Scaling Theranos with Elizabeth Holmes — Class 14 Notes of Stanford University’s CS183C

Here is an essay version of my class notes from Class 14 of Stanford University’s CS183C — Technology-enabled Blitzscaling — taught by Reid Hoffman, John Lilly, Chris Yeh, and Allen Blue. Errors and omissions are my own. Credit for good stuff is Reid, John, Chris Yeh, and Allen’s entirely.

This class was an interview by Chris Yeh of Elizabeth Holmes — the founder and CEO of Theranos — on lessons learned from scaling Theranos.

I had to leave for the last 15m of the class, so a big thank you to Ryan McKinney and Allen Blue for helping me to record and take notes for the last part of the class*

Video of the class, notes are below:

Chris Yeh: Theranos is a different type of company than other internet companies that have come before — what does Theranos do?

Elizabeth Holmes: Theranos makes early prevention a reality by providing access to actionable health information.

For a long time we debated what “access” meant. We are trying to provide health information — which has typically been inaccessible — to individuals of all economic classes of life.

For a long time (10 years), we have been figuring out how to build the backend technology — which power lab tests available for low cost and high quality. By providing this to retail chains (Walgreens) we help make these tests accessible to people of all kinds. We also work on making the full testing experience wonderful and change how consumers interact with the information from these tests.

Chris Yeh: You had started off in Stanford University working on Theranos in a basement — what were you focused on in the early days?

Elizabeth Holmes: The current paradigm in healthcare is you determine the kind of care someone needs once they are sick. The problem with this is they are already sick and it could be too late. I have seen this in my own family and have lost people to preventable illnesses — I wanted to change this.

While I was doing research at Stanford, I was looking for a product and working on things that could change this. Instead of just waiting for a doctor — could you get a test every quarter and begin to look at your biomedical data similar to how you look at your credit card data? Consumers probably understand the latter much more than the former.

Question from the audience: Can you tell me more about going from Stanford to starting the company? What were you working on?

Elizabeth Holmes: I was studying chemical engineering at Stanford. The research I worked on specifically dealt with handling very small volumes of fluid and using sensor info to detect things from this fluid.

I had always been interested in tech and healthcare and after looking more into the way we do testing — I realized it didn’t make much sense. For my research I was working in Singapore during the SARS outbreak and the types of equipment we were using (protein microarrays) to understand if people were sick — these systems hadn’t been changed since the 1960’s.

I was thinking about different ways to redesign this system and I begun to be obsessed with this problem. I started thinking about this as a freshman and I filed my first initial patents as a sophomore. Stanford University makes it really easy to take a leave of absence, so after the end of my first quarter in Sophomore year I went on leave to work on this full time.

I made this decision because all of the training, studying, and learning was meant to work on what I want to work on — but since I had found it already, I just spent full time doing it instead.

Chris Yeh: The story goes you went to your parents and said “instead of the money you saved up for me to go to Stanford, let me take the amount and start a company with it” — how did you persuade your parents to do this?

Elizabeth Holmes: We all ask ourselves the question — what do we want to do with our life?

As I thought about this question for myself I couldn’t think of anything more meaningful than working on a product which helped people not say goodbye to people so soon because they didn’t have enough time to do something.

The purpose of going to Stanford was to get the skill-sets to work on this problem, but when I felt like I was doing this already, there wasn’t much of a discussion about it. My parents were very supportive with my decision.

Chris Yeh: Theranos started off doing something very differently than what it’s doing today — how did you settle on the current product strategy?

Elizabeth Holmes: The vision has always been the same. The initial patents I filed were on certain elements of the technology we use today, but just in a very different form.

I knew I wanted to do something very big in terms of how lab testing is done more broadly; however, this is a very complicated problem in a highly regulated space. It’s also a problem where you develop consumables (what you put in the chemistry to process a test) to measure one thing (i.e. glucose test), this does not mean the same method can be applied to any other test.

We knew going into it that this was a very long term mission, and we set out to have a very long time horizon. We started off by building a business where we could realize our mission while doing our products and services along the way. We started off as a subset of the full vision, which was a lab with certain tests we could provide.

