Bad Blood : Secrets and Lies in a Silicon Valley Startup
by Carreyrou, John







Author's Noteix
Prologue3(6)
1 A Purposeful Life
9(9)
2 The Gluebot
18(12)
3 Apple Envy
30(11)
4 Goodbye East Paly
41(13)
5 The Childhood Neighbor
54(13)
6 Sunny
67(14)
7 Dr. J
81(14)
8 The miniLab
95(14)
9 The Wellness Play
109(11)
10 "Who Is LTC Shoemaker?"
120(12)
11 Lighting a Fuisz
132(9)
12 Ian Gibbons
141(9)
13 Chiat\Day
150(11)
14 Going Live
161(13)
15 Unicorn
174(10)
16 The Grandson
184(17)
17 Fame
201(12)
18 The Hippocratic Oath
213(10)
19 The Tip
223(17)
20 The Ambush
240(10)
21 Trade Secrets
250(9)
22 La Mattanza
259(9)
23 Damage Control
268(13)
24 The Empress Has No Clothes
281(13)
Epilogue294(7)
Acknowledgments301(4)
Notes305(20)
Index325


"The full inside story of the breathtaking rise and shocking collapse of Theranos-the Enron of Silicon Valley-by the prize-winning journalist who first broke the story and pursued it to the end in the face of pressure and threats from the CEO and her lawyers. In 2014, Theranos founder and CEO Elizabeth Holmes was widely seen as the female Steve Jobs: a brilliant Stanford dropout whose startup "unicorn" promised to revolutionize the medical industry with a machine that would make blood tests significantly faster and easier. Backed by investors such as Larry Ellison and Tim Draper, Theranos sold shares in an early fundraising round that valued the company at $9 billion, putting Holmes's worth at an estimated $4.7 billion. There was just one problem: the technology didn't work. For years, Holmes had been misleading investors, FDA officials, and her own employees. When Carreyrou, working at the Wall Street Journal, got a tip from a former Theranos employee and started asking questions, both Carreyrou and the Journal were threatened with lawsuits. Undaunted, the newspaper ran the first of dozens of Theranos articles in late 2015. By early 2017, the company's value was zero and Holmes faced potential legal action from the government and her investors. Here is the riveting story of the biggest corporate fraud since Enron, a disturbing cautionary tale set amid the bold promises and gold-rush frenzy of Silicon Valley"-





John Carreyrou is a two-time Pulitzer Prize-winning investigative reporter at The Wall Street Journal. For his extensive coverage of Theranos, Carreyrou was awarded the George Polk Award for Financial Reporting, the Gerald Loeb Award for Distinguished Business and Financial Journalism in the category of beat reporting, and the Barlett & Steele Silver Award for Investigative Business Journalism. Carreyrou lives in Brooklyn with his wife and three children.





*Starred Review* Stories of corporate fraud and malfeasance are so ubiquitous as to barely raise an eyebrow, so the shock-and-awe media coverage surrounding the charges of massive fraud against Theranos CEO Elizabeth Holmes indicated a story of nearly unprecedented significance. A teenage Stanford dropout when she patented her idea for developing portable devices to administer comprehensive tests using only a single drop of blood, Holmes had a meteoric rise in Silicon Valley. She was acknowledged as the youngest self-made female billionaire in the world, helped in large part by her doe-eyed, husky-voiced charisma that attracted the likes of former secretaries of state George Shultz and Henry Kissinger and current secretary of defense James Mattis to her board of directors. Yet the company's purported capabilities and successes were shams, created by Holmes' unwavering but deluded belief in her thesis and reinforced by a workplace run on intimidation, fear, and paranoia. It would take the dauntless efforts of Wall Street Journal reporter Carreyrou to expose Holmes for the charlatan she was. Crime thriller authors have nothing on Carreyrou's exquisite sense of suspenseful pacing and multifaceted character development in this riveting, read-in-one-sitting tour de force. Investigative journalists are perhaps the country's last true protectors of truth and justice, and Carreyrou's commitment to unraveling Holmes' crimes has been literally of life-saving value. Copyright 2018 Booklist Reviews.





