Sunday, December 16, 2018

Bad Blood: a very short review

How ought society feel about the Venture Capital approach to business innovation?

At this point, it's been a central part of American society for almost 60 years, getting its start late in the 1950's as various West Coast companies sought to commercialize the broad range of technological innovations that had emerged during and soon after World War II (most people cite the founding of Fairchild Semiconductor in 1959 as the start of Venture Capital as a technique for company formation).

So it's not entirely new, and you would think that at this point its approach to business decision-making is fairly well-known.

But perhaps not as well-known as you might think?

Recently, I had a trans-continental airplane round-trip over a 3-day weekend, and I brought along John Carreyrou's Bad Blood, about the rise and fall of Theranos.

The book is sub-titled: "Secrets and Lies in a Silicon Valley Startup", so clearly Carreyrou intended the book to be mostly about Theranos, but also about some broader topics as well.

Carreyrou is a reporter for the Wall Street Journal, and it's not entirely clear how much experience he has had with Silicon Valley Startups.

I was sitting at my messy desk in the Wall Street Journal's Midtown Manhattan newsroom casting about for a new story to sink my teeth into. I'd recently finished work on a year-long investigation of Medicare fraud and had no idea what to do next.

Carreyrou doesn't blow his own horn loudly enough here: he won the Pulitzer Prize in 2015 for his "Medicare Unmasked" articles for the WSJ.

Carryrou gets a tip from a health-care industry blogger and thinks it's right up his alley ("I'd reported about health-care issues for the better part of a decade"), so he decides to do a little digging.

What he finds shocks him! Among other things:

  • The company is full of young employees, just out of school, many with little or no experience in the areas in which they're working.
  • The company's offices are in a shabby warehouse in a bad part of town
  • There is very high turnover. Some people are quite successful and move rapidly up in responsibilities, while others are unable to fit in and soon leave or are fired.
  • People are working very long hours, nights and weekends, under tremendous pressure
  • The executives are tense and fearful. They require employees to sign onerous "non-disclosure" and "non-compete" employment contracts, deploy extensive security policies to try to contain knowledge of company secrets, and sternly lecture departing employees about their responsibilities when they leave
  • As a result, employees are often in the dark about the company's operations, and rumors and gossip spread widely.

Throughout Bad Blood, Carreyrou richly reports incidents like these, apparently feeling that, by themselves, they obviously and self-evidently indict Theranos and explain what went wrong.

But what Carreyrou apparently fails to know, is that all of the above, and more, is just Business As Usual in a Silicon Valley startup (believe me; I've been in-and-around them for three decades now).

This is what Silicon Valley startups are like.

It's a nasty, ugly, chaotic, disfunctional mess of a system.

And, putting aside the disagreeable behavior, it usually fails (it's well known that nearly all VC-funded startups go out of business before achieving success).

But, to riff on Churchill's famous line about Democracy ("it's the worst form of Government except for all those other forms that have been tried from time to time"), Venture Capital-funded startup formation is the worst form of business innovation except for all those other forms that have been tried from time to time.

The core aspect of a startup corporation like this is that it tries to do the impossible.

  • "Let's build a simple and powerful calculation tool for interactively analyzing data" (Lotus 1-2-3, 1984)
  • "Let's build a program that lets you sit at your PC and access computers all around the world" (Netscape, 1992)
  • "Let's build a program that lets you search all the world's computers" (Google, 1998)
  • "Let's build a system that lets people give other people short-distance car rides, and get paid for it" (Uber, 2009)
  • "Let's build a system so that people can pay $10/month to subscribe, and then they can watch as many movies in the theater as they want" (MoviePass, 2017)
All of these things were loudly and roundly deemed to be Hopeless Problems when people set out to do them. (And that last one, clearly, was hopeless!)

If the goal was straightforward, or easy to accomplish, the VC-funding approach wouldn't be necessary; you could get ordinary funding to try to build such an enterprise.

Theranos, however, had a big goal!

