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Reid Hoffman’s 4 lessons to prevent your startup from becoming the next Theranos

What risks are ethical when pursuing rapid growth?

Reid Hoffman’s 4 lessons to prevent your startup from becoming the next Theranos
[Photo: GES Photo/Public Domain]

Blitzscaling — pursuing rapid growth by prioritizing speed over efficiency in the face of uncertainty—is the primary way to turn startups into world-changing companies like Amazon, Facebook, and Google. Blitzscaling is risky because it involves committing massive resources while the outcome is far from certain. But in winner-take-most or winner-take-all markets, the biggest risk is allowing a competitor to reach market-dominant scale first. I explore these themes in the “Technology-enabled Blitzscaling” class at Stanford University, in my Masters of Scale podcast, and in my upcoming book, Blitzscaling, coauthored by Chris Yeh.

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Theranos founder and then CEO Elizabeth Holmes spoke to our Stanford class in 2015. Since then, both company and entrepreneur have received sharp criticism for alleged fraud. In an SEC settlement in 2018, Holmes paid a $500,000 fine and relinquished control of the company, though neither she nor the company admitted or denied the SEC’s allegations. Holmes has also been indicted on federal wire fraud charges.


Related: The government is charging Elizabeth Holmes in criminal court


Due to these developments, some have suggested taking down the video of Elizabeth Holmes’s visit to our class. Instead, we should learn from Theranos by adding this essay to the video. The courts will resolve the legal issues. But examining the claims about the company’s alleged misbehavior (and the world’s reactions to that behavior) sheds important light on the broader question of what risks are and are not ethical to take while blitzscaling.

The Theranos story came to light, thanks to the investigative reporting of the Wall Street Journal’s John Carreyrou, which he detailed in his book on Theranos, Bad Blood: Secrets and Lies in a Silicon Valley Startup. It’s an amazing and expansive story. In this essay, I’ll examine four of the core key criticisms of Theranos, and the lessons we can learn about responsible blitzscaling.

Fraud

Outright fraud, such as the SEC’s charge that Theranos claimed annual revenues of $100 million when the actual figure was around $100,000, is the simplest issue to address. People should absolutely expect all entrepreneurs—including responsible blitzscalers—to tell the truth.

Great blitzscaling companies like Amazon and Google didn’t need to overstate their revenues or lie about their financials to succeed. Their performance spoke for itself.

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In fact, one of the reasons that Theranos appears to have gotten away with its actions for so long is that everyone, including board members, business partners and even reporters, couldn’t conceive of the notion that the company would simply lie about so much, so often. Carryrou discussed this in an interview with New York magazine when he said: “You could make a case that maybe they [reporters who covered Theranos] should have done more reporting beyond interviewing her [Elizabeth Holmes] and her immediate entourage. But how much is a writer/reporter to blame when the subject is bald-face lying to him, too?”

Inappropriate risk taking

Another important criticism is that Theranos took excessive risks with patient well-being. Carreyou told CNN, “There’s no question in mind that she knew there was a risk that she was putting patients in harm’s way. The problem was Elizabeth channeled the Silicon Valley culture and way of operating for what was not a traditional tech business—it was a medical technology business.”


Related: It’s worth remembering how Theranos first responded to the WSJ’s exposé


Blitzscaling founders and companies have a moral obligation to do so responsibly. You can pursue rapid growth without giving up your moral compass. Part of this involves considering the level of risk that the company imposes on its customers and the broader ecosystem.

Blitzscaling inevitably involves risk. You can’t eliminate all risk without standing in the way of innovation. The fact that autonomous vehicles sometimes crash doesn’t mean we should simply ban them. But you should be explicit about how you’re mitigating risk, and how your product or service improves overall outcomes.

Risks vary along at least two important axes. The first axis is the severity of the potential impact on the individual. If you spend $1.99 on an app and it doesn’t work, it’s not a big deal in your life. If you quit your job to make a living by finding work via that app, that’s a much bigger deal, and if product failure could permanently degrade or even end your life—mortal risk—that’s the biggest deal of all, and the standards for ethical behavior become much more stringent.

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The second axis measures the scope of the risk—how many people might be impacted. If massive scale is involved, the risks are amplified and hence require greater responsibility.

According to Carreyrou’s reporting, Theranos took mortal risks at a massive scale by giving hundreds of thousands of patients inaccurate blood test results that might lead to improper care. Where a responsible blitzscaler would have proceeded cautiously, and with stringent ethical standards, Theranos did the opposite.

One of the ironies is that when Elizabeth Holmes visited our class, she acknowledged this very distinction. When asked about working in a regulated industry, she replied, “We are in a very regulated space, so this means you have to build a very different type of company because the stakes are so high and the decision-making is so long term compared to normal tech companies.”