A deep investigative report on the sensationalistic downfall of multibillion-dollar Silicon Valley biotech startup Theranos.Basing his findings on hundreds of interviews with people inside and outside the company, two-time Pulitzer Prize-winning Wall Street Journal reporter Carreyrou rigorously examines the seamy details behind the demise of Theranos and its creator, Elizabeth Holmes. Founded in 2003, when Holmes was just 19, the company's claim to "fame" was its revolutionary blood-testing system, which touted the detection of everything from high cholesterol to hepatitis C to cancer using only one drop of blood. While raising $9 billion through a series of aggressive (and falsified) claims and dozens of private investors, the company's spiking net worth caught Carreyrou's attention a few years ago. His eye-opening reporting on the company's inaccurate, voided, or corrected test results, as well as the loss of major retail partnerships with Walgreens and Safeway, knocked The ranos off the tech radar and left it irreversibly devastated. The author glosses over Holmes' history as an unpopular high schooler and, later, Stanford dropout, focusing on her early vision of the specialized blood-reading equipment, the rapid evolution of Theranos, and the early skepticism about the device's efficacy and reliability. The well-integrated employee profiles and testimonies effectively support Carreyrou's damning narrative and discredit Holmes as a power-hungry, avaricious young leader who courted venture capitalists with specious claims. Former Theranos employees paint Holmes as an increasingly tyrannical leader who demanded allegiance and who swiftly terminated those who she felt fell short of ultimate loyalty. The author brilliantly captures the interpersonal melodrama, hidden agendas, gross misrepresentations, nepotism, and a host of delusions and lies that further fractured the company's reputation and halted its rise. More recently, the Securities and Ex c hange Commission slapped Theranos and Holmes with fraud charges, though she still touts her device as having improved accuracy and importance. Already slated for feature film treatment, Carreyrou's exposé is a vivid, cinematic portrayal of serpentine Silicon Valley corruption. Copyright Kirkus 2018 Kirkus/BPI Communications. All rights reserved.





Prologue

November 17, 2006


Tim Kemp had good news for his team.

The former IBM executive was in charge of bioinformatics at Theranos, a startup with a cutting-edge blood-testing system. The company had just completed its first big live demonstration for a pharmaceutical company. Elizabeth Holmes, Theranos’s twenty-two-year-old founder, had flown to Switzerland and shown off the system’s capabilities to executives at Novartis, the European drug giant.

“Elizabeth called me this morning,” Kemp wrote in an email to his fifteen-person team. “She expressed her thanks and said that, ‘it was perfect!’ She specifically asked me to thank you and let you all know her appreciation. She additionally mentioned that Novartis was so impressed that they have asked for a proposal and have expressed interest in a financial arrangement for a project. We did what we came to do!”

This was a pivotal moment for Theranos. The three-year-old startup had progressed from an ambitious idea Holmes had dreamed up in her Stanford dorm room to an actual product a huge multinational corporation was interested in using.

Word of the demo’s success made its way upstairs to the second floor, where senior executives’ offices were located.

One of those executives was Henry Mosley, Theranos’s chief financial officer. Mosley had joined Theranos eight months earlier, in March 2006. A rumpled dresser with piercing green eyes and a laid-back personality, he was a veteran of Silicon Valley’s technology scene. After growing up in the Washington, D.C. area and getting his MBA at the University of Utah, he’d come out to California in the late 1970s and never left. His first job was at chipmaker Intel, one of the Valley’s pioneers. He’d later gone on to run the finance departments of four different tech companies, taking two of them public. Theranos was far from his first rodeo.

