I Just Finished “Bad Blood”

European Straits #131

Dear all,

We’re nearing the summer break, which always comes as a paradox. On one hand, many things are winding down, starting with fewer messages in my mailbox and fewer meetings. On the other hand, there are so many things to be completed within the next few days that I can’t really enjoy the unwinding 😧.

In this context, I’m experimenting with some rebalancing: less social media (I’ve uninstalled Twitter from my phone) and more books, including novels (I have my wife Laetitia to thank for that). Here’s what I’ve been reading lately.

Fleishman is in Trouble is a recently published masterpiece. The author, Taffy Brodesser-Akner, is best known for her long-form profiles of personalities, such as Gwyneth Paltrow and Bradley Cooper, once in GQ and now in the New York Times Magazine. This novel (her first) is a masterful depiction of the divorce of a high-flying New York couple, with so many different perspectives and unexpected twists that you end up with that all-too-rare feeling: reality rendered in all its nuances and complexity by fiction, which is kind of depressing and exhilarating at the same time. I discovered the book through Kara Swisher’s podcast featuring Brodesser-Akner, which you can listen to here: Taffy Brodesser-Akner’s first novel is about divorce in the age of Tinder.

I’m now reading The Code by Margaret O’Mara, which might be the first comprehensive history of Silicon Valley written by an actual historian. Before it was published, you could learn a lot about this topic, but only by browsing across sources as diverse as a biography of Robert Noyce, a book about how Fred Terman turned Stanford into an entrepreneurial powerhouse, Bill Janeway’s masterful Doing Capitalism in the Innovation Economy, or Steve Blank’s inspiring Secret History of Silicon Valley. But now it’s all there in Margaret’s book, put into perspective, highlighting the critical contribution of the state, and helping us understand where to go next. I can’t wait to read further, and if your interest has been piqued, you should have a look at Robyn Klingler-Vidra’s recent review.

Before those two, I finished Bad Blood by John Carreyrou, which I’d like to focus on today. Read along 👇

Lessons from the Theranos story

1/ I expect that most of you have heard about Bad Blood. But if not, it’s a book derived from a series of articles by Wall Street Journal investigative journalist John Carreyrou about the problems and demise of Elizabeth Holmes’s medical startup, Theranos. I’d seen on Twitter that many Silicon Valley personalities have read the book and boasted about liking it a lot. This is in part because the book is gripping: it reads like a thriller. But I suspect it’s also because many prominent players in the tech industry want to wash away the affront of having been mixed up with people who ended up being liars and fraudsters.

2/ As for me, the first time I heard about Theranos was in 2014. That was when Ken Auletta, the senior staff writer covering technology for the New Yorker wrote an article titled Blood, Simpler. I moved on without paying too much attention, sometimes using Theranos and its impressive valuation ($9B) as an example of how software was eating healthcare. So when the company was revealed as a fraud, I was taken aback. How could a magazine as renowned as the New Yorker fall for it? And how did Auletta still have a career after writing this misleading piece? (To be fair, Carreyrou discusses the Auletta article and points out that doubts and nuances could be found between the lines. In particular, Auletta was the first to echo those in the scientific community who were skeptical about Theranos’s technology.)

3/ Now what happened at Theranos? As you know, Elizabeth Holmes’s obsession was for most blood tests to soon be performed at home on a single device, all with a single drop of blood taken via a finger prick. Thanks to Theranos, we would soon be done with collecting gallons of blood using syringes in unwelcoming and inconvenient laboratories. In this world, Theranos would go on to transform healthcare like Apple once transformed computing. But then things did not go as planned. Theranos’s technology never worked. The company no longer exists. Its investors, who put in nearly $1 billion from 2003 to 2018, lost everything. Holmes and her right-hand man Ramesh “Sunny” Balwani have been sentenced to heavy fines and are forbidden from managing companies in the near future.

4/ One problem was that Theranos was trying to tackle two challenges at the same time. Rare, indeed, are the innovative companies that take several risks simultaneously. Some, as in biotech and , are ready to engage in years of R&D. Biotech startups know that if they develop a new drug treatment, it will be reimbursed by health insurance and access to the market will thus be easy. Other startups, on the other hand, are tackling a market that is difficult to penetrate, and as a result they carefully avoid engaging in too much R&D. Like with most software startups, which rely on open source libraries and cloud computing platforms, those prefer to use available and well-understood technologies to develop their product and interact as soon as possible with their first customers.

