Theranos. Emperors Without Clothes.

Emperors Without Clothes

I am intrigued by the Theranos story. But not in the way that most people are.

For those who do not know this story, Theranos was a Silicon Valley start-up company that was founded by a 19-year-old woman, Elizabeth Holmes, who dropped out of Stanford to change the world. In her vision, her company would offer inexpensive blood tests using blood collected from a finger stick. She convinced many that being able to test your blood regularly would revolutionize healthcare. She saw her vision as “disruptive” and revolutionary. To me, this is the first error of logic. Early detection is helpful, but it is hardly a panacea because it only works for existing tests and treatment. There are too many tests available to know which to choose. Also, there are many diseases that cannot be diagnosed with blood tests. (Medical scientists feared that this would lead to "over diagnosis, false-positive findings, or overly zealous diagnostic and screening efforts," John P.A. Ioannidis, Stanford Medical School.)

The next problem was that this vision was impossible with any technology. Holmes was very inexperienced, young and lacked basic knowledge about the myriad of engineering and sciences that would be required to realize her vision. Hundreds of tests from a single drop of blood drop performed with a portable tester violated laws of physics, medicine, pharmacology, microbiology, biomedicine, engineering and biology, seriously? Yet, she obtained $900M in funding over 12 years.

One of the reasons that she received this funding was her impressive Board. It consisted of such powerful men as Donald Lucas (an aging Venture Capitalist), George Schultz, Henry Kissinger, Bill Frist (Medical Doctor and former Senator), Marc Anderssen (founder of Netscape), David Boies (arguably the most powerful attorney in the country), General Mattis, Larry Ellison (founder of Oracle), and a powerful group of former cabinet members, generals, executives, venture capitalists, an admiral and senators. She fooled experienced writers such as Ken Auletta and Roger Parloff (who relied on the credentials of her impressive board of directors).

Recognized as brilliant and dedicated, she added to her enigmatic image by lowering her voice, using make-up to distort her facial features and copying Steve Job’s wardrobe. She created an almost a cult-like following by these powerful and very intelligent men, based solely on their “gut.” (Don Lucas, for example, relied on the fact that her relatives included a physician and an entrepreneur. “It is in her blood,” he replied as to her qualifications.)

The Theranos con would have been discovered earlier had Theranos not intimidated current and former employees into silence. Led by the over-aggressive Boies law firm, Theranos surveilled, threatened, harassed and abused employees to prevent them from exposing Theranos’s fraud.

Ultimately, Holmes’s house of cards was exposed by a Wall Street Journal investigation by John Carreyrou. (He also wrote a great book: Bad Blood.) He reported how Theranos faked the data, lied about revenues, brutually intimidated employees and risked people’s lives. Fortunately for the American people, the Federal government, another hero in the story, quickly stepped in (CMS & FDA) and shut down Theranos.

Here is my question.

How could such an experienced and brilliant board be fooled? There was not a single board member who had expertise in this area. It consisted solely of aging, powerful, wealthy, white males. (An early board member, a former Apple executive, was forced to resign for asking too many questions.) These powerful men followed her willingly and often; despite being warned that her claims strained credulity. No board member required that her technology be reviewed by an expert. (Apparently venture capital firms that specialized in biomedical companies refused to invest.)

In the beginning, Holmes met with a Stanford University professor (who was also an MD) who cautioned Holmes that her vision was not possible. When Holmes refused to accept that advice, she found another professor who fell for Holmes’s vision, quit his tenured position as Department Chair and followed her to her company.

Listening to Holmes’s double-speak, even I, who can certainly be fooled, could see that she was just talking in circles. Yet these men, who met with her quarterly and sometimes, monthly, never recognized it and some even refused to accept it after it was uncovered.

In George Schultz’s case, he was even willing to “sacrifice” his grandson. His grandson left Theranos disgusted by its fraud and deceit. The Theranos legal team, using surveillance, confidential sources and other proactive investigative techniques, discovered that he had spoken confidentially to a reporter (who had reached out to him). Schultz enabled Theranos to threaten his grandson and his grandson incurred almost $500,000 in legal fees defending himself from Theranos’s aggressive legal tactics.

I keep asking myself, why? Why would these men, who had successfully negotiated with other powerful men, who had adroitly managed their own careers follow her so slavishly? While she was attractive, she did not appear to use her sexuality. Instead I believe that they were blinded for several reasons.

FoMO (Fear of Missing Out). I think that as we age, we see a world that we are no longer leading. This fast-paced, multi-tasking world is so different from the world we commanded. I believe that many of these men just wanted to be relevant. They wanted it so bad, that they were willing to shed their natural skepticism.

Greed. Perhaps greed played a part as well. Who doesn’t want to be the investor who made millions of dollars by discovering the right startup at the right time?

Culpability. The governance of the board gave Holmes 99% of the voting shares. Now they claim that they saw themselves as advisory only; but did not consider how their names and their contacts (they brought Theranos the important publicity) would validate Theranos.

The Old Boys Network. Many boards have the same people on them. Since they trusted each other’s judgement, they felt that there was intelligence in numbers.

Lack of Diversity. This board consisted of older, successful, powerful men. Six were from the Hoover Institute, a policy “think-tank” housed at Stanford University. No members requested audited statements of revenues. (It was later discovered that Theranos grossly overstated its revenues.) No members requested a technical review. This group had too much faith in their own and each other’s judgement.

Arrogance. We believe that we are smart, talented, and successful because of our intelligence and talent. We don’t recognize how much luck is involved in our success. Underestimating the value of luck leads to arrogance. That arrogance allows us to be played. (Curiously, women do the opposite. They attribute success to luck and failure to their lack of talents. But there were no women on this board.)

Fortunately, in the long run, few people were hurt (with the exception of an employee who committed suicide because he was scheduled to testify about Holmes’s fraudulent authorship of patents). Most investors who lost their money could afford to lose it. Despite their incompetence, the board members have survived with their reputations intact.

So I doubt if there will be a lot of learnings from this. To me, the key learning is that diversity matters. Had this board contained experienced women (who had not been seduced by her charisma), scientists (who would ask the tough questions) and younger, “hungrier” people; I don’t believe that this would have happened.

But since we don’t seem to be able to learn from history, you can bet that this will happen again.