What had drawn Mosley to Theranos was the talent and experience gathered around Elizabeth. She might be young, but she was surrounded by an all-star cast. The chairman of her board was Donald L. Lucas, the venture capitalist who had groomed billionaire software entrepreneur Larry Ellison and helped him take Oracle Corporation public in the mid-1980s. Lucas and Ellison had both put some of their own money into Theranos.

Another board member with a sterling reputation was Channing Robertson, the associate dean of Stanford’s School of Engineering. Robertson was one of the stars of the Stanford faculty. His expert testimony about the addictive properties of cigarettes had forced the tobacco industry to enter into a landmark $6.5 billion settlement with the state of Minnesota in the late 1990s. Based on the few interactions Mosley had had with him, it was clear Robertson thought the world of Elizabeth.

Theranos also had a strong management team. Kemp had spent thirty years at IBM. Diane Parks, Theranos’s chief commercial officer, had twenty-five years of experience at pharmaceutical and biotechnology companies. John Howard, the senior vice president for products, had overseen Panasonic’s chip-making subsidiary. It wasn’t often that you found executives of that caliber at a small startup.

It wasn’t just the board and the executive team that had sold Mosley on Theranos, though. The market it was going after was huge. Pharmaceutical companies spent tens of billions of dollars on clinical trials to test new drugs each year. If Theranos could make itself indispensable to them and capture a fraction of that spending, it could make a killing.

Elizabeth had asked him to put together some financial projections she could show investors. The first set of numbers he’d come up with hadn’t been to her liking, so he’d revised them upward. He was a little uncomfortable with the revised numbers, but he figured they were in the realm of the plausible if the company executed perfectly. Besides, the venture capitalists startups courted for funding knew that startup founders overstated these forecasts. It was part of the game. VCs even had a term for it: the hockey-stick forecast. It showed revenue stagnating for a few years and then magically shooting up in a straight line.

The one thing Mosley wasn’t sure he completely understood was how the Theranos technology worked. When prospective investors came by, he took them to see Shaunak Roy, Theranos’s cofounder. Shaunak had a Ph.D. in chemical engineering. He and Elizabeth had worked together in Robertson’s research lab at Stanford.

Shaunak would prick his finger and milk a few drops of blood from it. Then he would transfer the blood to a white plastic cartridge the size of a credit card. The cartridge would slot into a rectangular box the size of a toaster. The box was called a reader. It extracted a data signal from the cartridge and beamed it wirelessly to a server that analyzed the data and beamed back a result. That was the gist of it.

When Shaunak demonstrated the system to investors, he pointed them to a computer screen that showed the blood flowing through the cartridge inside the reader. Mosley didn’t really grasp the physics or chemistries at play. But that wasn’t his role. He was the finance guy. As long as the system showed a result, he was happy. And it always did.

***

Elizabeth was back from Switzerland a few days later. She sauntered around with a smile on her face, more evidence that the trip had gone well, Mosley figured. Not that that was unusual. Elizabeth was often upbeat. She had an entrepreneur’s boundless optimism. She liked to use the term “extra-ordinary,” with “extra” written in italics and a hyphen for emphasis, to describe the Theranos mission in her emails to staff. It was a bit over the top, but she seemed sincere and Mosley knew that evangelizing was what successful startup founders did in Silicon Valley. You didn’t change the world by being cynical.

What was odd, though, was that the handful of colleagues who’d accompanied Elizabeth on the trip didn’t seem to share her enthusiasm. Some of them looked outright downcast.

Did someone’s puppy get run over? Mosley wondered half jokingly. He wandered downstairs, where most of the company’s sixty employees sat in clusters of cubicles, and looked for Shaunak. Surely Shaunak would know if there was any problem he hadn’t been told about.

At first, Shaunak professed not to know anything. But Mosley sensed he was holding back and kept pressing him. Shaunak gradually let down his guard and allowed that the Theranos 1.0, as Elizabeth had christened the blood-testing system, didn’t always work. It was kind of a crapshoot, actually, he said. Sometimes you could coax a result from it and sometimes you couldn’t.