As Carreyrou recognizes early on, they really did want to change the world:

It didn't take Ed long to realize that Theranos was the toughest engineering challenge he'd ever tackled. His experience was in electronics, not medical devices. And the prototype he'd inherited didn't really work. It was more like a mock-up of what Elizabeth had in mind. He had to turn the mock-up into a functioning device.

The main difficulty stemmed from Elizabeth's insistence that they use very little blood. She'd inherited from her mother a phobia of needles; Noel Holmes fainted at the mere sight of a syringe. Elizabeth wanted the Theranos technology to work with just a drop of blood pricked from the tip of a finger. She was so fixated on the idea that she got upset when an employee bought red Hershey's Kisses and put the Theranos logo on them for a company display at a job fair. The Hershey's Kisses were meant to represent drops of blood, but Elizabeth felt they were much too big to convey the tiny volumes she had in mind.

Her obsession with miniaturization extended to the cartridge. She wanted it to fit in the palm of a hand, further complicating Ed's task. He and his team spent months reengineering it, but they never reached a point where they could reliably reproduce the same test results from the same blood samples.

The quantity of blood they were allowed to work with was so small that it had to be diluted with a saline solution to create more volume. That made what would otherwise have been relatively routine chemistry work a lot more challenging.

Adding another level of complexity, blood and saline weren't the only fluids that had to flow through the cartidge. The reactions that occurred when the blood reached the little wells required chemicals known as reagents. Those were stored in separate chambers.

All these fluids needed to flow through the cartidge in a meticulously choreographed sequence, so the cartridge contained little valves that opened and shut at precise intervals. Ed and his engineers tinkered with the design and the timing of the valves and the speed at which the various fluids were pumped through the cartridge.

Hey, this is hard!

This is really hard!!

This is such a hard problem, that there is no way that a brilliant young scientist is going to figure this out in their dorm room on their own.

The only way that something like this is going to come about, is if thousands of people work for years and years on it, and that will require millions and millions of dollars.

But is it a bad idea, on the face of it, to try to build such a piece of technology?

I'd say, no! It's actually rather a genius idea!

And Elizabeth Holmes sets about it in exactly the way that other VC-funded, Stanford-bred, Silicon Valley startups have: she talks to her professors, who hook her up with some deep-pocketed businessmen, and they found a company to see if they can do it.

And oh! what a company! In addition to those Stanford professors and VC investors, they recruit perhaps the finest Board of Directors that a young Silicon Valley startup has ever had:

In addition to [George] Shultz and [James] Mattis, it now included former secretary of state Henry Kissinger, former secretary of defense William Perry, former Senate Arms [sic] Services Committee chairman Sam Nunn, and former navy admiral Gary Roughead.


Not to mention the fact that this board had a special adviser named David Boies who attended all of its meetings.


and two new directors: Richard Kovacevich, the former CEO of the giant bank Wells Fargo, and former Senate majority leader Bill Frist.

I mean, my goodness! None of my companies ever had two Secretaries of State and two Secretaries of Defense on their Board of Directors!

I can't think of ANY startup that I've heard of who had a Board of Directors like that!

And the company's business plan was equally impressive: they signed contracts with both Safeway and Walgreens to put their blood-testing devices into retail locations nation-wide, they worked with the U.S. military to design a version of the device that would be field-deployable with military teams overseas, and hired the legendary advertising Chiat/Day to explain to the world how Theranos was about to change it.

And they got tremendous traction.

Safeway alone, to name just one organization, invested hundreds of millions of their own company's money, and even RE-FURBISHED EVERY SINGLE ONE OF THEIR GROCERY STORES TO HAVE A FANCY BLOOD-TESTING CENTER (although these have now mostly been removed or re-purposed, several of the Safeway stores in my neighborhood still have these fancy enclosures, sitting vacant in the middle of the grocery store).

And then, it all fell apart. (And it wasn't just Theranos that failed; you can make a pretty strong case that Safeway's collapse and takeover by Cerberus Capital in 2014 was due to the impact of the Theranos failure.)

So what, exactly, went wrong?

From my point of view, this is where Carreyrou fails us.

