4 Lessons Every Startup Needs to Learn from the Downfall of Elizabeth Holmes and Theranos
Another Silicon Valley unicorn is on life support. Theranos’ CEO and founder Elizabeth Holmes and former President Ramesh “Sunny” Balwani were charged with massive fraud by the US Securities and Exchange Commission. As a result, Holmes — a media darling hailed as Silicon Valley’s latest wunderkind — will pay a $500,000 fine and is barred from serving as an officer or director of a publicly traded company for the next decade.
It’s a spectacular twist to the story of a company that raised more than $700 million with its promises of revolutionizing blood-tests by using just a few drops of blood to do the work of whole vials.
The only problem was, the product didn’t work as advertised.
There are a lot of lessons to draw from this story, but here are four I think are critical for leaders of fast-growing businesses.
1. Don’t over promise and under deliver.
Entrepreneurs are ambitious, enthusiastic and optimistic — often unrealistically so. It’s so easy to overpromise results that doing so is something of an occupational hazard for CEOs of fast-growing companies. But be forewarned: Once a promise is on the table, it creates serious pressure for the company to meet potentially unrealistic goals — and that’s the danger zone.
Before long, even well-meaning CEOs can find themselves cutting corners, making bad choices and standing behind claims that border on fiction. Holmes’ story underscores why it’s critical to keep a sharp eye on the line between aspirational thinking and the truth.
In his bestselling book Originals: How Non-Conformists Move the World, Adam Grant points out that entrepreneur Rufus Griscom of Babble.com took the exact opposite approach with his investors. He always started by revealing what could go wrong in his business. This strategy worked very well for him: He ultimately earned the trust of execs at Disney, which bought his company for $40 million.
2. Trust but verify.
It’s amazing how many smart people will jump on a bandwagon just because it’s full of other smart people. Theranos had no shortage of star power: Both Secretary of Defense James Mattis and former Secretary of State Henry Kissinger served on its board. But did they or any other powerhouses independently corroborate the company’s claims before joining up? One has to wonder.
In our fast-moving society, it’s critically important to do your own due diligence — whether you are a business leader or an investor.
The best entrepreneurs I know do as much digging on their financial partners as their investors do on them. It’s real work to read the fine print, ask the tough questions and form your own opinion — but it’s worth the effort. You absolutely cannot assume other smart people in the room did that homework for you.
3. Don’t raise too much money.
The fallout from the Theranos disaster is yet another warning sign that for startup companies to rein in their money-raising, especially in the early stages. Large investments also come with high expectations, and it’s human nature not to want to disappoint those who have put themselves and their assets on the line for us. The bigger the bucks, the higher the pressure. When a huge amount of money is riding on your success, anything less than a homerun becomes a failure, making it more likely to swing for the fences.
4. Say yes to no men and woman.
Our current President has made it clear that if you don’t support his every move, you are on thin ice in his administration — but that pattern of leadership is usually a recipe for disaster in the long term. In his bestselling book Principles, Bridgewater CEO and hedge fund legend Ray Dalio explains why it’s so important to surround yourself with people who challenge you and your assumptions. Having such a team creates checks and balances and eliminates the kind of group thinking that can lead to the kinds of missteps seen at Theranos.
For an example of how a diversity of views can bring out the best kind of leadership, take a look at Abraham Lincoln, who filled his cabinet with his political opponents (as chronicled in Team of Rivals by Doris Kearns Goodwin).
Unfortunately, it appears that Holmes started down a path of lying and covering up poor results without anyone on board to stand up and challenge her decisions. Misleading people became a slippery slope, and she eventually got in too deep. Her experience should be a lesson to leaders today who are sending signals they only want yes men and women on their teams.
Many of the stories about Holmes suggest that she never intended to deceive anyone. But, the road to hell is paved with good intentions. It’s easy for entrepreneurs to get caught up in their own vision and very tempting for them to want to “tweak” the facts to support their goals. A few white lies can quickly take a burgeoning business to criminal behavior — and that’s a path of no return.
Robert Glazer is the founder and CEO of Acceleration Partners and the author of the international bestselling book Performance Partnerships. Join 35,000 global leaders who follow his inspirational weekly Friday Forward or invite him to speak.
This article was originally published on Inc.com.
