Startup Lessons From The Theranos’ Fiasco

I had been following the Theranos episode for quite a while and recently managed to complete John Carreyrou’s book Bad Blood, his work on Theranos’ rise and fall. My intention of reading this book was to understand what Theranos got right to make it big and what it could have done to prevent its downfall. Here are a few lessons budding startups can learn from Theranos’ journey.

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The Product — You cannot sell a lie, not for long anyway.
Your product is a testament to the companies value, ethics, and presence. It draws inspiration from the change a founder envisions, the familiarity that the market prefers and the profitability that the investor values. So you would assume that the product needs to be complete in some form and show tangible value for a company to make headway. While this has always applied to traditional markets, the tech industry remains an exception. This is partly because many tech companies in Silicon Valley, the Mecca of the computer revolution, have been able to establish themselves by simply promising to deliver the far-fetched future. This is so common that when a budding company from the valley, with a barebones product, describes itself as a disruptor nobody bats an eye and instead compete to contribute to the fund train.

Even understanding the tolerance for hype, it is still surprising the extent to which you could market fiction as the product under the guise of vision. While overpromising could put you at an advantage during fundraising, and sometimes essential for the survival of your company, it is ultimately up to the founders to draw the line that separates technical feasibility and work of fiction. In the case of Theranos, time and time again, Elizabeth Holmes failed to acknowledge that her vision could not be attained by the currently available expertise or technology, despite her employees and data pointing to it. Instead of reining in her expectations she relied on deceit, consciously keeping her investors in the dark in the hope that reality one day would usher Theranos into the promised land. And by doing that she put her customers, her employees, her investors, and board members all in harm’s way.

You can fool all the people some of the time and some of the people all the time, but you cannot fool all the people all the time.

This is worth remembering not only because it is morally inferior to misguide people but also because it is insanely hard to fool people all the time. You might win the battle, but you will lose the war and with it all your credibility and the goodwill of the people around you.

The Founder-CEO is all about being the Jack of all trades.
An FC (Founder-CEO) is so many things — the evangelist, the architect, the visionary, the salesman, the magician, the artist, the consumer, the commander and the face of the company. As an FC every word, action, and thought is amplified through the people following you. Inspiring leadership is no longer a luxury but a necessity. You are a mini-celebrity and with fame comes responsibility. You have obligations towards yourself, your family, the company, investors, and customers. Nowhere would you be more hard pressed to cut corners than in this juggle!

Stephanie Hurlburt, in her guide, provides some reasoning on why founders always need good first impressions. This includes the way an FC dresses, appears and acts. Elizabeth Holmes had a perfect first impression. Right of the bat, she surprised people with her deep voice (some say the deep voice was deliberate) and piercing blue eyes. She was an extremely good salesperson, emulated a style that brought Steve Jobs to memory, extremely passionate about her vision, employing empathy effectively in her story of Theranos. Very rarely did people walk out of a first meeting unimpressed with her.

She had the right mix of charm, intelligence, and charisma that only the greatest display.

She could rally people behind her and make them feel part of a bigger than life mission. Alas, first impressions and pep-talks are not the only things required when you build a company. Whatever potency she built up with her first impressions was lost by her misjudgments. She would eventually burn out employees and lose their trust by her lack of integrity. She blatantly flouted the law and fired anyone who questioned her sanity. To conceal her deceit she fostered a culture of mistrust to prolong the company’s longevity and encouraged sycophantism to solidify her position. To me, Elizabeth Holmes represents the best of what you ought to and ought not to do as an FC at the same time.

The Culture — You reap what you sow.
Primal emotions did not exactly evolve humans into risk-seeking beings. Instead, they have always helped us stay safe, away from dangers and far from risky endeavors. This is why we feel uncomfortable with confrontations of any kind. As a counter, creating safe spaces for every employee can be one of the best perks a company can provide. Safety, physical and mental, brings out the authentic and often the best version of an employee. This open atmosphere has proved to be a key ingredient for innovation and productivity that companies everywhere obsess over.

Most companies in their early life are essentially a cult comprising a monoculture and make the transition to a poly-subculture environment as they grow bigger. One of the things that struck me as weird was how Theranos’ culture was always centered about secrecy, lack of transparency which never morphed into anything better, possibly as a cover-up for the non-functional product. Employees were consistently fired and even threated to be sued when they raised questions about the working of the product. NDAs, lawsuits and constant surveillance on all employee activities came as part of the employment package. Private investigators were hired to gather, and sometimes create, explosive evidence on employees who were suspected of being disloyal. All this resulted in a low trust, secretive, and negative environment making a majority of employees feel that they did not truly belong at the company. The ensuing mental brutality resulted in the death of Ian Gibbons, who was instrumental early in the companies patent portfolio presence. Almost all of the employees who left the job regretted having joined the company in the first place. It just wasn’t a positive place to work at.

Just like terminal cancer, the culture at Theranos sapped the finest, created an existential crisis, vilified souls and left the victims reduced to a fraction of their former selves.