5/ Theranos did not fall into any of these categories, not opting for either the biotech/deep tech road or the software one. Instead, it foolishly decided to navigate both roads simultaneously. It was taking both a risk on the R&D front (developing a new technology of blood sampling and analysis) and a risk on the market front (trying to convince partners, doctors, and patients to use this new technology). Failure was almost guaranteed in advance. Even for the best entrepreneurs (and Elizabeth Holmes is not one of them), two risks is already one too many. Yet there was a reason Holmes took this path: she had a precedent in mind, that of the first Apple computers, which popularized personal computing.

6/ There were two big differences, however, between 2003 Theranos and 1976 Apple. The first is that the computers assembled in Steve Jobs’s legendary garage in Los Altos could be sold directly to individuals. This was not the case with Theranos devices. Their marketing was with doctors and pharmacies, not the patients themselves. The second difference is the choice of business partners. Steve Jobs had succeeded in launching Apple because at the time he had partnered with Steve Wozniak, a genius computer tinkerer able to assemble the revolutionary machines by himself in a garage—and those computers actually worked! Holmes, though, partnered with Sunny Balwani, a mediocre entrepreneur who made an easy fortune during the dotcom bubble and whose main skill seems to have been his perverse taste for bullying Theranos’s employees.

7/ And Balwani really is the worst character in the story. His constant bullying, according to Carreyrou, explains a significant part of Theranos’s problems on various fronts. And because Balwani was in fact Holmes’s life partner (a fact of which many were unaware, including members of the board!), no employee could really confront her when it came to Balwani’s orders and decisions. Imagine a meaner, poorer version of Silicon Valley’s Russ Hanneman being your manager (Balwani even drove a Lamborghini!), but you can’t complain to the CEO about the bullying and terrible decisions because she’s sleeping with him. As once put by veteran political consultant Ed Rollins, “Never get into a pissing match with the person or persons who sleep with [the boss].”

8/ Another core feature of Theranos was all the lawyering. Silicon Valley might be successful because non-compete clauses are illegal in California. But this success is curbed by the widespread use of NDAs and their adverse consequences: they make it difficult to speak up about sexual harassment (remember the Susan Fowler story); they complicate things for engineers willing to switch employers (as illustrated by the Waymo/Uber litigation); and they effectively made it easier for the Theranos management to conceal their own fraud. Indeed Theranos was no exception to the passion of tech companies for NDAs and litigation. Literally hundreds of millions of dollars were spent on hounding and frightening employees, all with the help of the best and most dreaded litigators in the country. And at several points, Carreyrou’s work almost unraveled because of Theranos’s lawyers and their threatening his sources.

9/ Many of the Bad Blood readers in Silicon Valley didn’t really recognize their universe in John Carreyrou's book. Despite her dazzling success in the mainstream media, Elizabeth Holmes never convinced any of the leading venture capital firms on Sand Hill Road. Theranos’s office was in Menlo Park, close to Stanford (of which Holmes had once dropped out), but interactions with the local ecosystem were apparently scarce. Theranos’s shareholders were mostly wealthy but ignorant individuals, seduced by this ambitious young woman and by the presence of famous board members like Henry Kissinger, George Schultz, and James Mattis. Those investors were ignoring a lesson from venture capitalist Fred Wilson: Beware startups that put “names” on their board.

10/ Tech entrepreneurs have been disparaged for their culture and their propensity to sell sweet dreams long before they are realized. In the case of Theranos, this practice was intolerable because it directly endangered patients’ lives. But the failure of Theranos also heralds future success. Progress will be made sooner or later in the field of medical testing. A new generation of entrepreneurs will then seize those new technologies to somehow achieve the dream of Elizabeth Holmes: blood tests done at home, without syringes or pain, mostly by the patients themselves. And so the bad memory of Theranos will eventually be erased by the achievements of its successors.

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Here are more readings about Theranos, R&D in startups, NDAs, governance, and bad management:

Warm regards (from London, UK),