Lessons from Theranos, A Unicorn That Vanished
I included the book Bad Blood by John Carreyrou as one of my top reads for 2018 not only because the story of Theranos is so shocking that it’s almost unbelievable, but also because there are lessons all of us in this industry should take away from the story of Theranos and Elizabeth Holmes. In this blog, I focus on my top five lessons from the book.
Don’t Let FOMO Drive Your Decisions
In 2010, Walgreens signed up to beta test Theranos’ devices. When an external consultant, hired by Walgreens to serve as a technical expert expressed concerns about the devices to the firm’s executives, he was dismissed because, as one of the executives said, they didn’t want their main competitors, CVS, to get this technology and have it end up being real.
The lesson here is don’t let FOMO drive your decisions. Whether that’s a decision about hiring a potential star employee, who looks good on paper but is not right for the company; acquiring a new customer that would give your company credibility but not be a great early adopter of your product; or taking new investment even though the terms or investors are not right for your company. Making a decision because of FOMO will inevitably cost you time and money at best, and sink the company at worst.
Investors — This lesson is just as important for investors. Investing in a company just because another investor is participating in the round isn’t the best strategy. It’s crucial to do the DD and ensure that the reasons others are investing align with why you would invest in that company. FOMO was clearly a huge factor in Theranos’ ability to raise as much capital as they did.
Be Aware of Confirmation Bias
It seemed like people loved the story of Elizabeth Holmes: a child prodigy that taught herself mandarin and programming in high school, a young woman who dropped out of Stanford to pursue her vision, and a woman who was able to raise hundreds of millions of dollars in investment and get business and political celebrities to join her board. This was the making of a storybook Silicon Valley entrepreneur! She was charming, charismatic, intelligent and an incredible salesperson that could get investors, customers and employees to jump on board. She also had a vision that people could get behind: a device that could test for a range of conditions using a few drops of blood from a finger prick. I think many people had already made up their mind that Elizabeth was going to change the world even before they met her.
Confirmation bias is the tendency to interpret new evidence as confirmation of one’s existing beliefs or theories. We all experience confirmation bias at some point or another but when you are building a start-up it’s important to be skeptical, especially when the stakes are high. Understand that your business plan is full of big assumptions and your job is to test those assumptions, starting with the riskiest one. If your assumptions are proven wrong, you then develop new hypothesis to test. For example, when building your product you may have assumptions about which features are important and what problems you are solving but it’s crucial to remove your bias and test the assumptions with your target customers. Don’t lead your customers to answers, listen to them, observe them using your product, and try to take their feedback as objectively as possible.
Selling Does Not Mean Lying
The definition of selling is to “give or hand over (something) in exchange for money”. For a start-up, the “something” is a product that contains features with associated benefits. It’s one thing to explain those benefits in a way that resonates with your audience and another to lie about which features or products exist. Theranos outright lied to their potential customers about what their product could do and went so far as to stage test results.
Founders sometimes wonder what they should disclose to potential investors, customers and employees. My advice is tell them the truth. Sell the vision of how you will transform the industry and the benefits of your product, but when you are describing your current product tell them the truth because they will find out if you don’t — and your brand and reputation will be damaged. It’s especially important not to stretch the truth when recruiting employees because they will definitely find out, probably on their first day, and the impact of that can be devastating.
Don’t Start Scaling Before Product/Market Fit
Theranos was signing contracts with potential clients before the products were even working — at all. That resulted in inevitable delays and disappointed customers.
If you don’t have product/market fit you should not put any effort into growth strategies. In the early stages you should focus on working with a handful of customers, understand their problem and create a product or service that solves (at least one of) their top problems. Scaling happens once you have satisfied early adopters and the product solves a problem well enough that your customer does not want to live without it. Only when you have achieved that important milestone should you begin to focus on scaling.
Align Your Values
Theranos was a revolving door when it came to employees, and management happily got rid of anyone that spoke their mind, especially if they spoke out against the company’s current strategy. At Theranos you had to be 100% committed, no questions asked or you didn’t belong.
When hiring new employees, or if you are looking to work for a start-up, ensure that your values are aligned. People’s values will sneak into their work and their interactions with colleagues and customers. Unless you like employee churn or you like finding a new job regularly, it’s best to assess for fit at the on-set. And fast growth l is not a reason to put values aside.
Final Thoughts
I (really) hope that Elizabeth and Theranos are outliers when it comes to fraudulent activities by start-ups. However, it’s easy to get lost in the land of unicorns, hyper growth companies, and charismatic star founders, and forget to take a step back and focus on what steps are required to grow a successful business. Founders especially need to be cautious. Your job is to continuously sell your vision — to investors, to potential employees, to employees, to partners and to customers. Do not confuse your vision with current reality, and I would challenge you to think about how you will treat those that help you achieve your vision. Do you see your employees as pawns or partners in building the business? Do you care about your customers or are they simply revenue streams to fuel your rise as a unicorn CEO? Do you value those that helped you in the early days when very few believed in what you were doing? Your reputation is not something you can easily change so be careful to foster the one you want, for the long run.