As we started to generate revenue, we have kept expanding our technology until we were ready to offer a full-service lab to people.
Chris Yeh: In this Blitzscaling class, we talked a lot about going along on a smaller scale until you have product market fit — then start to scale. Where does Theranos stand in sense of scale?

Elizabeth Holmes: Right now we are about 1,000 people. We started the company serving pharmaceutical companies as the lab for their new drugs — in the context of being better and faster, measuring if a drug is working for a clinical trial.

We have since spent the last 1.5 years building out a model to work with consumers and physicians — starting off first in Arizona. Now we are at the point of being able to replicate that in California and Pennsylvania.

Chris Yeh: Arizona is interesting in the fact that you helped them rewrite their laws — can you talk about the regulatory strategy of Theranos?

Elizabeth Holmes: Well we are in a very regulated space, so this means you have to build a very different type of company because the stakes are so high and the decision making is so long term (compared to normal tech companies).

Even the FDA approvals we worked on took a couple years each per approval. So for us, government interactions come in many forms — in the efficacy and safety of testing, and also in the bill — we helped play a role in drafting it, which is how you enfranchise the individual to play a role in their own healthcare.

Our belief is, the only way to change the healthcare system is to empower people to play a role in the healthcare system except people are told they are not smart enough to handle their own health information.

I can go out and buy a weapon but I am not allowed to go out and order a lab test because that is considered to be too dangerous. I couldn’t disagree more strongly with this.

What we did in Arizona is write the first bill in the country to allow people to spend their own money for lab tests and be able to engage with their own healthcare information. This really changes a lot of things because the minute a person has visibility into price, the market begins to function and people can demand lower cost and higher quality options. Today there is no visibility into pricing.

It isn’t a coincidence there aren’t many new companies in healthcare technology which have broken through because this is a space that does not want to change.

Chris Yeh: How did you break through, and how did you help write the bill? Did you have a policy group? Did you bring in experienced law makers? What was the people strategy behind this?

Elizabeth Holmes: Overtime we built up this expertise, but in the beginning with Arizona, I met with every single person in the house and senate committees which oversaw the passage of this bill.

It’s a very human thing because if this law takes effect — the question is, “what would we do with it?” What change is going to happen in our state and what does it mean? There aren’t any shortcuts here.

Chris Yeh: Now you have achieved significant scale 1,000 people — as we like to say in this class “city level of scale” — what kinds of processes and tools do you use now to operate at this level of scale?

Elizabeth Holmes: I think about this in terms of people. We are a very flat organization and if I have learned anything, we are only as good as the worst people on our team.

Everything we have done is only because we have had the right people on our team. The ability to recruit, empower people, and grow people from within, is fundamental to our company.

There is also a huge part in building a culture — in our case it’s building a culture of people who want to do the hard things and aren’t afraid of challenging the big entrenched players in the industry.

Question from the audience: I have a question about the early days of Theranos — how did you go from leaving Stanford to building a company? How did you surround yourself with the right people and build the right team?

Elizabeth Holmes: There is a great Martin Luther King quote “Take the first step in faith. You don’t have to see the whole staircase, just take the first step.”

All of these things start in baby steps, you don’t start by hiring 100 people and raising $50M. For me, the first part was “what are we building? “— what is the product, what is the system, what is the initial design, etc. The first part for us was very technical.

Next it was “could someone work with me?” I had the opportunity to hire the person I was working under during my PhD program at Stanford (laughter) and then there was two of us.

Next it was “could we get access to lab space?” then thinking about raising some money and talking to people we knew. The thing with healthcare companies are they are very capital intensive businesses so we needed people who understood that.

It’s one step in front of the other. It starts with a clear understanding of why you are doing the company in the first place — what is the mission. Is it a mission you will fight for when it gets really hard? When you are failing and bad stuff happens — you are getting tested — make sure you are doing something you love.

Chris Yeh: In speaking of people, your brother is working for you as well — how do you balance personal and professional relationships?

Elizabeth Holmes: My brother came in 2003 when it was two of us and helped build our first website. After that he went back to school (Duke) then went to go work in DC. Once he had the experience and developed his own skill-set we convinced him to move back to join us.

With people you are close to — family or friends — these people will have to work even harder to make it work — it must be about business first. These people will have to work 4x the standard as everyone else.

