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Theranos: How the cult of the entrepreneur went too far

The cult of the startup founder and our reverence for entrepreneurialism shouldn’t excuse wrongdoing, says Pulitzer Prize-winning investigative reporter John Carreyrou.

John Carreyrou: 
I don’t think it’s just about greed. I don’t think the Theranos scandal was just about greed, and I don’t think Elizabeth Holmes’ only motive was greed.

I think, more than riches, what she was after was fame. She wanted to be in the pantheon of these billionaire tech founders and her idol, as I detail in the book, was Steve Jobs. I mean she absolutely idolized him and Apple.

So I mean in Silicon Valley—and really in American society at large—there’s this reverence for the entrepreneur and for the successful entrepreneur. And this reverence has morphed into almost like a cult of these young bright-eyed tech founders dropping out of (usually) Stanford and going on to found their businesses and getting a lot of funding and then becoming billionaires. And she was on that same track.

The problem is that on the way there she cut a lot of corners and crossed some bright red lines. The biggest one was that in the fall of 2013 she went live with her blood tests in Walgreens stores, first in Palo Alto and then in the Phoenix area. And very few of the tests on the menu were done with actual Theranos technology. Most of them, the vast majority, in fact, were done with third party analyzers bought from other companies. But then they also hacked those machines to “adapt” them to the small finger stick samples, because they wanted to maintain the illusion that they did have this innovative technology that could test, do the full range of tests from just a drop or two of blood pricked from a finger.

And in hacking these commercial machines they made the testing less accurate and less reliable. And so essentially they put lives at risk. That’s one big piece of it, and that’s part of the wrongdoing here.

But another part of it is that by going commercial and then soliciting funding from investors Elizabeth Holmes used the fact that her services were in Walgreen’s stores to get investors on board, because it was like the validation that “Yes, this product was for real. How could it not be? They’ve gone live with it. It’s commercial!”

But I would say that there were two stages of Theranos.

There was a stage when she had just dropped out with this vision, and people like Tim Draper and Don Lucas and Larry Ellison gave her money and funded her. And that was your typical early startup where chances are it’s not going to work out, because nine out of ten of these companies fail, and one succeeds, and maybe it becomes a great success.

And those are the odds, and the investors who invested in the first few rounds in 2005 and 2006 knew what those odds were, and they knew that they were taking a flyer and a young kid who seemed smart and dynamic and seemed to have a great vision.

Where Theranos became a fraud is much later, when in 2013 she launched the blood tests in Walgreens stores and then went back to investors to solicit more money. And that’s actually when Theranos raised the lion’s share of the nearly billion dollars that it raised over its 15 year history. More than $700 million of that billion dollars was raised after 2013, and it was based on the premise that Theranos had a groundbreaking product, and the “proof” was that the product was commercialized—it was in Walgreens stores.

So on the one hand you have putting patients in harm’s way with inaccurate blood tests, and on the other you have defrauding investors, essentially securities fraud.

And in this cult of the startup founder that we have (and of entrepreneurialism) we tend to forget that there’s also something called business ethics, and that these people, even if they have great ambitions and great visions they still need to play by the same rules that we all play by—by society’s rules.

And this cult of the startup founder and this reverence we have for entrepreneurialism shouldn’t excuse wrongdoing. It shouldn’t excuse committing white collar crimes. You’re always going to have people who can find ways to get around rules and laws. And so I hope that the Theranos scandal remains a lesson in people’s minds, in VCs’ minds, and entrepreneurs’ minds in Silicon Valley—that cutting too many corners and not obeying regulations in healthcare is not okay.

The cult of the startup founder and our reverence for entrepreneurialism shouldn’t excuse wrongdoing, says Pulitzer Prize-winning investigative reporter John Carreyrou. The story of the Silicon Valley startup Theranos is a prime lesson where the celebrated founder was able to cut many corners, put lives in danger, and commit fraud without anyone questioning her for years.

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