How can you tell a hopeful investment from a scam? The book Bad Blood: Secrets and lies in Silicon Valley startup might give you some clues.

Written by WSJ journalist John Carreyrou, Bad Blood details the spectacular rise and the even more spectacular fall of Theranos, a bioengineering startup headed by the photogenic Elizabeth Holmes. Founded in 2003 by a then 19 year old Holmes, Theranos claimed that it can do blood tests with only 1/1000 of the existing costs with its revolutionary technology. Theranos received USD 700 million in total funding, and was valued at USD 10 billion at its peak. Not bad for a company whose products didn’t work at all.

So how did Theranos being able to get away with lies for so long?

Being able to do all the blood tests at a prickle of fingertip is beyond the capability of modern technology. But essentially this was the promise and the secret technology of Theranos. Couldn’t the press and angel investors spotted the implausibility of the claim immediately? How can it remain on the field for so long, and deceive so many people?

Theranos has a charismatic, woman founder. Elizabeth Holmes is young, a Stanford dropout and also very pretty. The press loves the story of how a college dropout changes the world. The story of how Bill Gates, Steve Jobs and Mark Zuckerberg is the lore of Silicon Valley and beyond; we just love how they built their companies from nothing into world dominant empires. And now we have another college dropout, who is just as charismatic and is also on set to change the world! As one heard how she dread needle, and how she visioned to put every one of Theranos device in every single home, so that one could measure the drug results and adjust the dosage in real time, and so that “no one would have to say goodbye to the love ones too soon”, who wouldn’t want to believe it? That she happened to be an attractive, young woman definitely helped; listening to such a beauty talking is definitely more entertaining and more believable than listening to just another middle age, bald man saying exactly the same thing. It’s call the law of attraction. In the age when we are hell-bent on fixing the gender-inequality “problem” in tech and IT, we definitely need such a woman role model. Sometimes you might just get what you wish for, but be careful though.

Yes, I do believe that reverse sexism is at work here, however politically incorrect it might sound.

Beneath her charming appearance belied her ruthless side. Together with her sidekick cum boyfriend Sunny Balwani, the duo intimidated the employees from disclosing the trade secret of the company to anyone, which is nothing. Theranos was setup in such a way that different departments, or even different sections within the same technical department cannot communicate with each other, and only the founder knew what was going on. This made progress very difficult. Employees were berated for failing to achieve the impossible, the morale was low, the turnover was very high. Failing to deliver, Theranos resorted to lies to continue to mislead the press and investors. Disgruntled employees and those who left were kept silence with the threat of lawsuits so that no one can say the employees had no cloth.

But eventually, the lies caught up. Theranos was a big company with hundreds of employees at its height, all it took was one or two employees who told the truth to the press and the press would start digging, which would lead to the collapse of the house of cards. Furthermore, after many years in stealth mode, Theranos has to have something to show to the investors, which led to the partnership with healthcare stores such as Safeway and Walgreen, which exposed Theranos to actual market testing even though the product wasn’t ready at all. The market for healthcare is very unforgiving especially in a litigious country such as US. It wasn’t long before Theranos failure was exposed, and the press pounced on it like vulture pounding on dead meat, and Theranos was finished for good.

Both Elizabeth Holmes and Sunny Salwani are now facing federal lawsuit for “the conspiracy to commit fraud”.

So, next time if you are facing with an “investment” opportunity, how can you tell whether this is a genuine opportunity, or just a scam? We can never know for sure, but from this case can draw some useful lessons:

  1. How well can the leader take criticism. When the employees raised valid doubts about Holmes exaggerated presentation and commented that what she promised was not achievable, she would get angry and put them off her good books. Telling painful truth to her can mean the end of your spell at the company. Elizabeth Holmes herself was a college dropout and didn’t possess the necessary background to discern on technical things. When you are criticized for the things you are ignorant of by the people in the know, and you got angry, this means that your company’s ceiling is you, which is pretty low. Good luck changing the world with that kind of attitude.
  2. How truthful the company is. Theranos consistently misrepresented the capability of their devices to the press and investors. When people asked how can a prickle of blood can support so many tests despite the known current technological limitations, the company responded by saying that it’s all trade secret and you are not supposed to raise this question. The company also “boasted of mysterious contracts with pharmaceutical companies that never seemed to be available for viewing. It spread the story that the United States Army was using its devices on the battlefield and in Afghanistan–a fabrication.”  It is difficult to make forecasts, especially about the future. If a company has to lie about its past accomplishment, how can you trust its future projections?
  3. Cargo cult science. From her black turtle attire, to the supposed breakthrough killer device named “4S”, to the demand that the device must be miniature enough to be held in one hand, Holmes sought to emulate her idol, Steve Jobs at every turn. Richard Feynman calls this cargo cult science — you emulate the superficial and not the essence of a successful enterprise. Cargo cult science is what you practice when you don’t know the cause of the success, but you still want to copy something.
  4. Excessive secrecy. A lot of people sought to emulate Steve Jobs who is known to be a security paranoa. Sometimes secrecy is needed because you don’t want your competitors to beat you, but more often than not, it’s also a sign that something is rotten and hence the need to hide it. This is the case with Theranos, information was hidden even from the employees who were supposed to do the job, and leaving employees were threatened with lawsuit should they dare to betray the company’s trade secret. This is especially ironic because there is nothing worthy they can disclose — which is the root problem.
  5. Extraordinary claims require extraordinary evidence. If some inventions or investment returns seem too good to be true, then one needs to be extra vigilant, maybe it is really true after all, but it is more likely that it is not. This adage is especially true in technical fields such as bioengineering. In those fields, progress is usually incremental, and it disseminates quickly via peer-reviewed journals. If your invention is so good, then on what scientific basis it is being built on? Why is it that no one else stumble upon the same thing? Theranos had been consistent in unable to point to any studies that showed the efficacy of the killer device; the only “study” that it can pointed to is a paper in Hematology Reports, which includes the data of just one blood test with a grand total of six patients. This by itself is a pretty strong rat smell.
  6. High turnover of staffs. Usually one is not privy to the sensitive information such as staff turnover rate in a company, but in the case of Theranos, there are enough telltale signs: that the management team didn’t last long. In the book, a whistleblower found that the faces of the management team were completely different from the previous year. If the company is well, why people can’t stay long?

Having said this, I would like to offer a caveat….

Reading Bad Blood reminds me of Steve Jobs. Like Theranos, Apple was also shrouded in secrecy; like Holmes, Steve Jobs was also mean and demanding towards staffs; like Holmes, Steve Jobs demanded unreasonable high standards and pathological perfectionism towards the products; like Holmes, Steve Jobs also had the tendency to hyperbole and exaggerations, and like Holmes, Steve Jobs was also a non-technical founder at a technical company.

But unlike Holmes, Jobs has a genius technical cofounder in Steve Wozniak who practically single-handedly built the first generation Apple machine. Elizabeth Holmes simply didn’t have the luck to meet her Steve Wozniak before the music stopped, resulting in the abject failure ( Maybe she hoped that while she was faking it, she could meet her Wozniak? Obviously this is a risky strategy). Without Steve Wozniak Apple would most likely be confined to history dustbin and Steve Jobs would be remembered as just another megalomaniac, narcissist who dreamt way beyond his ability, if at all.

This is the tricky part about business case analysis: sometimes doing all the wrong things can still result in success, as long as you are lucky enough, likewise, doing all the right things can still end in failure, if you are unlucky enough. Even though we can watch out for the telltale signs, but we can never too sure of anything. In business, it takes luck– more than anything else– to be successful.