Theranos Was Every Startup Cliché in One Company

I read Bad Blood.

Bad Blood: Secrets and Lies in a Silicon Valley Startup

It’s the book by the Wall Street Journal reporter who exposed Theranos, once one of the world’s largest unicorns, as a company built on lies and fabrication. Looking back at the timeline, I had just moved from the US to Japan and was working on launching a startup business when the actual exposure and downfall happened, so honestly, at the time I only skimmed a web article about Theranos and thought “no way.” But I had watched closely how Elizabeth Holmes was celebrated in Silicon Valley, so the shock hit me all the harder. (Though at the time I was busy with my own stuff, so I’d completely forgotten about it lol)

This book meticulously documents the confessions of former employees and people involved, and the author’s struggle to obtain them and get the story published. Extremely shocking episodes line up one after another, but if you stop calmly for a moment, you find yourself thinking: “Isn’t something similar to Theranos, to varying degrees, happening at most startups?”

It’s just that most companies haven’t raised as much money as Theranos, haven’t gotten as much media attention as Theranos, don’t have as many big names involved as Theranos, and aren’t as mired in lawsuits as Theranos. As a result, they’re simply less exciting as a story. That’s all there is to it.

Let me write down a few of my thoughts.

“Bluffing”

For early-stage startups, raising money with a bit of bluffing has become such common practice that it’s almost conventional wisdom, even if it’s a bad habit. No, I can’t call it entirely evil. That’s because there are “few but certainly some” people who actually turn the bluff into reality and make it add up. And it’s undeniable that investors, knowing this, are playing a kind of game of chicken. But that’s a game with its own aesthetic, played strictly between “professional entrepreneurs” and “professional investors.” When amateurs play the same game with each other, it’s nothing but fraud.

“Shareholders whose relationship to the company is unclear”

Look at any company’s shareholder list and you’ll usually find one or two shareholders whose relationship to the company isn’t quite clear. That in itself is fine. It’s perfectly natural to feel “I don’t really understand the business, but I want to support it with some funding!” But if that one or two people happen to be a big name everyone knows, the story changes dramatically. “Once one big name bites, it becomes easier to raise money after that.” That’s the reason. In Theranos’s case, extremely prominent figures were listed among the shareholders from an early stage. Even if all they did was “support a young entrepreneur with a bit of spare investment capital,” people who see that shareholder list end up assuming, on their own, “if this is a business that Mr./Ms. So-and-so is willing to back, then what she [Elizabeth] is saying must be true.” In practice, I don’t think even professional venture capitalists are often able to conduct thorough due diligence entirely on their own. This is even truer for tech ventures. They build their DD around some clue — someone’s advice, past data, something. In such cases, the “names” on an existing shareholder list, or of the lead investor running a given round, can become a source of misleading impressions.

“The executive doesn’t listen to their capable subordinates, but listens to some famous rich person instead”

Subordinates may be specialists in their field, but they aren’t the executive. Scientists and engineers with little business experience in particular can’t deny being naive about politics and money. A famous rich person, on the other hand, usually became rich for a reason. They’re well-versed in both business and politics, and sharp about profit. An executive can’t help but sometimes think, “(they don’t get the big picture),” about their subordinates. And in that moment, it’s unfortunately possible for them to be swayed instead by the opinion of a third party who sees nothing but the big picture. But the subordinate doesn’t know that third party, doesn’t respect them, and certainly doesn’t rely on them. Once you sense that the person at the top of your own organization isn’t looking at you, but is instead taking orders from something out there somewhere, your feelings will naturally drift away.

“The fragmentation of information”

Theranos did take on an unprecedented, groundbreaking challenge, but given how much money and how much talented staff they gathered, many people probably thought, “shouldn’t they have gotten a little closer to succeeding?” (In reality their testing device didn’t work at all.) With over $1.4 billion in funding, over 600 employees, and nearly ten years of time, it almost seems like any great invention should have been possible. But reading the book, I felt one of the reasons they couldn’t pull it off was the thoroughgoing fragmentation of information. It’s common practice to keep highly confidential technology or features known to only a small group of people. Apparently at Apple too it was common knowledge that “ask Steve Jobs or Jony Ive about the product spec, because the rest of us aren’t told anyway.” But build a structure where no department can coordinate laterally with any other, and there’s no way development can function. Probably each member was thinking something like, “I’m getting a decent paycheck for now, so I’ll just handle what’s in front of me.” As a result, probably everyone had the attitude of “whatever,” “don’t care,” or “well, I don’t really understand the big picture anyway” even about the fact that they were building a system that was completely useless.

Americans and division of labor

I’ve noticed that Americans like dividing up labor. I think it’s because clarifying your own area of responsibility makes things like accountability, performance reviews, required skills, and task status (i.e., securing your private life) clear. But this always carries the risk that the team stops functioning organically as a team — Andy Grove, for instance, pointed this out strongly during the period when Japanese semiconductors were threatening the US (and yet it persists, because it’s culture).

“The top doesn’t understand the current state of things, or doesn’t try to”

Some organizations keep running even if lateral connections within the organization are severed. That’s a centralized organization. It works if the person at the top is excellent. Though it’s tough. But if, say, it’s a tech company where the top isn’t an engineer, the presence of a close aide (often the CTO) becomes important. If that aide is competent and has a solid trust relationship with the top, this problem can be sufficiently compensated for. But if it turns out that “the top doesn’t understand the current state,” “the aide doesn’t understand either,” and “neither the top nor the aide is competent,” then there’s nothing to be done anymore. It’s hopeless.

