Elizabeth Holmes and the Perils of Success

I am following with great interest one of the most significant fraud trials of the past decade, that of Elizabeth Holmes, the CEO of biotech startup Theranos. The company’s central product was a machine known as the Edison, which was supposed to provide a wide range of blood tests on just a few drops of blood taken by pricking a finger. It had the potential to revolutionize the blood testing industry, and the intent was to roll the machines out in pharmacy settings, including at Walgreens. Holmes’s vision and persuasiveness were sufficient to enable her to raise nearly a billion dollars in capital to support the dream, and no one ever asked for audited financial statements. As it turned out, there was a giant disconnect between what Holmes advertised and the actual performance of the machines

John Carreyrou of The Wall Street Journal broke the story through a series of articles beginning in 2015, eventually resulting in his book, Bad Blood. The whistleblower in the case, Tyler Shultz, is t

John Carreyrou of The Wall Street Journal broke the story through a series of articles beginning in 2015, eventually resulting in his book, Bad Blood. The whistleblower in the case, Tyler Shultz, is the grandson of former Theranos board member, George Shultz, who was Ronald Reagan’s Secretary of State. The younger Shultz was employed by Theranos after graduating from Stanford, and he quickly became aware of the inconsistency of the company’s testing and of the willingness of upper management to cover it up from outsiders. He captivated my Accounting Ethics students this spring as he told his story.

Elizabeth Holmes is not your everyday felon. As she battles for her freedom in the eighth week of her fraud trial, she portrays the quiet resolve of someone who has always, in the end, won. And this may indeed happen for her again.

There are several reasons why Ms. Holmes may never go to prison for her actions as CEO. Her trial, which began over two months ago, has devolved into a grind for a jury pool that is rapidly shrinking. The sheer number of witnesses going over similar facts about who knew what, and who was responsible, would be a lot for me to bear, and I am fascinated by cases like this one. For the average Californian who has a job and a family, and who is being called aside to do this as a civic duty, the requirements to focus must be unimaginable. One juror has been dismissed for working on Sudokus while the trial was going on. Another juror was allowed to leave after expressing to the judge that she could not send Elizabeth Holmes to prison because her religion believes in forgiveness.

In addition, there is the looming specter of the trial following hers of Sunny Balwani, her former partner and Theranos’s chief operating officer. In some senses, the defense has tried to make the current trial a trial of Balwani, holding him up as insulating Holmes from things that were nefarious, so that she never knowingly signed off on anything fraudulent. Balwani’s reputation as a bully certainly helps Holmes’s case. Without any resolution from a previous trial, the defense has significant opportunities to introduce reasonable doubt into the jury’s mind about what Ms. Holmes knew when.

In the entrepreneurial world, many celebrate the concept of “Fake it till you make it,” and those who perhaps exaggerate their progress early in the startup process are lionized as heroes once the company is a stable success. Holmes went beyond the normal startup founder,

captivating a broad audience with her persona and the back story of a teenage Stanford dropout who was just wasting her time taking classes when she already knew what she wanted to do. In addition, she was able to recruit investments from, and fill board seats with, a cadre of influential investors and politicians, earning her the title at one point of the youngest U.S. female billionaire. It also landed her on magazine covers and on stage at prominent business conferences.

It is easy to become jaded and wish for the worst for those who fall prey to their own hubris. And I would probably be the last person anyone in these cases would want on their jury. But at this point in my life I wonder, what if she had just accepted that they had failed in their attempt at greatness and offered disappointing news to her investors, and then tried again? Today she would likely be CEO of Theranos or of something greater. And when she holds her mother’s hand, it would be to walk her little boy around the block, not to go in and out of the courtroom.

And what exactly do I tell my students? All of them are looking for people to inspire them to do great things; my students want to be like these accomplished people. Should I turn my students into cynics because these people cross lines? My students sometimes have trouble settling for being really good, and they are only okay if they are the very best. The same has been true in amateur and professional sports, where numerous athletes have taken steroids to get an advantage.

The interesting thing to me is how many of these people are extraordinary without crossing the lines. Multiple Hall of Fame quality baseball players are not in the Hall simply because they took steroids. People like Barry Bonds and Roger Clemens were amazing before they broke the rules. The same is true of Elizabeth Holmes. What makes them willing to risk it all rather than fall short of being transformative?

I assume that ego is part of the answer. But I also have to recognize that many of us, including me, love to believe the unbelievable. And we invest ourselves in those who can make things seem possible. Sometimes it is just hero worship, and sometimes it is our money, but when those heroes fail, we are ready to burn the whole thing down. Perhaps we should recognize that we feed the flame as well.

In the meantime, in the next month or two, Elizabeth Holmes will learn her fate. Twelve good people will set the direction for her life. And this piece that I have written will fade into the dust of memory.

But if I could say one thing to my students, regardless of the trial’s outcome, it would be this: You are enough as you are. Dream big but tell the truth—to yourself and to others.

And if you are going to invest your money in your heroes—ask for audited financial statements.