Question from the audience: How do you think about product market fit when you have a 10 year plan and you need a lot of capital— you don’t really have opportunity to test small things along the way?

Elizabeth Holmes: We knew the vision of what we wanted to be working on. We started off by working for pharmaceutical companies — through measuring one specific thing.

Our pitch was to be able to do this one specific thing, but less expensive, faster, and with less blood. Because we were able to get the data back faster to the pharmaceutical company, we could help them understand the safety of the drug much quicker and cheaper.

We moved from doing this one specific test to multiple tests within the framework of what we ultimately wanted to build.

Chris Yeh: There has been a lot of press attention for Theranos recently — more interested in how do you keep employees up to date now that you have 1,000 employees — how do you maintain communication?

Elizabeth Holmes: The most humbling experience of my life has been seeing the ways our employees have reacted to all of this news. They are so motivated to go and prove these guys wrong and our whole company culture has changed around this. It’s a really unifying experience to be building a product in a space which is so resistant to change — in which people are threatening you.

We have an open space, open floor plan, and we have 3 meals a day together. The process we have taken is we get together every Friday and we talk about it. We talk about employees suggestions, I answer questions, and keep the communication open.

We knew going into this space that people would threaten us if we were making an impact.

Question from the audience: You have talked about hiring for mission — are there any specific things you ask in order to pull that out or is it more of gut feel?

Elizabeth Holmes: No matter how good you are with management — you are going to make mistakes with hiring because you meet a new candidate for not much time, to become part of your family.

You have to make a judgement call. What I spent a lot of time on is understanding why new recruiters want to join Theranos and not another company. Why us? Why not another company? What are you making your decision on? etc.

If their root answer is not our mission — for us right now we are building something where we have a lot of big companies who want us to disappear as fast as possible — they aren’t going to be able to make it with us in this environment. It takes fighters.

Many people in our company have lost family members due to preventable diseases or have autistic kids/family who go through having their blood drawn everyday — they know what this means. You work differently when you are trying to solve this kind of problem.

Question from the audience: You are synonymous with Theranos in a very public way — which isn't normal. It could be a good thing but it could be personally tough on you — in hindsight are you happy with being as public as a figure as you are?

Elizabeth Holmes: We started Theranos in 2003. The first time we ever engaged with a press publication was in 2013 — we were in stealth mode for 10 years which was wonderful.

The reason why we became more public is our work is changing our healthcare system in which early detection is a reality. If you spend a lot of time in rural areas where people can't afford access to good healthcare — they don't know that they have right to their own health information and they don’t know how to use it.

Part of what we need to do to realize our mission is to educate people on the fact that you can engage with your own health information, it can be accessible, and you should demand it. Part of my role has been changing state laws and advocating on a federal level because it’s so central to our mission.

Now if people put you on a magazine cover or say terrible things about you — it doesn’t matter. What’s real is every single day, are there more people getting access to their health information through Theranos which they wouldn't have access to before?

Much of our national press has been around changing state laws, reducing Medicare reimbursement rates (threatening), and lobbying for FDA regulation (controversial). In Arizona (where Theranos is currently operating) what we focused on is how we did our tests, the ability to do tests on smaller samples, what technologies we use, why it’s important, etc.

We didn’t realize until 2 weeks ago that all of the information in Arizona would become national news — but it is now. The media for us is a vehicle to communicate to people what we are fighting for.

Chris Yeh: One of the tools of getting a company to this scale is using boards and Theranos has an unusual board. Can you talk about the strategy and how does your board help?

Elizabeth Holmes: I’ve been privileged to learn from and spend time with incredibly brilliant strategists. Policy is an incredibly important tool for our mission and our board understands changing in policies and strategies for going into spaces where competitors want to get rid of you.

We’ve benefited in many ways from our boards. Over the course of the company we’ve changed our board many times and will continue to evolve the board as we grow.

For us healthcare is an incredibly complicated space. As I have thought about it, I believe there is a reason it has not changed for 60 years. It’s not just about making a test, it's about how you change the system.

Question from the audience: When you went to Arizona, was there any resistance against you there?

Elizabeth Holmes: We passed the legislation we worked on in every committee, in the House, in the Senate, and the Governor signed it. It was bipartisan and unanimous (except for 1 person because of the sponsor).

