This book reports on the startup of the Silicon Valley firm Theranos in 2008, a company offering blood tests through a simple, small sampling of blood from the individual’s fingertip, rather than from the slower, much more expensive conventional method of drawing larger blood samples from the arm, to then sending them to a conventional laboratory. The four main types of blood tests might thus be performed cheaper and faster, offering potential benefits for patients, medical doctors as well as to pharmaceutical firms undertaking clinical trials of new drugs alike. The company was founded by Elisabeth Holmes, a Stanford University undergraduate biochemistry drop-out, who was reported, in October 2014, to have a net worth of USD 4.5 billion and the world’s youngest self-made female billionaire. But Theranos did not work as expected, producing often erratic, unreliable “answers”. A patient’s health might indeed be put at risk, due to such inaccurate diagnoses. So, the estimate of Holmes’ net worth was revised to zero in 2016, and the company was ultimately dissolved in 2018.
Carreyrou, this book’s author, is a Pulitzer Prize-winning investigative journalist at The Wall Street Journal(WSJ). The work, highly acclaimed, did indeed become the winner of The Financial Times/McKinsey Business Book of the Year Award for 2018. The author has painstakingly pieced together this remarkable story of how Elisabeth Holmes, a 19-year-old college drop-out was able to successfully launch Theranos, to become by age 29, Silicon Valley’s first female billionaire entrepreneur. The book provides, however, a clear warning about what could happen to a person who tries too hard, say to replicate the accomplishments of a Steve Jobs or Bill Gates. Elaborate corporate fraud seems to have been at the center of it all, a company actually willing to gamble with people’s lives! But this tale of Theranos is not just full of corporate fraud, not just a bio-tech company with a seemingly relatively plausible, although far-stretching business model. Greed, pride, vanity, lust and anger are central parts of what is reported through the author’s investigative journalism. It is all a story of breathtaking rise and shocking collapse.
This reviewer is struck by the feeling that to assess the potential viability of these types of firms might typically be very hard, at least for non-specialists such as myself. Most of us do indeed lack the specific bio-technical and medical insights to assess the plausibility of a business strategy such as that of Theranos. Having invested in a bio-tech startup myself some years ago, and yet not seen much tangible results, I am asking myself whether indeed there may be fraudulent behaviors at work here too. This book has, however, provided me with several insights regarding how to probe into the reality of this type of startup. The following five points seem particularly key to me:
· The founder, Elisabeth Holmes in the case of Theranos, should have a multitude of deliberate strengths, i.e., be more than a one-dimensional specialist with convincing abilities in a number of areas. Ms. Holmes, for instance, seems to have an exceptional drive, being self-assured to a high degree, and having an exceptional ability to convince potential investors. Her strong mind and apparent beauty also clearly played parts in her effectiveness.
· Super-marketing seems to be central, in the sense that the Theranos team consistently claimed that the firm’s testing equipment was able to deliver fast, reliable tests, underscored by reliable data from such tests themselves, when this was clearly not the case. This was indeed extreme overselling, even actually bluffing! But a common dilemma when it comes to marketing in high tech firms is indeed that there is a need to do some overselling, to capitalize now on performance features likely to be realized in the future. But how much of such “stretch marketing” might be acceptable? Where is the line, so as not to market outright lies and bluffs? Super-marketing is indeed part of many startups’ success stories, but where is the limit?
· Are there clear streams of revenue coming in? Can specific customers be identified? In the case of Theranos this was certainly the case. The large drugstore chain Walgreen’s had entered into an agreement with the company to set up “test stations” in their various stores. Incidentally, Theranos had told Walgreen’s that it had a commercially ready laboratory with capability to undertake 192 different blood tests, all from its proprietary testing devices. And revenues were coming in. But Theranos was nevertheless far from break-even. Ms. Holmes further claimed that there were contracts with several pharmaceutical companies to add support to clinical testing in such firms. A trip to Novartis in Basel seems to have led to no new contract however, apparently because of the lack of reliable data from the testing equipment being documented.
· Who have already signed up as credible supporters? At Theranos there seemed to be at least four central supporting groups:
o Dignitaries on the board. These included important ex-politicians such as George Schultz and Sam Nunn. Elisabeth Holmes seemed to have put a lot of energy into cultivating contacts such as these. Clearly their high status and reputation added a lot of clout to the firm.
o Strong scientific support. The pre-eminent supporter here was Professor Channing Robertson, Associate Dean of Stanford’s School of Engineering, and one of Stanford’s star faculty members.
o Endorsement from venture capital experts. Perhaps the most prominent one here might be Mr. Tim Draper, the head of DFA, known for lucrative early investments, including the e-mail service firm, Hotmail.
o Investors. The list of major investors in Theranos was very impressive, and included DeVas, Cox, the Waltons, Carlos Slim and Rupert Murdoch (who invested, and lost, USD 125 million). All told, investors in Theranos have lost nearly USD 1 billion.
o Poor advisors. Ms. Ramesh “Sunny” Balwani, a Pakistan-born entrepreneur whom Elisabeth Holmes had met in Beijing, was Theranos’ number two executive and Elisabeth Holmes’ boyfriend, although around 20 years older than her. Sunny seemed to have had a generallybad influence, both on Holmes as well as on the firm which he co-led: lack of moral fiber, overly aggressive with employees (bordering on paranoiac when it came to company secrets), and so on.
Mr. Carreyrou had put together an article, published on the front page of The Wall Street Journal on 15thOctober 2015. Its title was “A Prized Startup’s Struggles”. This signaled the beginning of the end for Theranos. It is remarkable to read aloud the extent to which the company tried to block the publication of the article. Former employees were threatened with litigations and potential lawsuits, including the grandson of board members George Schultz, Mr. Tyler Schultz, who worked for Theranos for eight months in late 2013 and early 2014. There were endless meetings between the firm’s lawyers and the editorial leadership of WSJ. A key argument was that the lawyers were questioning the journalistic objectivity of Mr. Carreyrou. Ms. Holmes even seemed to try to include Rupert Murdoch, the owner of WSJ and a major investor in the firm to interfere, which, to his credit, he declined to do.
Rather than specifically reviewing each of the 24 chapters of the book, I shall conclude my book review with a general observation that I have come about to recognize not only as a reader of this great book, but also in my capacity as investor in various startups through my own portfolio investment firm. This insight has two aspects:
· The honesty and integrity of the leader at the top must be impeccable. As you perhaps saw in this book, to assess the above may perhaps often be quite difficult. Not only are many such leaders very good at camouflaging this side of what they stand for, they may be “smooth salespersons”! And the degree of dishonesty may grow over time, as many such leaders become “trapped” or addicted to the success of their own falsehoods.
· It is often difficult for non-specialists to assess the true merit of the business strategies of many startups. I do, in fact, often find myself in such an uncomfortable situation. It does help, of course, to reach out to specialists and to make some inquiries, such as Rupert Murdoch did before investing in Theranos (he listened to Yuri Milnar, the Russian technology investor, and called Toby Cosgrove, the CEO of Cleveland Clinic). But there is often little time!
For this reviewer it has been revealing to read this book. There are clearly some “inappropriate business practices” going on in many aspects, and perhaps particularly when it comes to making investments in startups. As an investor myself I felt that careful reading of this book gave me several new insights for how to review such startup investments. These are inherently risky, of course, but some aspects of the risk may perhaps be avoided. So, please read this book, especially if you are active in technology-based startup investments!
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