Bad Blood – John Carreyrou


Dear Partners in thought,

I wanted to depart temporarily from politics and geopolitics to address a topic that is more centred on my professional field with the unbelievable story of Theranos and its founder, Elizabeth Holmes. EH was the Steve Jobs-like black turtleneck- and slacks-clad blond girl-wonder, Stanford dropout, precocious entrepreneur extraordinaire, female role model who astounded the world of tech and finance with her Theranos start-up while in fact leading the biggest fraud in modern Silicon Valley history. She was a real poster “child” for entrepreneurial success, a genuine medical visionary, having gathered a senior team with years of tech experience and a board comprising leaders of our times. Bad Blood, written by John Carreyrou, a Wall Street Journal investigative reporter, twice Pulitzer Prize winner and the man who uncovered the EH fraud, is a very well crafted, highly enjoyable account of this unbelievable story, which saw him awarded several top prizes in journalism. Bad Blood is a story of the ambitious (and noble) ends justifying any means and a very personal obsession to succeed at all costs combined with a tyrannic and dishonest approach to management. As an aside, it would make a great movie or mini-series, which I am sure has not escaped Hollywood or Netflix.

When she grew up in DC in an upper middle class family, Elizabeth Holmes matter of factly told her family at age 9-10 that when she would grow up, she’d be a billionaire (and in fact not the President of the U.S., as the family wondered, as he would actually marry her as she would have one billion dollars). She grew up as an intensely competitive child, piling up the little Monopoly buildings on the way and making sure all of her competition was going bust (this early real estate background being puzzling…). As she became a sophomore in one of Houston’s finest high schools, she decided to focus exclusively on her studying, which ultimately led her to Stanford and starting a chemical engineering degree. When there she worked for the lab of famed Engineering Department head, Channing Robertson, assisting one of her first future Theranos employees, Shaunak Roy, who was concluding a PhD. When her father asked EH at Christmas dinner that year if she thought of pursuing a PhD programme, she responded: “No Dad, I am not interested in getting a PhD, I want to make money”. She dropped out of Stanford in 2003 at age 19, after one year, (breaking up with her freshman boyfriend, telling him she would have no time for him going forward) having decided to found Theranos and work on a revolutionary and patented while at Stanford blood-testing patch which could not only identify diseases but would cure them, something she wisely reduced to simple patch-less micro-fluidic testing so drug companies could in turn benefit from a more time- and cost-efficient means of developing their own products. Very few Silicon Valley actors and observers had run into such an ambitious individual before, indeed reminding them of the likes of Bill Gates and Steve Jobs.

EH, who possessed an incredible charisma and great, unblinking-eyed, convincing powers even at a very young age, raised initial capital (USD 6 m) from leading venture capital veterans whom she had been exposed to (like Tim Draper from famed Valley DFJ, Larry Elison from Oracle and his early 70s backer, financier Donald L. Lucas, who also became Chairman of the Board and others) and family, gathering around her a first class senior team with years of experience gained at IBM, Intel and Panasonic and having Channing Robertson on the Board. The first problem arose in 2006, three years on and at an impressive valuation of USD 165m post third round, when her CFO of eight months, who kind of worked on trust, started to query the validity of Theranos’s testing methods after a trip of EH and team to Novartis in Switzerland when the pharma company became very impressed with Theranos and its main product, wanting to secure a financial arrangement to develop a project together. As the CFO, who was responsible for upbeat sales forecasts based on product and client development, was becoming increasingly worried that investors might be misled through less than above-the-board testing demonstrations, he decided to confront EH at one of their regular meetings. EH told her CFO that there had been indeed a few hick ups with testing processes thus making the team have a ready made one just to use with investors and partners so they could avoid disappointing expectations. She also promptly added that he was not a team player and that he should leave right now – and not only the room (he would disappear, other staff speculating as to why, some embezzlement story floating around in his wake).

EH went on a campaign describing the future of preventive medicine in which drugs would be specifically tailored to individual needs thanks to Theranos’s blood- monitoring technology, stating that Theranos could eliminate 100,000 American deaths a year from adverse drug reactions. She started focusing on using as little blood as possible and avoiding needles in her experiments, partly as a long-lasting phobia and what would become a company trademark. As 2006 went on, she raised another USD 9m for a second round or so-called Series B and USD 32 m from a Series C round. While EH had received no medical or scientific training, she had developed a great vision and was able to sell it. In the summer of 2007, she took her admiration for Apple and Steve Jobs a step further, hiring several of Apple’s employees to work for Theranos, especially in the design area, including Ana Arriola who became its Chief Design Architect. Ana started also to change the look of EH and her wide gray pantsuits and Christmas sweaters to the black outfit that quickly became her trademark in Silicon Valley. Meanwhile the company kept moving forward, leaving East Palo Alto of ill repute to set up shop on the right side of the tracks.

