Rethinking Entrepreneurship: Why Everyone Should Be Paying More attention To The Theranos Scandal

Richard K. Yu
Written by Richard K. Yu

The Theranos debacle is one of the most problematic instances of scientific fraud and a stunning lack of oversight in recent times.

Jean-Louis Gassée gives a great primer on everything that seems to have gone wrong this article detailing the issue.

 

To take on the mantle of the entrepreneur you have to be willing to take big risks.

High risk, high reward.

But let’s not forget that great bluffs also pay out in a game of poker.

Do you ever wonder how many successful people have faked it until they made it and then never went back to do their due diligence for faking it?

You know, the unapologetic and guiltless impostors. The arguable opposites of those with impostor syndrome — the opposites of those with talent but who doubt their own ability.

People who specialize in sounding convincing rather than having actual expertise in their proclaimed subject area?

Me too.

I vouch for a scrutiny beyond credentialism, beyond funding people based on confidence, and beyond assuming that large market forces cannot make mistakes.

Imagine for a moment that you’re a high school teacher for chemistry.

Your students are learning the periodic table of elements for the first time in their lives.

Naturally, some of them catch on faster than others when it comes to the basic abbreviations of the names of elements, protons and electrons, and so forth.

You explain that some of the abbreviations are counterintuitive because there is an English name for the element while the abbreviation on the table is based on Latin or some other language.

For instance, the element silver is abbreviated Ag from its Latin argentum.

The students signal that they understand, so you start testing them on a few. You slip in a trick question, “What’s the chemical symbol for potassium?”

“P!” one of the students naïvely guesses.

“Wrong, it’s actually K. Be careful everyone, since this is a common mistake,” you advise.

Now give that same high school student a dash of bluster and put him in the seat of a medical devices company with a billion-dollar valuation in 2013, and you have the sinking ship Theranos.

At least according to a report published by John Carreyrou of the Wall Street Journal, that captured the flaws in the knowledge of one of Theranos’ key executives, Ramesh Balwani, who committed the same exact high-school level misunderstanding during his discussions with the company’s engineers.

Theranos was a company whose CEO, Elizabeth Holmes, managed to secure funding from powerful backers with connections to the U.S. government along with figures such as billionaires Larry Ellison and Rupert Murdoch.

During her company’s time in the limelight, Ms. Holmes was touted by many as “the next Steve Jobs,” and an example of how female entrepreneurs could also make a major impact in Silicon Valley.

To emphasize the point that Ms. Holmes, a Stanford dropout, rode the wave of success without substance, Theranos’ technology had never been published in any peer-reviewed journals prior to receiving almost $750 million from investors.

Aside from the issues relating to expertise, there is the issue of character which applies to both Theranos executives and their investors.

Ever since the initial reports about Theranos’ massive fraud and duplicitous behavior in concealing the effectiveness of its blood testing system, Edison, went mainstream in October 2015, the case has become a cautionary tale about accountability in business.

We have to ask ourselves:

“If billionaires and powerful government figures can make such huge lapses in judgment when it comes to investing millions of dollars into someone’s idea, then what does it say about everyone else?”

These are people that are running gargantuan organizations operating on an inconceivable scale. Leaders who are responsible for the lives of thousands if not millions of others collectively.

If they don’t care enough to do the due diligence themselves on such a large investment, then what does that say about the rest of their ventures with regards to oversight and involvement?

Is such negligence at the top of the economic ladder an ethical concern?

As far as I can tell, other than the desire of these individuals to optimize their economic situation and investments — along with a few personal tastes that vary based on the individual — I don’t think there is any other compelling force preventing wealthy investors from making mistakes.

In other words, it seems that we’re generally relying on an entrepreneur’s desire to make money to regulate how they choose to invest in products and services that will eventually become available to our society.

That guarantee seems to work better in some areas such as finance or in the entertainment industry, such as with music or movies.

We can probably count on the people designing the financial systems to make the most efficient financial systems to benefit the market because the firms with the fastest and most efficient systems have the competitive edge.

Meanwhile, we also cannot assign blame as easily to music or movie executives who’ve mastered a sense of what sells and sounds the most enjoyable to the general population, even if their work doesn’t really produce anything aesthetically innovative or interesting.

Obviously, each industry has its delinquents and failures, but it seems like there are unique problems when academia and entrepreneurship mix.

That’s because there’s more uncertainty with regards to how to develop something reliably profitable when it comes to fields heavily steeped in their relations to academia, like medicine.

This uncertainty, in my opinion, stems from the disconnect between what is true in practice and what is accepted on paper, which represents the fundamental disconnect between academia and reality.

One recent example of the consequences of this uncertainty can be found in Celgene’s purchase of an experimental drug for Crohn’s disease that just ended up not working.

The stock price of the company reflected this in its sharp October 2017 decline followed by a subsequent and continuous bleeding out of its value.

You’d think with the resources and the large group of experts that pharmaceutical companies like Celgene have at their disposal, they might be able to catch that an experimental drug was not likely to be effective, or at least sign a deal that accounted for the risk.

I mean this is a drug that Celgene bought for $710 million — you’d expect some sort of risk mitigation measures in case the whole thing goes up in smoke and your company loses nearly half its value.

I know hindsight is 20/20, but you also don’t bet your arm on a coin flip.

I think the same sort of uncertainty that leads to massive failures in the decision-making for the acquisition of innovative drugs with potential by pharmaceutical companies mirrors the collective decision-making by those propping up Elizabeth Holmes and Theranos.

These aren’t isolated incidents either regarding the impracticality of academia in certain applications and discoveries.

Often, it does not take an organization, but merely an individual to weaken or undermine the credibility of the major authorities in their respective fields of science.

Briefly, another incident that shocked the international academic community concerned the reporting of fraudulent results relating to revolutionary STEM cell techniques published in the prestigious journal Nature by Haruko Obokata in 2014.

This Medium article below by Ichi Kanaya seems to explore the issue a bit more deeply. The picture features Obokata justifying herself to reporters in the wake of the controversy.

After the doctored results were discovered, severe consequences followed, such as the suicide of her mentor Yoshiki Sasai partially due to the shame following the outrage of the scientific community.

In rethinking entrepreneurship, we need to evaluate how the relationship between someone’s credentials and confidence and what they can actually, practically accomplish is scrutinized.

This article was published on Medium. It is reposted here with the permission of the author, Richard K. Yu.