His primary thesis, as far as I can tell, is that Elizabeth Holmes lost her mental compass, or perhaps had no mental compass to begin with:

And with actions that ranged from blackmailing her chief financial officer to suing ex-employees, she had displayed a pattern of ruthlessness...

the Theranos board couldn't even reach a quorum without Holmes.


nothing could be decided or done without Holmes's assent.

it was Holmes who was the manipulator. One after another, she wrapped people around her finger and persuaded them to do her bidding.


in her all-consuming quest to be the second coming of Steve Jobs amid the gold rush of the "unicorn" boom, there came a point when she stopped listening to sound advice and began to cut corners. Her ambition was voracious and it brooked no interference.

I think Carreyrou fails to make this case. (It doesn't help that Holmes declined to be interviewed for the book and so Carreyrou's strongest sources are disgruntled ex-employees and a collection of industry observers and academic commentators.)

I think you can tell the story of Theranos much more simply:

  • Elizabeth Holmes, young and tremendously ambitious, had an idea, a world-changing idea.
  • She was blessed with charisma and enormous persuasive powers, and managed to convince powerful people to support her quest.
  • Once those powerful people were involved, and had money and reputation at stake, they in turn convinced other powerful people to join in the effort. (Carreyrou's description of how this affected David Boies is perhaps the strongest part of Bad Blood)
  • The immense pressures that arise in the Silicon Valley startup scene caused people to make promises they couldn't keep, to make unjustified claims, to "fake the demo" (faking the demo, of course, has been a Silicon Valley stain of shame for decades).
  • However, simultaneously, other people, who should have known better (e.g., the board of directors at Safeway, the investment committee at Walgreens, the journalists at Fortune who plastered her on their magazine cover, all those Secretaries of State and Secretaries of Defense and Senators and Professors and CEOs), WANTED TO BELIEVE SO BADLY that they convinced themselves Theranos was farther along than it was.
  • In the end, Theranos couldn't deliver on their promise, and the company was dissolved.

Hey, that last part? That's pretty much how every Silicon Valley startup story ends.

No news there.

It's that part just before it, the "we want to believe" part, that makes the story fascinating.

And I think that Carreyrou goes astray by trying to ascribe some malicious evil intent to Elizabeth Holmes.

People just want to believe in the impossible.

It would have been a good enough story as was, if Carreyrou had just left it there, and not tried to portray Holmes as this generation's Svengali.

Oh, well.

Give Bad Blood a try, if this is of any interest to you at all. It's a fast read, and quite fascinating.

Just understand that, yeah, it's ugly when the sausage is getting made.


  1. My take is somewhat different
    * I wasn't aware how long Theranos existed
    * Theranos may have been similar to other SV companies
    BUT is was working in a heavily regulated sector,
    even in the Mattis-driven battlefield project
    * the house of cards started collapsing as soon as
    the FDA got involved
    * more generally, the SEC charged Holmes & Balwani
    with lying to investors. While the punishments were
    lenient, other startups should be careful of being
    too optimistic in talking with investors
    * David Boies was extremely agressive when dealing with
    people Theranos thought might have been talking with
    the press. Unlike most company lawyers, Boies was
    given stock worth potentially $2B which was a strong
    incentive to protect the company. It remains to
    be seen whether this will be investigated
    * the board members appear to have joined in part
    because of Holmes' family connections.
    None of the board had any experience in the
    medical industry and it will be interesting to
    see if they come under investigation
    * people in other companies producing blood testing
    equipment would have have known
    * pinprick samples are fine for blood glucose
    since it's a small molecule, but would not
    accurately represent levels of large molecules
    flowing in veins & arteries
    * in any case, a small sample produces more
    variable readings as per "The Most Dangerous Equation"
    As experienced by Jean-Louis Gassée
    * a small venous draw was taken from most people
    but that blood was diluted for testing by existing
    blood analyzers, which resulted more variability

    One of the reasons fewer companies are appearing to the
    stock exchange is because there are staying private for
    longer because they are funded by VCs
    Whether on not that is good, it does mean startups
    escape public scrutiny.

  2. Thanks Danny! You make good points.

    Meanwhile, this article got WAY more hits than my lowly little blog generally registers. Somebody must have seen this somewhere...