Theranos was not just a tale of fraud. Its management culture was one of tyranny, fear and dishonesty prompted by the imperative need to keep dark secrets, with staff being fired through what could be seen as an ever revolving door policy enforced by EH (and later boyfriend and Executive Chairman, Ramesh Balwani, a.k.a. Sunny, a successful Bombay-born Valley entrepreneur, 20 year+ EH’s senior who acted after 2009 as the top enforcer at Theranos with a personal focus on staff timesheets and productivity). No senior staff could stay very long at Theranos, willingly or not, the former through crisis of conscience, the latter though periodic purges. Following the CFO, the heads of engineering, chemistry, marketing, sales, design, IT as well as the general counsel and many in their teams would be fired either as they were perceived as not loyal enough or actually because they asked too many questions about the validity of the testing processes at Theranos. EH demanded absolute loyalty from staff, this feature being an overriding quality. She would have files “built” on leaving employees, insist on the strictest belt-and-braces non-disclosure agreements and would ask her IT team to control all staff communication and ensure they knew what they were doing at all time, also making sure dinner was brought on-site so they would only leave by 10 pm every day and thus worked longer hours. Early board members like Avie Tevanian, one of Steve Jobs friends since NeXT decided to leave, having greatly supported the company, after legal threats from Theranos following his incessant questioning, including with true believer Chairman Lucas of how the company really operated. EH showed a renewed intensity in developing the business asking her engineering team to work 24-7 (which was turned down by her engineering head to his latter sorrow) and making teams compete against each other, without sharing information, so she could be the only one to have the full picture. Departments were not working together, operating in tight silos officially to enhance security, with the sales team never seeing any testing validation data before they would market the product. Paranoia was running high as EH and Sunny were strong believers in that Laboratories of America and Quest Diagnostic, the leading American lab rivals, would stop at nothing to undermine Theranos, while they barely noticed it at the time. So focused on speed to market she was, she even hired a competing engineering team to ensure that progress went faster, which it did, resulting in the head of her first team and his entire staff to be asked to leave. EH slept four hours a night, popping chocolate-coated coffee beans during the day. In August 2007, she went after former and current key employees who wanted to set up a company of their own (albeit for the veterinarian segment, judged easier) under license of the company technology, pursuing them in court and showing her extreme care for the company’ proprietary information or, as it turned out, to protect the secret of the viability of Theranos to develop a reliable testing process. Finally, while not disclosing her relationship with her number two, Sunny, she displayed tone-deaf nepotism by hiring her brother, Christian, as director of product management together with three of his Duke fraternity brothers (all aptly named “The Frat Pack”), the group benefiting from access to EH and Sunny well beyond their seniority, essentially based on the key feature of total loyalty. This approach was also combined with a pervasive lack of empathy as shown when a depressed (due to his qualms with the Theranos culture) and (as such) recently demoted head of chemistry committed suicide and EH’s first reaction was to have the in house counsel to ask his widow to send back his laptop and privileged information/or made sure she destroyed them (incidentally first concealing the death from most staff and then allowing the rumour that the employee had died from a cancer relapse).

While many discussions, leading to funding agreements with Big Pharma such as Astra Zeneca, Novartis, Pfizer or J&J entailed early testing and validation projects which in the end fizzled out by lack of concrete results, EH focused on the leaders of the grocery retail sector with Walgreens and Safeway, both old world companies that needed to reboot growth. While EH was able to enter into two potential exclusive agreements with both – Walgreens for supermarkets and Safeway for drugstores – she did not let them and their consultants (especially Walgreens’ Collaborative, a consulting firm whose task initially was to vet Theranos’ testing processes) to even have a look at their lab, which was not ready for inspection as not fully developed. Unbelievably the senior management of both Walgreens (led by Dr. J, a very colourful head of innovation and true believer in EH) and Safeway (with its CEO also swayed by EH) were too enthusiastic for a new future via healthcare to risk losing the Theranos opportunity by probing too closely testing processes at Theranos and alienating EH. Walgreens had a bad case of FoMO (Fear of Missing an Opportunity) fearing that CVS would then replace them while Safeway was pressured by stock market analysts to find a fast way to grow a stagnating business. In the end both companies came up short and in the case of Safeway with USD 250m in non-existant blood testing revenues as well as USD 100 m of store redesign costs when they set up state of the art, quasi-luxury in-house clinics throughout 2012. Theranos could not show their mini-labs or lab to any parent as all of their equipment was straight from Chicago’s Abbott Laboratories, Germany’s Siemens and Italy’s DiaSorin. Trying parallel expansion routes, EH also met four star General James Mattis in 2011, now Secretary of Defense, then the Head of U.S. Central Command to explore how Theranos could assist finger pricking blood testing to help diagnosing and helping wounded soldiers in the Afghan war theatre, a concept that was immediately strongly supported by Mattis. The discussions with the military bogged down on regulatory matters in spite of EH trying to sway the course of events her way against the views of the military medical leadership and going straight back to Mattis, the latter who retired shortly thereafter, making the project vanish without much internal support (incidentally this military link was often mentioned by EH to various parties, including her leading ad agency of past Apple glory, who had a contract of USD 6m a year, and whose team thought that this small start-up, an unusual client, was funded by the Pentagon and also understood why secrecy explained they could not have access to reports supporting its scientific claims).

