Bad Blood

Tech has some nasty habits and they surface in all deals, big and small

In terms of a captivating and thus a super fast and engaging read, John Carreyrou’s ‘Bad Blood’ ranks high. And as someone active in tech and investing, this book for me was pure gold, so much is recognizable and some of it is quite instructive at the same time. In short, the Wall Street Journal’s Carreyrou started researching the billion-dollar biotech start-up Theranos a number of years ago following some tips. He caught on to what turned out to be a fraudulent disaster that famously collapsed last year. The revolutionary and unique blood testing technology propelled its founder young and enigmatic Elizabeth Holmes to instant stardom, and now she is in the dock facing a possible sentence of twenty years. Theranos was able to raise hundreds of millions of investor money, appointed some illustrious political heavyweights on its board (George Schultz, James Mattis, Henry Kissinger) while giving its commercial partners (CVS and Walgreens most notably) the runaround. A few things in the book really stand out and deserve some further attention.

Disconnect between R&D and Commercialization – the core problem Theranos ran into was in the end believing that its product was ready for the market. In order to progress and keep raising dollars for its ambitious vision, it had to show commercial traction. The product was nowhere near where it should have been for that and Holmes and her boyfriend/COO Balwani pushed so hard on their team while leading their partners in all directions but the right one, that in the end the product was not delivering at all. Although I have never seen this phenomenon to this extent, I do regularly see how founders push their teams to deliver too early, too crappy a product and then endangering the whole venture by losing client and then investor confidence. This relentless push is of course Steve Jobs in action, idolized by Holmes who even started dressing like him, with one major difference: biotech is not software, or hardware.  Holmes went too far and failed hard.

The Female Founder & the Older Guys - I have seen this dynamic in the Vancouver market too where young female CEOs very often get a lot more attention than male founders and not always for the right reasons. Seasoned male investors fall in love with the company and its tech, but if you listen to them carefully that passion often mutates into something that is more focused on the young woman who is pushing the tech than the business deal. In doing so they suspend judgement and make an investment for all the wrong reasons. What is even more galling in this case is that they were really seasoned guys – Tim Draper, Rupert Murdoch – who ended up jumping into Theranos and Holmes’ fantasy without much of due diligence. Even worse, veteran politicians and military men who had joined the board of Theranos started questioning their own advisors and opted to follow with whatever Holmes and her gang of aggressive lawyers served up as unquestionable progress at Theranos. Nowhere is this sadder than when former Secretary of State George Schultz – who sat on the Theranos board – disses his own grandson Tyler who as young employee quickly figured out those things were not adding up at the company. His parents ended up $400k out of pocket in legal fees in what essentially could have been resolved amicably at the family dinner table. Was Schultz this captivated by Holmes? It is hard to believe, but it is the inescapable conclusion if you read the book.

Hype driving Financing – It is a bit of a pity that Carreyrou does not dive deeper into the financing cycles that enabled Theranos to keep tapping – at increasing valuations – into investor’s pocket books. Due diligence and proper governance were all thrown over board, the ‘fear-of-missing-out’ combined with Holmes’ ever rising star kept the machine going, unquestioned. And anyone who did raise some concern could count on super lawyer David Boies (he of the Florida recount fame) to unleash his dogs: from letters to lawsuits to surveillance.
The latter point takes me to my own personal approach to early stage tech and investing. Investors should always focus on, together with figuring out where the tech stands, the team. Theranos was a revolving door from early on (notably Apple employees being hired and fired long before the many scandals broke), many observers noted the bizarre security measures, not to mention the dysfunctional communications and absurd HR practices. That should have been the red flag early on, long before a few brave whistleblowers risked their reputations and financial health to uncover what Theranos really was.

Read the book. Really, read the whole thing.