Launching a product that embarrasses you

Another criticism of Theranos is that the company encouraged its team to ignore or even cover up the warning signs about product quality. In an interview that appeared in Vox, Carreyrou told a reporter, “One of her advisers was Larry Ellison [the billionaire cofounder and CEO of Oracle]. Larry Ellison’s advice to her was that in his early years, he was also getting told by the coders and guys creating the software he was selling that “this isn’t feasible” and “we can’t get it done on time.” And [Larry] was always pushing them to deliver and ignoring their complaints. And he told [Elizabeth] to do the same. Of course, that was terrible advice and he was a bad role model.”

At first glance, this might sound similar to my oft-quoted advice to consumer internet entrepreneurs, “If you are not embarrassed by the first version of your product, you’ve launched too late.” When blitzscaling, speed is the primary goal.

But the spirit behind these two approaches is completely different. I don’t advise entrepreneurs to ignore complaints; I advise them to launch an unpolished version of their product so that they can begin gathering market feedback as quickly as possible so that they can focus on fixing bugs and adding features that people actually want and need.

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In contrast, Carreyrou paints the picture of Theranos that shows a company that was intent on launching by a certain date–regardless of product readiness–to meet a contractual deadline in its Walgreens partnership, and which was actively ignoring or covering up known problems, rather than fixing them.

There’s a big difference between being embarrassed and being indicted.

Theranos could have approached its situation very differently. For example, the company could have started conducting blood tests at Walgreens with a standard blood draw using existing Siemens blood testing machines. This would have been truthful, and would still have been beneficial to patients because of the added convenience of getting tested without requiring a doctor’s order (at least in Arizona). In this scenario, Theranos could have gradually shifted to using its own nanotainer technology when it was actually working. In our book, we describe this as scaling by initially doing things that don’t scale. Instead, Theranos claimed to be using its nanotainer technology, but actually diluted pin-prick blood draws with water so that there was enough liquid to use the Siemens machines. The company then adjusted those test results by the level of dilution, producing inaccurate reports.


Related: The reporter who exposed Theranos tells investors how to spot another Elizabeth Holmes


Selling a compelling vision of the future is a classic part of the entrepreneurial process. Theranos painted a vivid vision of faster, cheaper, more readily available blood tests. But high-integrity entrepreneurs don’t try to fool their audience when it comes to what is vision and what is reality. They don’t lie and say, “Here’s what we’ve accomplished (even though we really didn’t).” They articulate an optimistic but realistic case: “Here’s where we are, here’s where we want to get, here are our plans to get there, here are the risks, and here’s why we believe we will overcome those risks.”

Cult or culture?

One of the many troubling stories described how Theranos leadership reacted after a number of employees resigned after being asked to help the company go live with technology that didn’t work. Carreyrou reported in Wired about a company all-hands meeting right after the resignations: “Still visibly angry, Holmes told the gathered employees that she was building a religion. If there were any among them who didn’t believe, they should leave.”

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While people may joke that some Silicon Valley companies act like obedience-demanding cults (with Apple Stores standing in for marble temples), the fact is that the best companies and leaders build cultures that accept and learn from dissent. Most companies, including giants like Facebook, Google and Microsoft, hold regular all-hands meetings where employees can ask any question, including questioning whether specific company actions help or hinder its mission, rather than being required to demonstrate blind faith.

Blitzscaling companies build strong cultures on a foundation of rigorous debate and shared values.

Theranos: example or exception of blitzscaling?

Theranos stands accused of engaging in a wide range of unethical behavior, including outright fraud. It is precisely because of this behavior that we should view Theranos as an exception to, rather than an example of how blitzscaling works.

Yes, there are real risks that an entrepreneur should take to get to critical scale more quickly, such as raising money (from experienced investors) and launching quickly without waiting until you have a complete and polished product. When the risks are mortal or systemic, you need to have answers for those risks—often before you deploy, and always before you scale. Taking these risks helped companies like Facebook and Google become massively successful. They also helped those companies make our lives significantly better overall.

You don’t have to blitzscale alone; almost all successful blitzscalers raise money from, and fill their boards with, experienced venture capitalists. This is not only because blitzscaling requires significant amounts of capital, but also because investors who have prior blitzscaling experience can help founders avoid major landmines.

One of the ways that Theranos was exceptional—and I worried about at the time as a danger sign—was its reliance on big-name board members and investors who had very little experience with blitzscaling or even technology investing.

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In the end, however, even experienced board members and investors do not control whether entrepreneurs act ethically and honestly, although it is their fiduciary responsibility to hold the entrepreneurs accountable if and when they do act improperly. Entrepreneurs themselves need to take responsibility for acting ethically.

According to Federal prosecutors, Theranos behaved illegally. But even if its actions were legal, they would have been unethical and irresponsible. We believe that the responsibilities of a blitzscaler go beyond simply maximizing shareholder value while obeying the law; you are also responsible for how the actions of your business impact the larger society. Hopefully, this realization will be one of the lasting legacies of the Theranos story.


Reid Hoffman is the cofounder of LinkedIn, a partner at the venture capital firm Greylock Partners, author of several books, and host of the Masters of Scale podcast.

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