On 7th September, 2013, the WSJ did a front page Weekend piece on EH and Theranos right at the time of the official commercial launch of Theranos (ten years after its set-up!) with the first wellness center cum blood testing facility installed in the Walgreens store in Palo Alto as a prelude to nationwide roll-up to be started in sunny Phoenix. Both events would be artfully used to validate the product as EH was deciding to go for another, this time very meaningful, fundraise that would value the privately-held company at USD 6 bn (with some investors then participating when they had turned down the opportunity at USD 40 m). We see two founding partners of a San Francisco hedge fund being wheeled in to a meeting with EH and Sunny, in the Theranos building, going through a security team supervised by Mattis’s connection, Jim Rivera, former head of security at the Pentagon, and being escorted everywhere including to the restroom, still with some off-limit areas like the lab facilities (for some good reasons that it is not yet functional). One of the key deciding factors for investors in addition to EH’s clear visionary leadership and top salesmanship, combined with Theranos’s supposed scientific accomplishments, is the unquestionable quality of its board of directors. In recent years, EH managed to reshuffle her board, inviting 92 year old George Schultz, former secretary of state to Ronald Reagan (who concluded the September 2013 WSJ article comparing EH to Bill Gates and Steve Jobs), James Mattis following his retirement from the Army earlier that year, Henry Kissinger, former secretary of defence William Perry, former senate armed services committee chairman Sam Nunn and former navy admiral Gary Roughead. It would be hard not to be impressed with such a display of former senior officials (all fellows at the Hoover Institution at Stanford) who clearly must have done their homework on Theranos before lending their name and time as Board members in exchange for grants of stock (incidentally further validating the links of Theranos with the defense establishment). Sadly target investors were shown financial projections that were five to twelvefold higher than internal projections, something that would never cross their minds with such a great overall story, amazing leadership, prestigious board and top legal advisers, including famed David Boies, keeping watch. In February 2014, the company was valued at USD 10 bn with EH owning slightly more than half of it.

The first serious potential blow to EH and the company came from an unexpected quarter – from a young Stanford graduate recently hired named Tyler whose grandfather was…George Shultz. Tyler had grown suspicious of the quality of the mini-lab and testing processes at Theranos, had met with EH who placated him far more she would have with another employee, sending him to recheck with more senior staff. When Tyler was still not convinced, having had exchanges with the New York Health Department to double check matters, he went to his grandfather who thought EH would explain everything, which in turn was left to Sunny in an unusually less blunt but still venomous way, asking for an apology from Tyler, who in turn decided to quit. Amazingly, EH contacted George Shultz asking for Tyler to stop his vendetta “or else”, a message that was conveyed to him as he was still in the company’s parking lot by his own mother, with George still “doting” on EH, thinking he was wrong on Theranos. Meanwhile the specialist printed media were sending EH to stardom with Fortune’s article entitled “This CEO is Out for Blood” in its 12th June 2014 issue, the new valuation of the company, the ascetic and reclusive profile, and the repeated comparisons of EH to Bill Gates and Steve Jobs. Forbes followed suit with an article entitled “Bloody Amazing” and pronouncing EH as the youngest woman to become a self-made billionaire, being pictured in Forbes 400, the issue showing the wealthiest Americans. Other articles on EH followed with USA Today, Inc., Fast Company and Glamour with NPR, Fox Business, CNBC, CNN and CBS News offering extended coverage of the new Valley girl wonder. EH was becoming truly unassailable. She was the recipient of the Horatio Alger Award with Time Magazine naming her one of the top 100 most influential people in the world. President Obama made her a U.S. Ambassador for Global Entrepreneurship and Harvard Medical School a fellow. She had the right profile that attracted all the attention of the time, something that she may not have looked for but she thoroughly enjoyed, judging from the frequency of her rock star interviews. What differentiated her from Marissa Meyer or Sheryl Sandberg was that EH had been a tech “founder” billionaire. From ascetic and reclusive, EH went quickly to the status of “ubiquitous celebrity”. She quickly changed her habits and image, hiring her top advertising agent to work as the company’s Chief Creative Officer on her new image and that of Theranos.

