Lying? Or Mutually Agreed-Upon Hallucination?

This will be another post on the Theranos story, which is described in detail in the book Bad Blood. I want to give a contrarian take on the story. For a good start, it's worth reading this piece in Tech Crunch called In Defense of Theranos. It was published before bad press about Therano's misdeeds completely destroyed the company, but I think some of it holds up well and generalizes beyond this particular story.

Theranos founder Elizabeth Holmes' vision was to have blood tests done by a finger-stick rather than having to draw a full vial of blood from a vein. Theranos often fibbed to its investors and partner companies about how far along their technology was. Walgreens, for example, ran many of its blood tests through Theranos. They didn't realize that Theranos was actually using standard industry machines (for example, from the German firm Siemens) to do its blood testing, not Theranos' proprietary machine (a device called "The Edison", which never quite worked). At least Theranos wasn't misleading patients with unreliable blood testing technology, but then again it wasn't exactly being forthright with its investors.

But hold on a second. People were raising questions and concerns about the technology, and these warnings were being ignored. Here's a typical example from Bad Blood. A major investor was George Schultz, an elder statesman who had worked in the Nixon and the Reagan administrations. Schultz comes off as foolish and self-delusional in this story. His grandson Tyler briefly worked for Thernaos. Tyler noticed terrible problems with Theranos' lab practices and became a major whistle-blower. Tyler tried to warn his grandfather, who basically blew him off and even tried to strong-arm his own grandson into signing a non-disclosure statement in front of two Theranos lawyers. One way of telling this story is: Theranos led a concerted, deliberate effort to deceive its investors, and they succeeded in fooling most of them. Another way of telling this story is: Theranos and its investors both mutually consented to uphold a fiction that the technology was working well, or that imminent improvements would make it so. Theranos was a private company, after all. If private investors wanted to put their money toward a moonshot, they have the right to do so. One could make an "everybody knows tech start-ups exaggerate" kind of argument. See the Tech Cruch piece, where it talks about hype outpacing reality. Maybe these investors each had some money in each of 100 different moonshots, expecting most of them to fail. Its even possible that a necessary condition for success is for the CEO, senior leadership, and the company's board to have irrational optimism about the prospects of success. It's hard to bring in hundreds of millions of dollars and top talent if you're telling everyone, "Meh, we're probably one of the 99 failures, but we'll give it a go anyway! (raises fist weakly)." It seems like Theranos did this to an excessive degree and probably crossed the line into outright lying, but to some degree this was mutually agreed-upon hallucination.

Walgreens also had many chances to figure out the truth. Walgreens' own lab scientists were skeptical of Theranos' tech and called for audits and clinical trials. Theranos pushed back, and Walgreens management ultimately sided with Theranos against their own scientists. Frustrated senior scientists at Walgreens complained about Theranos' tech not working, but Walgreens senior management basically told them, "If this works, and if our competitors are in on this but we aren't, we'll lose everything." Classic moonshot thinking. I don't know if this is irrational optimism or calculated risk-taking at work.

Carreyrou interviewed a number of scientists in the field of blood testing while researching for his Wall Street Journal piece and his book Bad Blood. A number of them said some pretty damning things. What Theranos was trying to do, to replace a blood test normally done on a full vial of blood with a single drop from a finger stick, wasn't technically feasible. Doing it would require solving many medical and engineering problems that weren't even close to being solved. A finger stick results in capillary blood, which is different from the blood you'd get from a vein ("venous" blood). Basically, the capillary blood has a lot of extra crap in it that can pollute a blood test. A scientist told Carreyrou that solving this problem would be a major engineering accomplishment, and that it was less plausible than finding out Theranos had invented a working time machine. Maybe that's an overstatement of the difficulty, but plainly some very knowledgeable people were saying Theranos' tech wasn't possible. It seems like it shouldn't have been that hard for investors to discover contrarian information. At the very least, they might have revised their earnings estimates or their expectations of pay-back times to reflect the immature status of the technology. To some extent, the investors were snowed. But in a deeper sense, they allowed themselves to be snowed.

It's also worth thinking about this from the following perspective. Suppose the investors were truly joining Theranos in a mutual hallucination. They knew it was unlikely to work, but thought it was worth trying anyway. How do they react when a big story hits the news, telling the world about this mutual self-deception? An investigative journalist tells the world that this young college dropout (Elizabeth Holmes) fooled them all. These are elder statesmen, like George Schultz and Henry Kissinger, and business moguls like Rupert Murdoch. Surely this damaging news story results not just in declining market value, but also hurt feelings and bruised egos, even damaged reputations. Such an investor is likely to feel aggrieved and embrace the "They lied to us" narrative over the "We mutually agreed to indulge an optimistic fiction" narrative. Carreyrou doesn't exactly dodge the fact that some of the investors were delusional, but if I were to write a book like his I'd have a longer discussion of how investors were in part responsible for letting Theranos get away with fibbing for so long. They had a hand in generating those multi-million dollar losses to their own portfolios.  Don't feel too sorry for them.

The Tech Crunch piece linked to above makes this point well: Who exactly is the aggrieved party here? Not the investors, who took a calculated risk. Not the customers, who ultimately got blood tests that were run on standard industry equipment. (Carreyrou finds a few cases of patients who made medical decisions based on bad Theranos tests, or were needlessly worried by positive test results. But it wasn't a wholesale fraud with regard to actual patients. It's telling that Carreyrou could only find a few victims.) Really, the most aggrieved party is the media. So many reporters wrote puff pieces about Theranos and ended up looking foolish. Naturally, they're going to think it's a huge deal when someone points out Thernos snowed them, even if all parties with a concrete interest in the matter are okay with the state of things. It's an overstatement to say that the media is the only aggrieved party. Theranos shamelessly and ruthlessly harassed whistle-blowers, sicking high-powered lawyers and private investigators on them. (David Boies, possibly the most respected lawyer in America, comes off looking like quite the goon in this story.) They even threatened doctors who had complained about Theranos' inaccurate blood tests, which had mislead and needlessly terrified some of their patients. I hope this post doesn't come off as defending these behaviors, which I regard as sleazy and probably illegal. Seriously, good on Carreyrou for demonstrating to the world that this kind of corporate malfeasance still exists. But with respect to the investors, I think it's less useful to think of this as a "con men separate fools from their money" story and more useful to think of it as a "mutual hallucination" story. I think something like this dynamic is at play with every tech start-up. Maybe half the time it sort of works, and the other half the time you lose all or most of your money. At the top 99.99th percentile, you get a Google or an Apple. At the bottom 0.01th percentile, you get a Theranos or an Enron. There's probably some value in doing a postmortem narrative on the failures, but keep in mind we all know ahead of time that most of these things fail.