tech business, where greed and ambition and hucksterism prevail and where moral and ethical considerations are conveniently ignored.
I was delighted to invite John to LRN to discuss Bad Blood: Secrets and Lies in a Silicon Valley Startup, his book about Theranos, which has now been made into an HBO documentary. It is a riveting story of how Threranos founder Elizabeth Holmes burst upon the Silicon Valley scene, charmed venture capitalists and tech veterans, and briefly became the world’s youngest self-made female billionaire. Holmes’ inspiring vision of a pin-prick blood testing system that one day would be used in homes captivated a long list of powerful figures, including former Secretaries of State Henry Kissinger and George Schultz and retired General James Mattis, later Donald Trump’s secretary of defense.
Before John’s visit, I spent a long weekend reading and discussing John’s book with my family. We were all fascinated and troubled by the story. When I asked my 10-year-old son what he learned from the book, he thought for a minute and said, “When you go for big money as opposed to truly trying to make a difference in the world and you do that in healthcare, that’s not only wrong, it’s cruel.”
Indeed, Theranos might have hurt hundreds of thousands of people — maybe millions. Its fake and innacurate results could have killed people by preventing them from getting early treatment for cancer or other deadly diseases — the exact opposite of what the Theranos vision promised. By the time John’s reporting first uncovered the fraud in 2015, Walgreens was poised to roll out Theranos self-testing centers across its chain of more than 9,000 drug stores in the United States.
How could a fraud of this magnitude happen? How could smart investors, respected statesmen, and the media be taken in? After Enron and the real estate bubble, hadn’t we all learned that when something seems too good to be true — in this case a system for making hundreds of tests from a single drop of blood — it is? This is what I wanted to learn in the conversation with John. What are the lessons from Theranos and what can we do to avoid the next Theranos? In the hour-long discussion, we found out that it was a combination of culture and values (or lack thereof) that kept the fraud going. We also learned that it was a few individuals who showed outstanding moral courage that finally brought Theranos down.
What was the role of the culture? John emphasizes that Theranos should not be considered an outlier. In many ways, he argues, Theranos can be viewed as a natural product of the Silicon Valley culture. Startups there can’t just build a better mousetrap. To get funded, companies must prove that they can “get big fast” and “disrupt” existing business models. That puts pressure on everyone to cut corners.
Another tradition in the Silicon Valley culture is “fake it until you make it.” John told the story of how Larry Ellison, when he was building Oracle into a software giant, “would announce features that his programmers and coders hadn’t even begun working on.” But Oracle eventually delivered on its promises and went on to be a Fortune 100 company.
Holmes took faking it to life-threatening extremes. When it became clear that her engineers could not deliver the suitcase-size testing machine that could do thousands of tests from one drop of blood, Holmes simply kept on faking it. This, to me, is a difference of kind, not just degree. When you have knowledge that somebody might get falsely diagnosed, might ingest an unneeded drug or accept a treatment they don’t need, or not get a required surgery, that really crosses a line.
Holmes kept promising her technology would work and convinced Walgreens to bet more than $100 million to build Theranos blood-testing centers in its stores, despite the reservations of its own experts. The company fell into another Silicon Valley culture trap: FOMO (fear of missing out). It jumped at the opportunity with Theranos because it feared that rival CVS would get into this new business first.
Scale values, not value. By scaling values, I mean articulating shared values — what the company stands for, the behaviors that are expected — and building them into everything the organization does. These values need to be infused into practices, protocols, and behavioral norms. Behaviors that demonstrate core values — standing up for the truth, treating colleagues with respect, etc. — should be embedded in performance metrics. The result is what I call a “human” operating system, which unleashes human energy to accomplish objectives and gives employees permission to aim high.
For Holmes, normal human values were never part of the program. At the age of nine, when asked what she wanted to do when she grew up, she didn’t say doctor or astronaut or that she wanted to make the world a better place. She said she wanted to be a billionaire. I asked John if he thought this made Holmes a sociopath. “I raise the question,” he said. “But I say it is up to psychologists to decide whether she fits the clinical profile.”
Holmes’ own lack of moral and ethical values — and her total lack of empathy — made her a highly ineffective leader. She and her boyfriend/COO managed through fear and intimidation. They were secretive and paranoid. They became even more devious after the prototypes at Walgreens did not function properly and they concocted a scheme to substitute results from an in-house blood lab, although it turned out even those results were unreliable because of the small blood samples.
Holmes and the COO were constantly on the hunt for disloyal employees, who were summarily demoted or fired. Employees who joined Theranos because they were truly inspired by its noble purpose burned out or left in disgust when they discovered what Theranos was really about. Holmes sued departing employees to keep their silence and deter others from talking.
Ultimately, moral courage triumphs. As the saying goes, “truth will out.” But it took the moral courage of three exceptional individuals — and John’s dogged reporting — to bring the fraud to light. Ultimately, what motivated John’s sources, he said, “was, first and foremost, the fact that they were afraid that someone with a false positive or a false negative from a Theranos blood test was going to die.”
As John recounts, Theranos used every ounce of leverage to intimidate the whistleblowers and the Wall Street Journal into silence. Holmes repeatedly told Tyler Schultz, one of John’s named sources, that he would never have a career in Silicon Valley if he continued to cooperate with John. Yet the opposite happened. According to John, Tyler received multiple job offers the morning the first Wall Street Journal story exposing Theranos hit the front page. (Other long-time Theranos employees have not fared so well and still struggle to find employment, CNN recently reported).
Famed litigator David Boies, who has represented Harvey Weinstein in his #metoo cases, came after John. Boies had joined the Theranos board and was acting as counsel in exchange for Theranos shares. Holmes even tried to get Journal owner Rupert Murdoch — the largest individual outside shareholder — to quash the series. But John and the whistleblowers persisted. They teach a valuable lesson in the power of moral courage.
And the lessons for Silicon Valley? As John said, Theranos should serve as a warning. Today, Silicon Valley’s tech giants are facing questions about their ethical judgment. With the rise of fake news and revelations of how consumers have been manipulated by the data they generate online, trust in tech companies has eroded. If they want to rebuild trust and help Silicon Valley live up to its great potential for doing good, companies should prioritize sustainable values, place truth and trust at the heart of their cultures, and elevate individuals who show moral courage.
