28 February 2020

JM Finn Investment Book Club Review - Bad Blood: Secrets and Lies in a Silicon Valley Start-up

Silicon Valley is celebrated for being a leading technology and innovation hub which is why it has been dubbed the start-up capital of the world.

Many notable companies such as Google, Facebook and PayPal, are headquartered in the region, with a mix of super-companies and small start-ups trying to make it big. Bay area start-ups received $46.9 billion of US venture capital investment in 2019 (Silicon Valley Business Journal). If you want to be a noteworthy player in the technological sphere this appears to be the place to set up shop.

This is exactly what Elizabeth Holmes, the then 19 year-old CEO of Theranos, set out to do in 2003. She created a biotech company which promised to provide precise blood-sample readings akin to machines already on the market but, with only a few drops of blood taken from a single pinprick. Theranos then aimed to perform a full range of tests, broader than any other blood sampler on the market. This would have required ground-breaking technology. Holmes, consumed by the idea of being a young and successful entrepreneur, went to extreme measures to acquire fame and admiration in the tech space. She was briefly hailed as the female Steve Jobs, who she idolised and imitated. Her obsession with wearing black turtle-necks and the uncanny similarities between the Theranos device and the Apple iPhone did not go unnoticed.

The book is brilliantly written by prize winning New York Times investigative journalist John Carreyrou. He follows the rise and fall of Theranos and how Holmes drove her company and its employees into chaos. At many stages blurring the ethical and moral boundaries and then stepping right over them in an effort to achieve success and power in the tech space.

The book exposes the limitations of the Theranos machine, as it was wrought with errors and malfunctioned relentlessly. Instead of the pinprick technology, blood was often taken using traditional venous blood draws and the testing was performed with rivals such as Siemens’ equipment to ensure accurate results. Holmes created a “culture of fear”, with employees aware of the fraudulent activities, yet frightened to go to the authorities or to the media. Many warned Holmes that the technology was not ready to be accurately relied upon however, she often pressured her team to proceed with medical trials and clinics in an attempt to not disappoint her investors.

The aftermath was horrific. The book reports patients receiving faulty results and having to be rushed to hospital when in fact nothing was wrong. Even more concerning, there may have been patients with life-threatening illnesses that went unnoticed. Fortunately, the doctors often noticed that something was askew and typically asked for a second opinion from traditional blood-testing laboratories.

But what contributed to the rise of a company based on lies and a lack of concrete scientific evidence? Surely evidence and a track record of stellar performance is what matters most for a biotech company, especially to be adored and regarded so highly by the media and investors. Theranos gained a celebrity cast of board directors, most notably two retired political heavyweights; George Shultz, a member of the Nixon and Reagan political cabinets, and Henry Kissinger who served as the United States Secretary of State. It seemed that the more high-profile and distinguished individuals who supported the company, the more others wanted to get in on the action. Even Walgreens and Safeway joined in, shelling out millions of dollars to set up clinics to show off Theranos’s technology. Even when the science did not add up, they turned a blind eye to the misgivings of the company in fear of missing out on a supposed incredible business opportunity.  

 ‘Bad Blood: Secrets and Lies in a Silicon Valley Start-up’ is an excellent read for those interested in learning more about what can go wrong in a culture focused on success and keeping up with appearances. Carreyrou tells the story of Theranos almost to perfection, presenting Holmes as a delusional, hostile leader with a complete lack of moral compass. He writes, “Holmes and her company overpromised and then cut corners when they couldn’t deliver”. This is the essence of the book, when Holmes could not meet expectations she lied and attempted to conceal her tracks, ultimately getting found out. The fact that she got so far makes a compelling story. We do have to wonder, perhaps Silicon Valley does not quite deserve the enchanted, fairy-tale status that society has conferred upon it. ‘Bad Blood: Secrets and Lies in a Silicon Valley Start-up’ is certainly a page turner, full of scandal and corruption, and should not be missed. 

By Ashleigh Taylor.

The JM Finn  Investment Book Club was convened in the hope that, month by month, some of the wisdom of investing gurus such as Warren Buffet, Charlie Munger, and Mohnish Pabrai might rub off on the participants eager selves.

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