Bad Blood: Secrets and Lies in a Silicon Valley Startup
By John Carreyrou

The crime:

In 2003, at the age of 19, Stanford drop-out Elizabeth Holmes started Theranos, a company that sought to revolutionize blood testing by creating a machine capable of doing a number of different blood tests using only a small amount (a fingerprick) of blood. Theranos attracted large amounts of investment capital and at its height had a valuation of $9 billion, making Holmes herself both a media star and “the youngest and wealthiest self-made female billionaire in the United States” (according to Forbes magazine). The blood-testing machines, however, never worked as advertised, and when the truth came out Theranos went bankrupt. Both Holmes and her second in command, Ramesh “Sunny” Balwani, were convicted of fraud, sentenced to prison, and subjected to massive fines.

The book:

I think it’s a testament to the power of financial crime stories that they’re all the same but are still interesting. Enron, Bernie Madoff, FTX. The particulars vary, but every scam is driven by greed. People kill for all sorts of reasons (including greed), but they swindle others and commit fraud for money. And the people who get suckered are lured on by their dreams of avarice. That’s all there is to it.

I keep coming back to the Bre-X story (which I doubt many people have any memory of now, even though it was the basis for a movie) because it was one of the oldest cons in the book – the salted gold mine – and it basically represents the archetype for most frauds. Enron and Madoff’s Ponzi scheme and Theranos were all salted gold mines. People saw the shine of easy money and were struck by the fear of missing out. But in every case it was fake.

Should they have known it was too good to be true? I’m not sure that old admonition works in a lottery or casino economy like ours. Sometimes investments that seem too good to be true really do strike the jackpot. It’s all so random. That said, Holmes was making some very specific claims about what the Theranos testing devices could do that anyone with a medical background should have been able to see through quite easily. That her all-star board was made up primarily of very old men whose eminence had nothing to do with scientific knowledge wasn’t that surprising, or the fact that they did nothing to call any of Holmes’s claims into question. If there’s one thing that that the history of financial crime in our time proves it’s that corporate boards can be expected to do absolutely nothing in the face of even the most egregious misbehaviour. They’re just window dressing.

The more interesting question then is how many people knew Holmes’s pitch was fake but were just happy to make a killing on it, figuring they’d be able to get out in time and leave someone else holding the bag. My own sense is that most of the people taken in really were blinded at the thought of a ginormous pot of gold at the end of the Theranos rainbow. John Carreyrou, who was the first to break the story in the pages of the Wall Street Journal, makes it out that investors were “bewitched by Holmes’s mixture of charm, intelligence, and charisma.” Which may be true, up to a point. But I think most people seduce themselves in such matters. They fervently want to believe, and that desire is their undoing more than any spell cast by the con.

These were, after all, the gold rush days of Silicon Valley, and fortunes were being minted overnight by companies whose business models made far less sense. “Every startup founder in the Valley wanted to be the next Mark Zuckerberg and every VC [venture capitalist] wanted a seat on the next rocket ship to riches.” And the thing is, the idea for a fast and convenient method of blood testing was a good one, and since the demise of Theranos other companies have made progress working in the same direction. Holmes, however, had no experience in the field and there were red flags all over the place signaling that her device was humbug. There were also expert voices that raised doubts, but they were rigorously suppressed by the corporate thought police. Legal legend David Boies and his law firm come across as some of the real villains of the piece, perhaps because Carreyrou’s own interactions with them were so strained. Theranos was incredibly secretive and paranoid about bad press, and this wasn’t because they were trying to protect valuable intellectual property. What this resulted in was a lot of legal “hardball” which played very ugly indeed. If you were wondering why whistleblowers need protection, this could be a case study. The fact is, nobody wants to stop a money train.

Given all of what I’ve said about how typical a story of financial fraud Theranos was, it’s worth asking what made it so noteworthy. The key factor is the figure of Elizabeth Holmes. As a young, attractive, “female Steve Jobs” you have to think that if she hadn’t created herself (meaning that persona, complete with the black turtleneck and fake deep voice) then the media or the culture more generally would have had to invent her. She was what the age demanded even more than it demanded a portable, instant blood-test kit, and she was just as wonky a product when brought to market.

Carreyrou makes a convincing case that Holmes made a mistake in taking as her model for a startup the “fake it ‘til you make it” model of the tech giants and not the more disciplined approach of a medical company. But since she didn’t seem to have much affinity for either tech or medicine I think it was easy for her to get confused. In any event, tech was the “rocket ship to riches.” Beyond that, she was able to borrow the specious Silicon Valley rhetoric of wanting to change the world and improve everyone’s life through technology that has long been a hallmark of tech startups. And once again, this rhetoric was exposed as a sham. I find it amazing there are people, and among them even critics of the tech giants, who continue to echo this nonsense. There are people who still think that Microsoft, Apple, Google, Facebook or Twitter/X are going to make the world a better place, or have ever had that as their goal. This is just sad and deluded. Elizabeth Holmes, like all the tech nerd-bros who came before and after her, wanted to be rich and powerful and that’s all there was to it.

