In Bad Blood: Secrets and Lies in a Silicon Valley Startup (Amazon,) author John Carreyrou chronicles the fraud that was Theranos.
For those who don’t know about Theranos, it was a Silicon Valley unicorn that claimed to have invented a device that would run over 200 diagnostic tests on single drop of your blood. A pin-prick was all that took. Turned out that they had invented no such device. But that didn’t stop them from selling it to drug chains and supermarket stores and conducting over a million blood tests. The author was instrumental in blowing its cover at the Wall Street Journal. Theranos subsequently recalled the results of all of its tests and has recently decided to dissolve itself after top executives were indicted for defrauding investors.
Hardware is hard. Healthcare is harder still. It takes over 10 years and $2 billion to get a drug to market. There is a reason for that. The first goal is healthcare is to “do no harm.” Trying to mesh this with the Silicon Valley ethos of “build fast and break things” is a recipe for disaster. You cannot code away bottlenecks created by physics, biology and chemistry that easily. To make matters worse, the Theranos CEO seemed to have embraced two other adages – “fake it till you make it” and “better to ask for forgiveness than to wait for permission.” Works fine when you are trying to sell an app.
The Valley is full of stories about how many big software companies that we know today would never have existed if they had played it straight. There is this story about Oracle labeling the buggy first version of its database as “version 2” (because nobody would buy version 1.0) and sending a team of engineers to get it working on the client site (they sold it as a “product” because it would allow them to charge more, but in effect, it was really a service that required an on-site team.) Then there is Uber that brazenly broke taxi regulations everywhere and then hired lobbyists to change them in its favor. However, the stories that are celebrated are that of survivors. Those who couldn’t “make it” or couldn’t successfully get “forgiveness” ended up being shuttered and forgotten.
Key take-ways form the Theranos saga:
- The board of directors have a duty to keep the CEO on the straight and the narrow.
- Investors should at least talk to a few of a company’s customers before committing capital to it.
- High staff turnover is a red flag.
- Not having a full-time CFO in a large company is another red flag.
- Deals not turning into revenue and revenue not turning into cash in the bank is the reddest flag.
Recommendation: Read it now!