This was news to Mosley. He thought the system was reliable. Didn’t it always seem to work when investors came to view it?

Well, there was a reason it always seemed to work, Shaunak said. The image on the computer screen showing the blood flowing through the cartridge and settling into the little wells was real. But you never knew whether you were going to get a result or not. So they’d recorded a result from one of the times it worked. It was that recorded result that was displayed at the end of each demo.

Mosley was stunned. He thought the results were extracted in real time from the blood inside the cartridge. That was certainly what the investors he brought by were led to believe. What Shaunak had just described sounded like a sham. It was OK to be optimistic and aspirational when you pitched investors, but there was a line not to cross. And this, in Mosley’s view, crossed it.

So, what exactly had happened with Novartis? Mosley couldn’t get a straight answer from anyone, but he now suspected some similar sleight of hand. And he was right. One of the two readers Elizabeth took to Switzerland had malfunctioned when they got there. The employees she brought with her had stayed up all night trying to get it to work. To mask the problem during the demo the next morning, Tim Kemp’s team in California had beamed over a fake result.

***

Mosley had a weekly meeting with Elizabeth scheduled for that afternoon. When he entered her office, he was immediately reminded of her charisma. She had the presence of someone much older than she was. The way she trained her big blue eyes on you without blinking made you feel like the center of the world. It was almost hypnotic. Her voice added to the mesmerizing effect: she spoke in an unusually deep baritone.

Mosley decided to let the meeting run its natural course before bringing up his concerns. Theranos had just closed its third round of funding. By any measure, it was a resounding success: the company had raised another $32 million from investors, on top of the $15 million raised in its first two funding rounds. The most impressive number was its new valuation: one hundred and sixty-five million dollars. There weren’t many three-year-old startups that could say they were worth that much.

One big reason for the rich valuation was the agreements Theranos told investors it had reached with pharmaceutical partners. A slide deck listed six deals with five companies that would generate revenues of $120 million to $300 million over the next eighteen months. It listed another fifteen deals under negotiation. If those came to fruition, revenues could eventually reach $1.5 billion, according to the PowerPoint presentation.

The pharmaceutical companies were going to use Theranos’s blood-testing system to monitor patients’ response to new drugs. The cartridges and readers would be placed in patients’ homes during clinical trials. Patients would prick their fingers several times a day and the readers would beam their blood-test results to the trial’s sponsor. If the results indicated a bad reaction to the drug, the drug’s maker would be able to lower the dosage immediately rather than wait until the end of the trial. This would reduce pharmaceutical companies’ research costs by as much as 30 percent. Or so the slide deck said.

Mosley’s unease with all these claims had grown since that morning’s discovery. For one thing, in his eight months at Theranos, he’d never laid eyes on the pharmaceutical contracts. Every time he inquired about them, he was told they were “under legal review.” More important, he’d agreed to those ambitious revenue forecasts because he thought the Theranos system worked reliably.

If Elizabeth shared any of these misgivings, she showed no signs of it. She was the picture of a relaxed and happy leader. The new valuation, in particular, was a source of great pride. New directors might join the board to reflect the growing roster of investors, she told him.

Mosley saw an opening to broach the trip to Switzerland and the office rumors that something had gone wrong. When he did, Elizabeth admitted that there had been a problem, but she shrugged it off. It would easily be fixed, she said.

Mosley was dubious given what he now knew. He brought up what Shaunak had told him about the investor demos. They should stop doing them if they weren’t completely real, he said. “We’ve been fooling investors. We can’t keep doing that.”

Elizabeth’s expression suddenly changed. Her cheerful demeanor of just moments ago vanished and gave way to a mask of hostility. It was like a switch had been flipped. She leveled a cold stare at her chief financial officer.

“Henry, you’re not a team player,” she said in an icy tone. “I think you should leave right now.”

There was no mistaking what had just happened. Elizabeth wasn’t merely asking him to get out of her office. She was telling him to leave the company—immediately. Mosley had just been fired.






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