There was one set of organizations who lobbied against it — the traditional lab companies.

Question from the audience: How did you deal with being so young (Elizabeth started Theranos at 19 years old) especially in the early stage?

Elizabeth Holmes: I didn’t focus on it or pay attention to it.

It’s similar to being a woman in engineering — you just don’t pay attention. What matters is action — what you build and create. Focus on that, keep your head down and ultimately over time everything washes away.

(The first 7 years of the company Elizabeth wasn’t allowed to rent a car)

Question from the audience: What is your thought process of not revealing specifics about the technology you are building — using trade secrets vs. patents? What’s the strategy behind this?

Elizabeth Holmes: We’ve been very aggressive about building our patent portfolio and we take it very seriously.

The question is who do we care about having confidence in our tests? Our answer has been the physicians and the people who we are serving (Arizona). Right in in the work of clinical lab testing, Theranos is in one city in the world, and we focused on this one community.

We knew at some point because we were doing things differently (lobbying for FDA regulations, trying to lower Medicare rate) that this might be disruptive. We are at a point now where in order to demonstrate the integrity of our technology — we are going to put it in the public domain.

We thought the only way to do this was to be the first and only lab to go into FDA and file all of our tests with the FDA — which no other lab has done before. We thought if the FDA came out with the decision summaries about our tests, this would make the point. However there isn’t a reason we can’t put this in the public domain too, so we will.

We’re at a point where we are so high visibility with so many people that this is the best response. Data speaks for itself.

Chris Yeh: Another tool to build a company are the investors you pick. For example Larry Ellison is a big investor in Theranos, how do you pick your investors?

Elizabeth Holmes: This is a huge question because investors can make or break a company. When you are looking to build something long term — you need investors who understand what it means to build a long term business. This is different than how some other companies have picked their investors.

Chris Yeh: You have talked a lot about the best people being promoted from within. When did you decide to grow people from within, and when did you go outside?

Elizabeth Holmes: When you are scaling this quickly the majority of the people who are in the company, are now new. Through promoting within you have a much easier time preserving and keeping the culture.

However by definition you can’t always grow people fast enough so when bringing in outside execs we make sure we get to know them well enough before bringing them in the family.

Chris Yeh: How do you personally allocate your time?

Elizabeth Holmes: Part of my role is to solve the toughest problem in the areas which are the most critical path.

Personally my passions are focusing as much as I can on the product and external/internal communication. However I work on the things which are most important at the time. For example when we were passing the bill in Arizona I was there 24/7 and that was my top priority.

Question from the audience: As much as you can talk about it, how is Theranos technology different? How do you dramatically lower the cost of testing?

Elizabeth Holmes: The biggest was redesigning the whole end to end spectrum of testing. We have changed the way the actual tests are run all the way from the devices, consumables, software, chemistry, hardware, how we process samples, using automation, etc which all combines to become lower cost.

Chris Yeh: You started your first business in China, and how has that impacted your view of the world?

Elizabeth Holmes: I grew up learning Mandarin. Studied at Beijing University. I loved being there, the intensity and the passion of the students there. A very stimulating environment, and the drive for excellence.

I moved a lot, so nothing's really normal. You don’t look at a specific community or way of living as a group you identify with. It’s been a great thing because you can identify with what you create and what your calling is. I went over there pretty much on my own, and that shaped you.

Who was the first person who believed in you, and what did you do to convince them?

Probably my parents. Ultimately it's yourself. You make a decision you are going to do something you really believe in, and you fight for it.

Question from the audience: With the aspect of breakthrough products, Theranos has been turning out products which are innovative. How have you driven consistently to innovative problem solving?

Elizabeth Holmes: We’re trying to solve different problems. People say we're in the lab business or the finger stick business — we aren’t in either of these businesses. We are in the “can we make early detection a reality” business.

Everything we do is building systems, building products, and creating access in which person by person people can engage with their health information in such a way where they are not asking themselves “what if I had known sooner?”.

That is a totally different way of approaching this problem.

Question from the audience: Why did you decide to launch Theranos in Silicon Valley? There are probably locations more prepared to work in biotech.

Elizabeth Holmes: I’m highly biased, people in Silicon Valley are amazing and want to make a difference. One of the things we love the most about our company is our diversity of people who have all come to Silicon Valley and work on tough meaningful problems.