The Hype Machine — No fire without fuel.
The world runs on proxies. You hope to get into a reputed college because you associate a college’s historical success with your future success. You feel the handbag from Coach must be better than others because the price was proxy for quality. Staying true to the capitalist ideology, Silicon Valley companies have always relied on hype to survive. The dot-com rage and the crypto bull run of 2017 are testaments to the success of the hype machine, which was also responsible for how Theranos raised $900M without a working product.
The hype machine is easy to deconstruct. A proxy ignites a spark to start the machine. This spark causes mass hysteria and FOMO group-think mixture to (YOLO and 21st Century, why not?!) explode. The opportunists compete to add fuel to the machine almost immediately enabling the vehicle to zip towards its mysterious destination. Essentially, the power of belief in the proxy is what adds money to a company’s balance sheet. Elizabeth Holmes, a dropout from Stanford after two semesters, and Theranos had a stellar backing. Channing Robertson, a reputed Stanford professor helped create credibility to Holmes. Donald L Lucas, the well known VC, backed Elizabeth and enabled her to raise large sums of money. Jay Rosan and Steve Burd, holding key positions from Walgreens and Safeway respectively, brought Theranos to limelight with their hopes of a national rollout. James Mattis AKA Mad Dog Mattis, under his belief that the new biomedical tech could fundamentally change warfare, was a frontman to Theranos. George Schultz and Henry Kissinger, both heavyweight statesmen threw their clout behind Theranos, even backing Elizabeth Holmes after the first revelations of fraud surfaced. David Boies, the legendary advocate who provided great legal support to the company, went so far as to accept Theranos stock as compensation because he was aboard the hype train.

With a board of eminent personalities such as this, it was hard to disregard Theranos and its promise as fake. Elizabeth Holmes on her part made several high-profile appearances to cement her company’s authenticity in the public eye. She was a Business Ambassador to the Obama administration’s entrepreneurial PAGE program and held a fundraiser for Hillary Clinton’s presidential campaign. She attended top medical conferences and asserted that her technology was both superior and cheap, although both these claims were refuted later. Security measures at the company’s office were straight out of a Mission Impossible movie creating an impression that there was a secret worth protecting.

The frenzy and the secrecy made the money pour in.

In short, thanks to the hype machine the word on the streets was that Theranos was the new Apple of the industry.

The Legality — Law is perhaps reactive but certainly is retroactive.
Most of the successful innovative startups have always operated partially, often completely, in the grey-zone. In fact, they understood how to game the law without undermining it. This is how Uber mastered the gig-economy and Airbnb avoided labeling itself as a hotel boutique and saved on paying taxes. Navigating the grey-zone is not for the faint-hearted. You could make headway by being a bulldog and try skirting the regulations with the help of a good law firm. In fact, it is exactly here that good lawyers are worth their weight in gold. Lawsuits were flying back and forth all through Theranos’ history and most of them were settled favorably to the company. Theranos, for its part, could win most of their legal confrontations, largely because of the clout and aggression Boies Schiller Flexner LLP (David Boies’ law firm), often considered the best in the country, brought to the table. Apart from defining safeguards for intellectual property and protecting your business from various federal and state laws, advocates also help guide the company from incorporation to exit and avoid many pitfalls that certainly could end the business.

The advice that most fledgling founders often hear but neglect is looping in legal representation as early and frequently as possible.

This is not to say that you should try going above the law and rely on your law firm to protect you. You may certainly be able to do that for a short time, but when new rules are crafted by governments they will most certainly be retroactive and needing you to course correct hard and fast. Not only would you be paying big dollars for your law firm for keeping your company afloat, but also end up paying moolah when the new regulations are reconciled slowly in your product. Most companies despite their best efforts to immune themselves from law often find themselves mired in neck-deep legal troubles ranging from IP theft, resource abuse, employee harassment, lawsuits anyway. Although it seems like common sense, it does good to remember that the more you operate in the grey-zone the bigger your legal price might be and that no legal advocacy will cost you more than hiring lawyers.

The Vision — What about why?
You probably understand why convincing someone to join a startup might be hard, at least for the first time. Hiring for startups is challenging. Startups operate in a chaotic culture offering their employees non-existent work-life balance and meager salaries while asking them to trust in an unproven leader. This hardly seems like a good deal for a prospective employee. For those uninitiated in hiring, a couple of elements help you be more persuasive. Optimism towards the market, passion for the value the company adds, vivid description of the Utopia the company wants to create and emphasizing on the impact that a single employee will have on the world are what seems to matter the most. As outlined in my previous post most humans look to derive meaning from their existence and work life tends to be a big part of it. Vision is the utopia, the larger than life backdrop that provides meaning to why employees need to do the work they are doing. This is why Facebook says that it wants to make the world a better place by connecting people all over the world, comfortably skipping the reality because of it of contradictions to the company’s vision. Airbnb claims every employee’s work takes the company closer to the vision of Belong Anywhere (try telling that to Israelis about living in Palestine).

A company’s vision almost always likely is a utopia and paints the world in excessively rosy goodness achievable only through the extensive use of its product. Theranos started off as a big if but with an even bigger then. If only you could manage to create a device that could run all the blood tests from a drop of blood, you could reach a world where blood test costs could be brought down. If the blood tests became inexpensive, you could perform all the tests all the time resulting in early detection, prevention of diseases. This, in turn, would save people money, prolong their lives and live more healthy. This vision was further bolstered by anecdotes from peoples lives emphasizing why Theranos’ device was the only thing stopping preventable deaths of loved ones.

Theranos’ vision was a compelling and deeply personal message that a lot of people could relate to.

Employers wanted to chip in and save the world. This job, they thought, would be the most impactful and relevant time of their lives. Of course, reality couldn’t have been farther away from the vision at Theranos but that shouldn’t mean you cannot appreciate the dream.

Startups are a risky lot. Some fizzle out, many are invalidated, few implode, more are thwarted out, others squashed and the rest, the extreme minority, make it big. Despite its failure, thinking less of Theranos’ vision or intention would be foolish. There is still goodness and nobility in what Theranos set out to achieve. Failure comes as a possibility of anything you do and at Theranos it was primarily due a non-functional, essentially debarment for a medical device. Instead, what stood out to me as foolish in the whole episode is how Elizabeth Holmes refused to embrace failure and instead spun a web of lies to continue living in the false dream despite repeated warnings from well-wishers.
Who said making a difference in the world was easy!

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