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Mercy for Elizabeth Holmes?

Two weeks ago, the news hit the press that Elizabeth Holmes, founder and CEO of Theranos, was found guilty on four conspiracy and fraud charges for swindling her investors and is facing up to 20 years in prison.

Elizabeth Holmes, a Stanford drop out, founded the Biotech company in 2003 at the age of 19 with the ambition to revolutionize blood testing by providing the capability to run hundreds of tests on only a pinprick of blood. This would eliminate the need to stick a needle into someone’s body and collect bottles of blood making it an easier, quicker, and cheaper process that could be performed virtually anywhere without the need to see a doctor.

That was exactly the stuff that dreams are made of in Silicon Valley. She was hyped as the next Steve Jobs and eventually became the youngest self-made billionaire with Theranos getting to a peak evaluation of $9bn. Walgreens, Rupert Murdoch, Larry Ellison, and others had invested heavily into the company. Henry Kissinger was on the board of directors as well as William Foege, former director of the Center for Disease Control and Prevention (CDC). 

How cool was that combination? With Walgreens, a giant distribution channel was already on board. The CDC would give the product instant credibility and help to establish it as a worldwide standard for blood testing. Henry Kissinger’s network was invaluable, and the Murdoch empire would spread the story through all their media channels globally. What a perfect setup it was!

In 2015 an investigative journalist from the Wall Street Journal revealed that fake demonstrations had been done to investors and the tests proved to be massively inaccurate. Secretly other tests using traditional blood drawing methods and outside labs were performed instead. Also, Elizabeth Holmes tried to use her contact to Rupert Murdoch to suppress the article, but the Wall Street Journal published it anyway. It eventually led to the collapse of the company in 2018.

The public verdict seems to be unanimously that this is a clear case of fraud and Elizabeth Holmes is the guilty one. Having worked with Silicon Valley companies for almost 40 years I asked myself if she wasn’t rather the victim of “The System” of Silicon Valley. In a sense it reminded me of the ballad “The Sourceres Apprentice” from the German Poet Johann Wolfgang von Goethe where the talented apprentice out of curiosity unleashes a process that becomes uncontrollable and seemingly ends in chaos. Luckily in the end the master steps in to resolve the situation. Unfortunately, in the case of Elizabeth Holmes there was no master, there were apparently no controls. Of course, Silicon Valley hard core advocates will argue that it is exactly the unlimited belief in and commitment to innovation that makes extraordinary success happen. 

The belief of Silicon Valley is that if you match young talented entrepreneurs and scientists with venture capitalist anything is possible. I am not going to argue against that, but I think the Theranos case has shown that this alone is not a recipe for success. If you have a dream about something that has the potential of revolutionizing an industry, in the very beginning there is no assurance whatsoever that you’ll be successful. Yet, in order to attract investors, you have to give them the impression that the probability for success is reasonable. “Fake it until you make it” is a principle that comes to mind. The creative process needs to manage beliefs, uncertainties, failures, emotions, showstoppers and so forth and I am sure that there have been many attempts to distill “the ultimate success formula” which will guarantee success in a reproduceable fashion. 

I assume we all agree that the CEO of a startup needs to perform the fine art of managing expectations while keeping in touch with reality and considering possibilities. Obviously, Elizabeth Holmes failed miserably on that task. You need to at least give your investors and the market a positive impression of the truth (aka “the glass is half full”) because otherwise they get cold feed, lose confidence, the stock takes a hit, your funding gets impacted and you might be forced to balance the books by bloodshed (aka layoffs) which can take you into a downward spiral you might not recover from. So, it is all about controlling the hype while still enjoying the ride. 

In my opinion the dilemma starts with a lie. It is so tempting to use it in order to prevent “the system” from crashing but it also gets you a potentially fundamental crossroad. From now on your future story needs to be consistent with the essence of the lie and that may bring you totally out of sync with reality. The pressure to stay consistent with your lie becomes unmanageable and at that point there is no way to reset to the truth. It is time for the big bang.

As a CEO you need to ask yourself the question: how do I find out what’s really going on? Is telling the truth supported and encouraged by the company culture that has been developed or do my people tell me what they think I want to hear? In most cases I am likely to get different opinions. Who do I listen to? The people I like, the best storytellers? Do I actually want to hear the truth, can I resist the urge to take the drug of illusion? Those are choices you have to make almost on a daily basis. 

In my 40+ years working for Silicon Valley companies I have seen various “fake it until you make it situations” none of which ended in a big bang though. The hype cooled down and the project was discretely buried and that even worked when billion-dollar investments had been involved. I think the tragedy of Theranos was also rooted in the fact that it was a one product company, so all the eggs were in just one basket and there was hardly a way to mitigate the risk. 

Let’s ask ourselves the question: what would I have done as the CEO of Theranos? Before we do that, we should remind ourselves that this exercise is somewhat unfair as we are judging the CEO while we already know the full outcome. In a sense we have to make judgements in the context that existed at the time. 

For me the analogy of the “Boiling Frog” apologue comes to mind. The premise is that if a frog is put suddenly into boiling water, it will jump out, but if the frog is put in tepid water which is then brought to a boil slowly, it will not perceive the danger and will be cooked to death. The story is often used as a metaphor for the inability or unwillingness of people to react to or be aware of sinister threats that arise gradually rather than suddenly. In the Theranos case the heat was raising maybe half a degree a month.

One of the prime duties of a CEO is to put in place the controls necessary to get a clear picture of what is going on while managing the communication with the stakeholders and the outside world. Yes, you need to also take risks in order to get the high rewards, but you need to put a red line out there to keep it to a manageable level. Now what do you do when you reach that red line? Buy more time? Bite the bullet and tell the complete truth or let it out piece by piece? Ask the board of directors for help? Look for a partnership to get access to alternative/complementary technology? Limit the playing field to a “safe” space where the technology works? As a last resort you could decide to take refuge under the wings of a health care giant as long as you still have assets of interest. Probably many of these thoughts went through Elizabeth Holmes’ mind at some point in time, but no visible action was taken. Inaction proved to be the path of death in this case.

Finally, the investors have taken her to the cleaners and are looking for revenge. How about their duties? Did they understand the risk they were taking? Did they get an independent view of outside experts in this field? Did they draw a red line? Did they offer/provide help? Or were they just dazzled by their own greed? Interestingly enough, the board of directors never gets sued for not taking action.

In summary, the system of Silicon Valley is not the world formula for guaranteed success and despite of what is being said, it does not really tolerate failure. It is the joint responsibility of the managers in play on both sides to create a culture of openness, transparency, support and proactiveness that allows “stuff” to bubble up and be dealt with before the only viable sentence becomes the death penalty.

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