“A promise made somewhere”

Not a few people have probably experienced being rushed on a schedule that wasn’t in any milestone plan. At companies where the executive also handles sales, there’s a pattern of “making promises somewhere without telling anyone.” It’s the result of desperately trying to seize a business opportunity, so you can’t really treat it too harshly. Properly, that information should be shared with the team. Then the team would grudgingly come to accept it. But if it isn’t shared, trust is damaged. Employees are not slaves.

“Executives chosen by connections”

Trust is important when selecting executives. That’s true at any company. But trust should be used in a way that “doesn’t fear clashing opinions.” At Theranos, the COO was the boyfriend, and the executives were Elizabeth’s brother — who had no real practical experience — and his friends. There was no selection process aimed at productively building anything up. And the board of directors, which properly should have functioned as an “older brother” or “father” figure, was also filled for a long time with members who had personal relationships with Elizabeth, with Elizabeth holding over 90% of the voting rights. This is an extremely tragic situation.

“People with nothing but academic credentials and thin practical experience get put in important positions”

A degree is a pretty useful trump card. In fact, in the pitch decks unveiled by Silicon Valley startups, the names of people from prestigious universities line up in a way that’s surprisingly common. But everyone knows that isn’t really what matters. Given that everyone knows it, the fact that this tendency never dies out is perhaps a kind of tacit deference. Academic credentials are useful, but they’re nothing more than a bluff. There’s a well-known “hack” for Japanese academic credentials, for example: if you want the prestige of a University of Tokyo degree, you can get in through graduate school. Your undergraduate grades, your papers, and an interview are enough to be properly evaluated. That’s a far better bet than a one-shot entrance exam.

“High pay for a figurehead consultant”

It’s rare, but not unheard of, for people outside the executive team to see the company’s accounting records. There’s a certain individual’s name in the payment history. Googling it reveals that they’re a very big name or well-connected figure. And yet you’ve never heard the name inside the company, and you don’t know what their role is. When you probe gently, you get answers like “we’re getting advice on such-and-such” or “huh? wasn’t that just recently… (but we’ve apparently been paying them for a year).” In short, it’s a figurehead, and if it turns out that the money flowing there is at a level that could have hired several engineers, it’s guaranteed to be deflating.

“The employee who suddenly disappears”

At companies with strict security, it does happen that someone who resigns delivers the news in a meeting room, or is told they’re being fired, and then leaves the company without ever returning to their desk. Generally this is to prevent the risk of removing confidential information or leaking data after they’ve gone back to their regular desk. But beyond that general explanation, I think in practice there are quite a few cases where the real reason is something like “to keep them from badmouthing the company to people around them” or “because it’s a forced dismissal, to prevent any kind of retaliation” — in other words, it’s a means of preventing the negative fallout from what isn’t an amicable departure. When someone who’s resigning disappears abruptly, without even saying goodbye to the people around them, despite there being no security risk involved at all, it’s almost always this pattern. It’s a sign of a bad company.

“Want to buy back the stock of the company you’re leaving?”

This is an extremely serious matter, but as a general rule, when a company moves to expel an executive who held stock, the company will fight tooth and nail to get that stock back. In other words, this too is a case of a non-amicable departure, so from the executive’s standpoint, having a shareholder out there who might hold a personal grudge makes for restless nights, even if it’s only a minority stake. But from the perspective of the person who was expelled, it’s only natural to feel, “why should I have to comply with your demands on top of being forcibly thrown out?” Still, there’s no shortage of cases where the company aggressively pursues recovery, brandishing the contract or resorting to some legal action. At Theranos, a veteran named Avie — who had served as a close aide to Jobs at both NeXT and Apple — suffered this fate, and when he consulted a lawyer, he was told something to the effect of, “do you think this company has promise? Is this stock worth holding onto through the trouble?” Many people would probably think, of course, that there’s no attachment left. And in fact, that’s what Avie did too.

“Say something reasonable and you get pushed out”

The section about Ian is genuinely heavy to read. It’s the story of an experienced veteran scientist who raised objections about the performance of Theranos’s testing device, was branded “uncooperative,” pushed out to the sidelines, became depressed, and then… Excellent scientists and engineers are good at saying “reasonable things.” That’s a pattern so consistent across countries it’s almost a mystery of life itself. At many early-stage startups, the gap between the “grand vision” and the “feeble reality” is far too wide. Everyone knows this. And yet they keep pushing forward with fervor regardless. You mustn’t look back, and you mustn’t waver. Just keep moving forward, no matter what. In that kind of situation, criticism that pulls out “reasonable things” is naturally unwelcome. A clear-headed executive should be able to make an appropriate judgment call, something like: “thank them for the feedback, and press on anyway,” or “think of a workaround, and don’t stop moving forward,” or “we can’t cross this particular line, so we’ll stop here.” But an executive or company in dire straits ignores it, tramples it, or pushes it aside and moves forward as if nothing happened. Of course, what excellent scientists and engineers say isn’t infallible either. There are startups where their predictions were wrong and the company still achieved great success. But in most cases, the result is nothing more than “falling into the same pitfall someone has fallen into before, without learning a thing.”

“Winning one ill-fitting award after another”

As I’ve written in another note, it often takes several years before the true badness of a company in bad shape actually becomes public. Theranos was no exception, and if anything, that’s the case for most such companies. So even if a company is harboring some huge, fatal flaw, it can keep being “today’s hottest startup” for a while, right up until its remaining lifespan runs out. Of course, winning an award is an honor. You should sincerely accept the expectations of the people who chose you, and it’s surely something the stakeholders are happy about too. But continuing to receive honors disproportionate to reality creates a different kind of harm. Namely: “the recipient loses sight of their actual position.” This alone is an extremely serious, potentially fatal disease.

Originally published in Japanese at https://clazytech.com/2021/03/399/. Translated with LLM assistance and reviewed before publication.