PDF Summary:Bad Blood, by John Carreyrou

Theranos was a high-flying blood test startup. Founded in 2003 by 19-year old Stanford dropout Elizabeth Holmes, Theranos raised over $700 million in investment at a $9 billion valuation. The problem? It was all fake.

What led professional investors, Walgreens, and luminaries like Henry Kissinger to be blind-sided by Theranos’s deception? Learn about the rise and fall of this cautionary startup and the psychological biases at play.

(continued)...

How Did the Deception Continue?

To hide the fact that their proprietary machine that didn’t work, Theranos crossed the limits of scientific legitimacy. These were non-standard distortions of scientific practice.

• In coefficient of variation studies (a measure of precision and repeatability), deviant results were repeated until they got satisfactory results - basically retaking a test until you get the right answers. Furthermore, they used only the median values of 6 replicates, guaranteeing a tighter CV.
• In quality control checks, outliers were inappropriately thrown out - basically changing the answer to get what you want.

When scientific manipulation wasn’t enough, Theranos actively deceived people and lied by omission.

• To press and investors, Elizabeth embellished claims level of accuracy and number of assays that could be run on their proprietary machine.
• Theranos was scheduled to run demonstrations for pharmaceutical company partners. When their devices didn’t work live, they ran fake demonstrations instead.

When company insiders doubted the company’s strategy, Theranos actively quashed dissent.

• Non-believers were quickly fired for being disruptive, then bound by an NDA so they couldn’t leak details to press. Instead, sycophants and order-followers were promoted.
• Former employees who were suspected of leaking bad information were threatened legally and monitored by private investigators.

Mental biases like fear of missing out and sunk cost fallacy prevented partners from looking deeper.

• Partner company Walgreens couldn’t pull out despite mounting doubts about Theranos. If the innovation were real, it couldn’t risk CVS taking it. Furthermore, it had already shouldered the money of the building out new clinics, and once it got deep enough, pulling out would have been intensely embarrassing.
• Because of all the hype, the investing rounds in Theranos were hot. Therefore, investors didn’t have the time to pause for deep due diligence. If they did express doubt and ask for more time, they’d likely be excluded from the deal.

How Did the Deception End?

Theranos overreached in ambition, causing them to require delivering at some point.

• They promised too much to Walgreens and had to deliver. This prompted them to cheat.

Theranos stepped too far down the slippery slope of deception, until even their strong-arm tactics couldn’t hold back a conscience.

• Embellishing results in prototyping phase was somewhat acceptable. Lying about real patient data, which affected clinical decision making, crossed the line for many employees.
• Many employees left; most stayed quiet due to fears of reprisal; some brave whistleblowers let conscience override fear, and they reported to regulators and reporters.

A journalist fought for the story.

• Despite continuing threats of litigation, harassment of his sources, and personal surveillance by private investigators, John Carreyrou pressed forward with his story, knowing it would be big. Arguably, without his story, Theranos would have been allowed to persist for years longer, harming many more patients.

In the downfall, momentum and vicious cycles are as punishing as they are powerful on the way up.

• Once the evidence of Theranos’s failure became clear, the flywheel effect worked in the opposite direction. Walgreens dropped the partnership; regulators fixated their attention on Theranos; the public lambasted her and the gullibility of Theranos’s supporters; sources readily reached out to reporters to share useful information; investors sued Holmes for fraud.