Bad Blood is a story that has been be told, thanks to the courage, persistence and methods of John Carreyrou, a twice Pulitzer Prize-winning journalist of The Wall Street Journal.
It took him over three years of intense follow-up, standing up to the pressures from law firms, surveillance and the fact that the owner of the firm was a personal investor in the fraud that he exposed.
The book tells us that money is the greatest invention of man and is beyond the realm of right and wrong, when it comes to lawmakers.
John unveils the story of a bio-tech start-up named Theranos headed by a charismatic Ivy League dropout whose ambitions were, perhaps, surpassed only by her deviousness and viciousness in trying to keep the fraud going.
Elizabeth Holmes, charmed potential investors with a story about her technological capabilities that would bring affordable and miniaturised diagnostics in the area of blood testing. Her skill and strategy can be inferred from the fact that she started the story in 2003, at the age of 19, and succeeded in raising nearly a billion dollars from investors and got a ‘valuation’ that was close to 20 billion dollars!
The book is a page-turner. With each page, the greed and desperation of Elizabeth Holmes keeps getting firmer and the methods used to suppress staff and disbelievers is nothing short of ‘mafiaesque’. Using the legal system to threaten dissenting employees, using greed to make the partner of a hotshot law firm a director and attorney after giving him stocks, using outright subterfuge and threats to cover her tracks, the story is thriller.
The charm and deviousness of the lady is evident from the marquee names that were persuaded to join her board—Henry Kissinger, George Schulz (former US Secretary of State), William Perry (former US Secretary of Defence) as well as a former senator, a retired admiral from the US Navy, a retired general from the US Army, the former CEO of Bechtel, ex-chairman of Wells Fargo and, last but not the least, David Boies, founder and chairman of Boies Schiller & Flexner, a top notch corporate law firm.
Most board members were given stock options and their greed kicked in to ensure that they worked to protect her from attack. The lawyer was used to silence employees who figured out what was happening and left, taking heed of the voice of their conscience.
Another important player in the story is her boyfriend, Ramesh Balwani, 20 years her senior, who joins the executive management to help keep mouths shut through terror and threats.
Apart from the story of greed and fear, what is amazing is that the con game went on for nearly 15 years.
The big takeaway, for me, is not in the storyline. This book is calls for serious introspection by venture capitalists (VCs) and private equity investment managers and investors.
In May 2018, John Carreyrou reported that American business and government leaders lost more than $600 million of private investments in Theranos. Major investments had been made by the Walton family ($150 million), Rupert Murdoch ($121 million), Betsy DeVos ($100 million) and the Cox family (of Cox media group - $100 million). The final liquidation of the company in September 2018 rendered these investments completely worthless.
Venture capital is essentially an adventure in action. They back an idea that has potential and can be scaled up big time. Often, VCs end up seeing stories where there is none because their focus, often, is on the promoter and his/her passion. A charismatic promoter can sidestep all due diligence, as happened in the case in Theranos.
Law firms drafted reports; accountants must have seen the numbers; and not one of them showed an iota of common sense. Of course, no law touches these intermediary enablers who seem to sign on the dotted line, provided the fee is right. VC investment managers seem to have been overcome by their fear of being ‘left out’ and eschewed asking tough questions. Some of the marquee investors took big calls based on their ‘gut feel’ and were probably swayed by the charisma of Elizabeth Holmes. What is truly surprising is that most of them seem to have just invested on the basis of a storyboard; and, even after putting money in, never bothered to find out what was happening. So long as new money was coming in at higher valuations, the party went on. Human greed has no boundaries.
The term ‘Wild West’ refers to America in the late-19th and early-20th century, a time when rules did not apply and scores were settled with guns. The period from 2000 onwards is a kind of ‘Wild West’ for the financial sector. There is no punishment for the perpetrator. Globally, countries seem to be competing with each other to attract and retain capital, with no questions asked. The punishment that was meted out to Ms Holmes—a two-year ban on participating in the blood-testing business—is absolutely laughable. Clearly, the odds are in favour of Bernie Madoff, Elizabeth Holmes, Enrons, World Coms and the VC industry that rolls the dice with other peoples’ money.
In our childhood, when we played cricket, the boy who owned the bat, ball and stumps made the batting rules. It is the same with capitalism, where the high priests of finance write the rules. I doubt if the Theranos story offers a lesson for anyone. There will be others like it and investors will pile on to them again. We see the foolishness of money managers from the fact that, even after the fraud was discovered, a distressed fund invested in Theranos in the hope of making a killing. The eminent board got away without any prosecution. The two main characters, Elizabeth and Ramesh Balwani, could get 20 years in prison, IF they are convicted. The firm of David Boies continues with its high-profile representation of the rich and the famous (https://en.wikipedia.org/wiki/Boies_Schiller_Flexner_LLP
The book is being made into a movie and I suspect, rather sadly, that the character of Elizabeth Holmes will be an inspiration for many.