In my library I have a shelf for “Business Books” and a separate shelf for “Scams, Cons & Hoaxes.” The second shelf is far larger than the first one, which should alert everyone to my fascination with the shadier side of business. That said, I’ve never read about a scam like the one involving Theranos. First, unlike most Ponzi schemes, this variation was not planned in advance. It evolved to save a failing business, so it was a “make it up as you go along” kind of deal. Eventually, the scam got too deep for any amount of money or any kind of business savior to salvage.
The blood-testing devices invented by the folks at Theranos (the name came from “therapy” and “diagnosis”) simply didn’t work, but that didn’t stop the principals from raising hundreds of millions of dollars to keep the company and as many as 800 employees floundering about. The main problem was that management couldn’t tell the difference between a prototype and a finished product. One critic said that the Theranos business plan was like “building the bus while driving it.”
The Theranos scam was similar to a Ponzi scheme in the sense that there were always new investors to keep the company going. The big difference was that the earlier investors never got paid back by the new investors. Promising new investors a high rate of return on their investments immediately is the key to making a Ponzi scheme work for a while. But the Theranos scheme worked because new investors were impressed with the reputations of the previous investors and the quality of the Theranos board members (lured by now-worthless stock deals) despite the company’s lack of any actual sales income. Instead of perfecting real products and putting them on the market, management (lacking a chief financial officer), fabricated new income streams out of thin air and used such projections to generate more investments into the company. I think that’s called fraud. In 2015, investors had pushed the value of Theranos to 9 billion dollars. When the scam was revealed and everything was said and done in 2018, the value of Theranos was zero dollars. As the author, John Carreyrou, writes in the last sentence in the book, “All told, investors in Theranos have lost nearly $1 billion.”
Bad Blood is a book that should be read by every business person anywhere. It’s not only educational, it’s humbling. Despite nearly unlimited funding, these people couldn’t make a success out of a flawed business plan.
Review of “Bad Blood”
