10 Lessons in Management and Investing from John Carreyrou's Bad Blood

I recently read Bad Blood by John Carreyrou. It’s a book that charts the rise and fall of the (briefly) multi-billion dollar-valued startup, Theranos. If you’re unfamiliar with the company, it was founded by entrepreneur Elizabeth Holmes when she was 19 and purported to be have a machine able to do hundreds of different blood tests from a single drop of blood. When these claims came into contact with reality, however, what emerged was a company with little in the way of real, working technology, and a lot in the way of cover-ups, poor working practices and unkept promises. There’s a good piece to read on Theranos and its decline at Vanity Fair.

Here is a non-exhaustive list of some lessons that can be learned about management, and perhaps even investing, from the book.

1. If things seem bad to you as an employee, you’re probably right

If you’re at a company where things seem chaotic, and management seem to be making poor decisions, even as far as lying to regulators and painting a falsely rosy picture to investors, you may well be right. Poor business practices from senior management are almost always felt by employees.

2. Steve Jobs’s success is a lesson, not a model

A lot of executives seem to believe that Steve Jobs’s abrasive management style was what caused Apple’s success, whereas Steve Jobs was brilliant despite not because of his management style. Indeed, Jobs himself toned down his approach as time went on. He realised that it was often counter-productive. Elizabeth Holmes is a big fan of Steve Jobs (she even copied him by constantly leasing cars so she didn’t have to have a registration plate) and enjoyed comparisons with the Apple founder. A lot of Theranos’s attitude towards secrecy, working hours and micro-management seems to have at least some basis in the worst stories heard from Apple and Jobs.

3. Loyalty is earned

Ramesh “Sunny” Balwani, Theranos’s COO, wanted complete loyalty from employees, which isn’t necessarily unreasonable. However, what both Holmes and Balwani failed to realise is that loyalty is earned, you can’t force it onto employees, especially not through constant micro-management. As such, despite the heavy focus on loyalty (e.g. firing employees who questioned working practices, or for not being ‘team players’), Carreyrou’s book has been pieced together from interviews with many, many ex-employees. Granted, in part this is because the company is now no more, but even earlier ex-employees spoke out despite Non-Disclosure Agreements, and while the company had still a valuation in the billions because they felt mistreated and weren’t prepared to support the company’s practices. In Fred Lee’s If Disney Ran Your Hospital, he says "Being micromanaged by one’s boss is the surest way to lose talented people." And this certainly seems to have played out repeatedly at Theranos.

4. Value comes from shipping a product

Until a company ships a working product, you should consider whether they will ever have a working product. Theranos never made a revolutionary product, but they were valued as though they did. Speculative investors have to make these sorts of decisions, and often have the money to cover the losses of some with the successes of others. Smaller investors shouldn’t take these sorts of risks though. I’m sure that some thought it was less risky than it appeared because of Theranos’s own statements about how they were progressing, but in my view, actually shipping a product is the only evidence that a company is capable of shipping a product.

5. High valuations require firm evidence

Relatedly - you should back-up a company’s rosy outlook on their future with evidence that it’s well-placed. This includes information you have working for the company if you’ve been granted stock as part of your renumeration. If the company seems poorly run, then this is likely to effect your stock and you should get out. The recent WeWork fiasco (which you can read more about here) shows how many of the staff had bought into the WeWork dream. Some, I’m sure, were unaware of problems, but others must have had some belief something wasn’t right and didn’t trust themselves.

6. Talent and intelligence are not all-encompassing

The case of both Adam Neumann of WeWork and Elizabeth Holmes of Theranos show examples of people who are extremely talented in one area (sales) and yet have severe deficiencies in others (ethics, business, decision-making, relating to people). There seems to be a widespread belief that smart people are smart in all areas, but a brief moment of thought will remind you of people you know who are brilliant at some things and ludicrously deficient in others. High-flyers in unicorn start-ups are no different.

7. Just because you’re working with talented people, it doesn’t mean you’ll be successful

A key takeaway from Theranos is that talented people can fail to make a revolutionary product when they’re tasked with something that’s beyond their capabilities (indeed, probably beyond anyone’s capabilities). Noticing that you’re working with brilliant people should not be enough to reassure you that a company will be successful.

8. Leaders that don’t listen to staff, fail

Multiple times, the shortcomings of the technology were raised to senior staff, and indeed to the woefully inadequate board, but this challenge was taken as a sign of someone who was not bought into the company’s vision. They were sidelined, disparaged, silenced and fired by Holmes and Balwani, leaving an organisation of mostly “true believers” which proved absolutely fatal.

9. Most people want to do the right thing

One positive note from Theranos is that there were a lot of people who had severe concerns with the practices of the company. As mentioned above, they were removed, and some contributed to the expose that brought the company down, but there should be some comfort in the fact they were there. Most people are decent and want to do the right thing, even when constantly challenged by inept, bullying managers.

10. Theranos and WeWork aren’t unique

I’m going to finish with a less positive point, though. Throughout the end of Theranos’s existence, the company hired the most expensive of lawyers and used everything in their power (including influence from Obama’s Whitehouse) to keep their failures under wraps. It should strike fear into the heart of any start-up investors that this could well have been successful, at least for a time, especially in a company in which the faults weren’t quite so egregious as Theranos. It’s extremely unlikely the case of Theranos is unique. It’s worth looking at every one of the companies with similar access to legal resources, and political influence, and ask how much other terrible behaviour is being covered up. Chances are there’s an awful lot more than just Theranos and WeWork.