The demise of EH and Theranos was dated February 2015 when John Carreyrou, an investigative journalist at the WSJ, twice Pulitzer Prize winner and the subsequent author of our book, began to look into the whole story. The lack of peer reviewed data mentioned in more recent and inquisitive The New Yorker article seemed very suspect to him while the process as described by EH did not have the ring of a scientist or medical expert that she could not actually be and derided as “comically vague” by the magazine. He went back to the WSJ piece of seventeen months earlier, realising the impact it had had on EH’s image, company’s achievements and subsequent meteoric fundraising. He contacted various former company employees and individuals involved with Theranos, getting the impression that the technology just was not working as the world thought. Most former employees were obviously worried by their non-disclosure agreements and requested anonymity which was given. JC established very quickly through Alan Beam, the former head of the lab, all the testing process problems as if the flood of information had waited to erupt for too long even if the technical aspects required time to be digested. Management culture, style and the role of Ramesh “Sunny” Balwani were particularly addressed by JC’ interviewees, with some focus on the romantic relationship between the number one and number two at the company, all the while the New Yorker article had portrayed EH as a single whom the Kissingers had tried to fix up on dates, showing a lack of forthrightness with her board that might hide other key matters. Tyler Shultz was particularly eager to talk to JC, believing that in end his grandfather would do the right thing. So was Rochelle Gibbons, the widow of Ian Gibbons, the former head of chemistry who committed suicide. And increasingly, others. As it is like a detective story that is enjoyable to discover I will let you taste personally the ways JC uncovered the fraud and its many legal developments which ultimately led on 14th March 2018 to the SEC charging Theranos, EH and Sunny with “conducting an elaborate years-long fraud”. In order to resolve the agency’s civil charges, EH was forced to relinquish her voting control over Theranos, give back a substantial share of her stockholding and pay a USD 500,000 penalty, agreeing not to be a member of any public company for ten years. The SEC sued Sunny in California, having been unable to reach a settlement wth him. This set of civil remedies may seem little in relation to the magnitude of the fraud that was committed though, post-pool publication, EH and Sunny have been charged with Federal wire fraud (criminal charge) in relation to defrauding investors and the Federal Government by the U.S. Attorney for the Northern District of California on 16th June, 2018, paving the way to potential jail time that would potentially and ultimately match the immensity of the fraud.

The most remarkable feature in this story of fraud is that it was a fraud that was orchestrated and hidden for so long and that EH was able in the meantime to attract so many talents as staff and board members without any problem and in spite of a terrible work environment and management culture. One should also remember that, while devoid of any formal medical or scientific training, EH was indeed a talented individual having identified a segment where she wanted to do good and make money as an entrepreneur, something that should not be totally forgotten. When EH started Theranos , another young dropout from Harvard this time, was also making history: Mark Zuckerberg. He would change the world, as EH wanted, but would have to deal with hubris and serious issues, prompting some drastic personal and corporate adjustments, later. Theranos is also one of the most recent and biggest story of “vaporware” or “fake-it-until-you-make it” culture that is on and off prevalent in Silicon Valley. There will be may books and studies focused on EH to ascertain whether she was under the spell of Sunny or a real sociopath having created a corporate hell on earth, as it may be more likely, who took all the decisions as she did, controlling 97% of the voting rights of the company as of late 2013, rendering the board pointless in terms of decision-making if only as counterweight.

One of the main questions will remain why nothing could be done to stop that fraud earlier even if and when many tried to blow the whistle and more importantly how and why so many senior personalities enabled it by being true believers, especially among short-sighted potential partners who needed solution for their own futures and most certainly heavyweights at the board level. Finally the Theranos story is a story of Big Tech – with a health care focus that indeed lacked the adequate tech – (which the company could have been a leader of and was briefly to some extent) and its impact on our lives and society, changing it for the better and for the worse, depending where one looks. On this Big Tech evolution I recommend that you read regularly the great articles of Rana Foroohar from the FT, today one of the best journalists and writers dealing with the many implications of tech for us. Let’s remember that it is an investigative journalist who uncovered the Theranos fraud.

Incredible story of our times. Bad Blood is a book that should be read also as it is linked to “who we are” and why, even if we are, some of us, awed by tech wonders and their makers, we need to ensure that the creation of dreams and especially staggering wealth does not involve fraud and follows best practices and behaviour, lest we see other Theranos or Uber older formula arise…It is also a question of values and about what kind of society we wish to be and our children to grow and believe in.

I dedicate this book note to Kris, a brother and a great banker, who goes through tough times and I love. Life is short and what differentiates the greats is their care.

Now I have a question: Who’s going to play EH in the movie?

Warmest regards



Serge Desprat 19th July, 2018 (Martha’s Vineyard, MA)