Bad Blood is subtitled, Secrets and Lies in a Silicon Valley Startup. This is the story of Theranos, the blood testing company started by a 19-year-old Stanford dropout, Elizabeth Holmes, and now called the biggest fraud since Enron.
I started reading this book, by Wall Street Journal writer John Carreyrou, in August, not knowing that Holmes’s trial was to begin in September. In fact, jury selection was completed last week, and the trial will continue starting today.
These big fraud cases or other financial train wrecks make for interesting reading and often spawn several books. In the case of Theranos, there is one book, by the reporter who broke the story of the fraud, and this book has been the basis of all the other stories, an HBO documentary, and an upcoming movie starring Jennifer Lawrence as Holmes.
Let me say right now, this is a hell of a book and I recommend it to you. It is 300 pages, well researched, and a tale of our times. The cast of characters couldn’t be fiction. The chapters are about twelve to fifteen pages long, which makes it a great bedtime book to me. I’d read one or two chapters a night.
Since the book was published two years ago, you can pick up a hardcover copy on eBay for $5; I did. While the book has an Epilogue, the real Epilogue is going to unfold in over the next few weeks.
The story starts with the childhood of Elizabeth Holmes. She was determined to be a billionaire from a young age. This ambition only grew. Her dream was to create a machine to replace laboratory blood tests. Rather than getting a blood draw using a needle and several vials, a finger prick and only a drop or two of blood would be used. This was a result of Holmes’s aversion to needles. The envisioned machine would do over a hundred different tests on an automated basis. The vision was to have Theranos machines in clinics, grocery stores, even homes. A patient and their doctor could monitor their health, their reaction to medicines and more, almost in real time. It was a vison that would radically improve healthcare.
In addition, Holmes was bright, confident and filled society’s desire for a young, female Steve Jobs. In fact, Holmes started emulating Jobs by wearing black turtlenecks every day and affecting a very deep voice.
Holmes and her company, Theranos, received funding from some of the top venture capitalists in the Valley. The board of directors was filled with the likes of George Schultz, the former Secretary of State, Jim “Mad Dog” Mattis, Henry Kissinger, another former Secretary of State and more. Most of the board came from the Heritage Foundation, a Republican think tank located on the Stanford campus.
The last fund raising round valued Theranos at over $9 billion. Holmes’s share was between $4 and $5 billion, making her the first self-made woman billionaire in the Valley. She was tech royalty.
Theranos employed extreme secrecy and was extraordinarily aggressive about enforcing non-disclosure agreements, to the point of having many ex-employees under 24/7 surveillance. The Theranos law firm was Boies Schiller Flexner. David Boies, perhaps the world’s most celebrated lawyer, handled the Theranos account.
There was one problem with the whole Theranos vision: The technology didn’t work. The Theranos machines couldn’t do what was promised. In fact, what was promised was impossible and may always be impossible. The amount of blood drawn simply was too small and all the promised tests could not be done inside one small machine. To cover for the failure of the company’s technology, Theranos used conventional blood testing using a variety of huge, conventional machines and methods. Or they just sent back test results that were inaccurate.
For tech startups, there is a tolerance for vaporware and overpromising. Fake-it-until-you-make-it has been used by Microsoft, Apple and thousands of other tech startups. The problem with this approach for Theranos was that they were in healthcare, not software. Their inaccurate results were being used by people and their doctors to guide their care. They put people’s lives at risk.
The reporting by the author, and tips from insiders, led to investigations by the FDA and CMS—Centers of Medicare & Medicaid Services. These investigations led to lawsuits from Walgreens and Safeway, who had contracts with Theranos. Then came the shareholder suits.
Besides all the other bad practices at Theranos, Holmes had her boyfriend, Sunny Balwani, 20 years her senior, as the COO of Theranos, without informing her board of directors. Balwani had made a bunch of money in the dot com bubble of the 1990s and thought he was a good businessman. He was not.
The book has a number of interesting side plots. One of the main ones was between George Schultz, the eminent statesman, and his grandson, Tyler Schultz, who ended up working at Theranos and was one of the key sources for the author, despite tremendous pressure from the Theranos lawyers. Tyler’s family ended up spending $400,000 in legal fees to defend him. Tyler ended up estranged from his grandfather, who favored Elizabeth Holmes. The wise old man was wrong, and the smart young man was right.
Rupert Murdock was the single biggest investor in Theranos. As the author and his paper, the Wall Street Journal, were nearing breaking the story, Holmes asked Murdock to kill the story. (Murdock owns the WSJ.) I don’t have much good to say about Rupert Murdock but give the man his due. He refused to intervene, let the WSJ editors do their job, and lost $150 million on his investment.
Another interesting subplot is that of the lawyer, David Boies. Considered probably the most famous lawyer in the world, with an extremely high profile. He and his firm were behind all the high-pressure tactics and dirty tricks Theranos employed to tamp down the bad news that was leaking out of Theranos. As the end was nearing, Holmes removed her entire board of directors and put Boies in as a board member. In one of life’s little ironies, Boies Schiller Flexner received Theranos stock rather than cash compensation. The stock ended up worthless. I did a Google search of David Boies. It lists all his accolades, which are amazing, but the last date noted is 2013. That’s about when he got involved with Theranos. How the mighty are fallen.
The trials of Elizabeth Holmes and Sunny Balwani were separated several months ago, the better to throw one another under the bus. Holmes’s trial is underway and Balwani will be tried in a few months. There are a number of questions about the trial that the author answered two years ago.
First, did Balwani control Holmes? That seems to be the way the Holmes lawyers are headed. But the answer is no. Holmes had engineered matters to give herself 99.7% of the voting rights for Theranos. The board never voted on anything; they couldn’t even form a quorum without Holmes. By her own admission, Holmes made all decisions. And in the end, she fired Balwani from the company and split up with him romantically.
Second, are Holmes and Balwani guilty? Holmes certainly is. She’s a brilliant sociopath and a master manipulator. She was well aware of the fraud she committed and the lies she was telling. But the trial requires a unanimous jury of twelve. And Holmes has just given birth to a son with her new boyfriend. It’s hard to see this as anything more than another ploy to save her own skin. If convicted, the child could grow to an adult before his mother got out of prison.
How about Balwani? He isn’t as guilty as Holmes but should still be convicted. They were true partners-in-crime; they deserved each other. We’ll see if that happens.
It’s a terrific book. Read it and watch the final chapter unfold on the nightly news.
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