Question from the audience: I think it was very smart to do the Walgreens thing. What about the home?

Elizabeth Holmes: I think it’s really interesting. All of our belief systems are about empowering the individual at the time and place that matters. The state laws are important because when you have a right to your own health information, you become interested in it.

Question from the audience: Back in the early days, before all the publicity, how did you reach out to regulators?

Elizabeth Holmes: We showed up, we thought hard about this problem, thought about the system, thought about who the right advisors are, etc.

Nobody’s ever said they would build labs, take hundreds of tests, and put them through the FDA process. People say I am going to take a single product through the FDA, no one has ever tried to take 100’s of products through the FDA process as a startup.

Question from the audience: Why blood testing? There are lots of ways to disrupt the healthcare system. Did you look at others?

Elizabeth Holmes: We have, but blood testing is really important because the blood testing data is really important.

The way you get access to it which is the traditional puncture method — sometimes in places which are in uncomfortable locations on the body — are a big barrier to this vital information. Additionally you don’t know how much you are agreeing to pay when you do a test.

40–60% of people who are assigned to get a blood test by their doctor, don’t get it. These tests are also typically only ordered if you are systematic of something already.

If you just want to test yourself because of a family history of a certain illness — insurance doesn’t cover ift— you can’t get preventative care. This is a way to get access to information before you get sick, so you can do something about it.

Question from the audience: One of the great ways to disrupt health care is through testing. What other avenues should be tried, disrupted?

Elizabeth Holmes: One of the coolest things is rethinking therapeutics. This whole concept in cancer, if you can design therapeutics to target your own immune system to go fight a cancer.

It’s totally different than the traditional method of chemo where you take a poison and hopefully the poison will take as much as the bad stuff as possible.

The idea of activating your own immune system is a total game changer. There’s a hope this will work over a large number of mutations of a cancer.

Question from the audience: How do you think about big pharma?

Elizabeth Holmes: They were our customers for quite some time as we built out our framework. They play a very important role, and as we think about new innovations, they play a huge role in helping make those disruptions real.

Question from the audience: What % of your time do you spend in meetings, and what do you do when you’re not?

Elizabeth Holmes: I’m in formally scheduled meetings for a pretty small time, but informal meetings is a lot of time — real time problem solving. Part of our culture is real-time communication. The rest of the time is focused on executing or solving problems.

Question from the audience: What was the business in China?

Elizabeth Holmes: This was in my C++ days, I was looking at the fact that universities in China didn’t have access to compilers the way US universities did, so I was distributing compilers to Universities in China.

Did it make a lot of money? — No (laughter)

Question from the audience: You’ve made mission and values very accessible (clearly stated.) How does this effect your employees and partners?

Elizabeth Holmes: I think being really clear on your mission is your ultimate statement on what you’re going to do and how to do it. One of the most powerful things I’ve learned is that your values become your decision-making framework.

Question from the audience: You’ve had a passion since the start — what advice do you have for someone who doesn’t feel it as strongly?

Elizabeth Holmes: You spend a lot of time thinking about what you really, really love doing. It’s the experiment you keep going back to over and over to solve it. For example artists who are obsessed with painting a specific kind of portrait — because they love it.

If you find that thing you would want to do if it wasn’t about money, what would you do. It will be very hard, so you need to be doing something you love so you can keep at it.

I asked myself the question — If I was fired, I couldn’t be CEO, or we failed — what would I do? My answer was I would be doing the same thing I am doing now because this is what I want to do it. I’m going to do it as many times as I need to make it work.

Question from the audience: How do you think about scaling globally, given the regulatory changes between countries?

Elizabeth Holmes: It’s completely different in each place so it comes down to people, and getting the people who really know how to operate in each area.

We’re going city to city now, and our success relies on how well those people can operate in each area.

Question from the audience: What would you tell your 19 year old self?

Elizabeth Holmes: Do it even more intensely.

What did you do that wasn’t intense enough? laughter…

I’ve learned as I went along. I wasn’t like this when I was at Stanford. I’ve trained myself to do what it would take. All those doubts that go into figuring out whether you’ll be successful at something —I believe that if you can imagine it, you can achieve it.