But there are things about Holmes that are harder to explain. Chief among these is her mysterious relationship with Sunny Balwani. I say mysterious both because she attempted to keep the fact that they were living together hidden from everyone the entire time Theranos was in operation, and also because I just can’t figure it out.

What did she see in him? They seem to have first met when she was a student and he was a guy who had made a lot of money when a software company he’d been president of was acquired at the height of the dot-com bubble. Five months later the bubble burst and the company eventually went bankrupt. “His timing was perfect,” Carreyrou drily notes.

Holmes was young, stylish, smart, and capable of being charming. Balwani was nearly twenty years older, two inches shorter (he was about 5’5”), “portly,” “lacking in the most basic grace and manners,” not at all good-looking, and as for style . . .

The way Sunny dressed was . . . meant to telegraph affluence, though not necessarily taste. He wore white designer shirts with puffy sleeves, acid-washed jeans, and blue Gucci loafers. His shirts’ top three buttons were always undone, causing his chest hair to spill out and revealing a thin gold chain around his neck. A pungent scent of cologne emanated from him at all times. Combined with the flashy cars, the overall impression was of someone heading out to a night-club rather than to the office.

And it got worse. Balwani was born in Pakistan, which apparently helped shape his abrasive and authoritarian management style. While most people seemed to like working for Holmes, Balwani was a presence that few could endure. When he wasn’t firing employees for petty infractions he was “boastful and patronizing,” “haughty and demeaning . . . barking orders and dressing people down.” Like a lot of blowhards who have risen to positions of prominence on the basis of nothing more than blind luck, this arrogance was probably defensive. Theranos employees soon found ways to manage his moods, “as it dawned on them that they were dealing with an erratic man-child of limited intellect and even more limited attention span.” They even played practical jokes on him that exploited his ignorance of chemistry and engineering. If he hadn’t been placed in a position of responsibility everyone would have just considered him an obnoxious jerk and tried to steer clear of him.

Which brings us back to the question of what Holmes saw in him. Even Carreyrou is left shaking his head.

One school of thought is that she became captive to Balwani’s nefarious influence. Under this theory, Balwani was Holmes’s Svengali and molded her – the innocent ingénue with big dreams – into the precocious young female startup founder that the Valley craved and that he was too old, too male, and too Indian to play himself. There’s no question that Balwani was a bad influence. But to place all the blame on his shoulders is not only too convenient, it’s inaccurate. Employees who saw the two interact up close describe a partnership in which Holmes, even if she was almost twenty years younger, had the last say. Moreover, Balwani didn’t join Theranos until late 2009. By then, Holmes had already been misleading pharmaceutical companies for years about the readiness of her technology. And with actions that ranged from blackmailing her chief financial officer to suing employees, she had displayed a pattern of ruthlessness at odds with the portrait of a well-intentioned young woman manipulated by an older man.

Yet why were they still living together up until the end? Again: what did she see in him? Something here doesn’t add up.

Bad Blood is one of those slightly frustrating true crime books that on the one hand stands as definitive, being both well written and giving the perspective of a journalist who became closely involved in the events leading up to the company’s unraveling, but that, in the usual rush to be timely, came out several years before the Theranos trials brought some closure to the story. Still, it remains the best if not the fullest account of what happened, and Carreyrou’s assessment of what went wrong strikes me as right on target.

Noted in passing:

When Theranos’s corporate HQ (what had previously been Facebook’s building) was being given a makeover Holmes wanted motivational quotes painted in black on the white walls. These were the usual guff from people like Michael Jordan and Theodore Roosevelt. But pride of place went to a quote that she fell in love with “from Yoda in Star Wars” (actually The Empire Strikes Back): “Do or do not. There is no try.” She had this “painted in huge capital letters in the building’s entrance.”

As far as red flags go, I think this might have been enough for me to hold off investing any money in the company. I mean, really. Yoda?

One of the more surprising names on the list of Theranos marks was Rupert Murdoch (yes, another old guy). Indeed, after putting $125 million into the company he was its biggest investor. But after everything went smash and the lawsuits were gearing up, he seems not to have been too distressed.

Most of the other investors opted against litigation, settling instead for a grant of extra shares in exchange for a promise not to sue. One notable exception was Rupert Murdoch. The media mogul sold his stock back to Theranos for one dollar so he could claim a big tax write-off on his other earnings. With a fortune estimated at $12 billion, Murdoch could afford to lose more than $100 million on a bad investment.

This is what the game looks like when you’re a billionaire. Even when you lose you win.

Takeaways:

I think Holmes was basically blind with greed and ambition, but the way she shut herself off from any criticism or nay-saying really spelled her doom. I think it was super-investor Warren Buffett who said that he likes to keep someone on the payroll who will disagree with every position he takes and decision he makes, because otherwise he would just be surrounded by yes-men. One of Holmes’s friends became worried that in “her relentless drive to be a successful startup founder, she had built a bubble around herself that was cutting her off from reality.” At one point Holmes even told an all-hands meeting that she was “building a religion” and that “if there were any among them who didn’t believe, they should leave.”

As I’ve said before, the bubble is a danger for anyone who achieves a position of relative wealth and power. The state of being insulated from negativity is something I think a lot of people dream of. It’s very seductive, but the results can be fatal.

True Crime Files