Coyote Blog

Over the weekend I read John Carreyrou's book Bad Blood, which is a narrative of the fraud at blood analyzer startup Theranos that Mr. Carrreyrou broke in the WSJ.  To save me summarizing the story, here is the Amazon description:

 In Bad Blood, the Wall Street Journal’s John Carreyrou takes us through the step-by-step history of Theranos, a Silicon Valley startup that became almost mythical, in no small part due to its young, charismatic founder Elizabeth Holmes. In fact, Theranos was mythical for a different reason, because the technological promise it was founded upon—that vital health information could be gleaned from a small drop of blood using handheld devices—was a lie. Carreyrou tracks the experiences of former employees to craft the fascinating story of a company run under a strict code of secrecy, a place where leadership was constantly throwing up smoke screens and making promises that it could not keep. Meanwhile, investors kept pouring in money, turning Elizabeth Holmes into a temporary billionaire. As companies like Walgreens and Safeway strike deals with Theranos, and as even the army tries to get in on the Theranos promise (there’s a brief cameo by James “Mad Dog” Mattis), the plot thickens and the proverbial noose grows tighter. Although I knew how the story ended, I found myself reading this book compulsively

In short, I really enjoyed the book and found it hard to put down.  Carreyrou has made it an interesting narrative, that gets bogged down only slightly by the fact that there are just so many people's names that pass through the narrative, an unavoidable problem given the huge employee turnover at Theranos.  There is a meta-narrative that repeats over and over:  new employee shows up full of passion, new employee starts seeing bad stuff, new employee reports bad stuff to visionary founder, visionary founder fires employee on the spot, employee gets harassed for months and years by Theranos lawyers.

I will warn you that a book like this was always going to be catnip for me.  I love business craziness and disaster stories (e.g. Barbarians at the Gate and the Devil's Candy).  Possibly this is just schadenfreude, or possibly it was from my personal brush with another one (I worked for Jeff Skilling briefly at McKinsey & Co. on the Enron study).  But I think many will enjoy it, if for no other reasons that while Skilling at Enron or Johnson at RJR were not well known to the average person, Elizabeth Holmes was a household name, almost a pop culture figure.  She was  on the cover of every magazine and on every talk show.  She was both admired and envied, both as a young female billionaire and as someone who had a real vision to help humanity.  How did she go so far off the rails?

I followed this story originally in the pages of Carreyrou's WSJ articles, and as it unfolded I was asking, like most everyone, could this be true?  As he continued to report, it became steadily clearer that there was real fraud involved.  So I wanted to read the book and see where the fraud started.  I assumed that the central mystery of the book would be when that fateful step over the line occured.

But it turned out that Holmes was going over the line almost from the very beginning.  The real mystery became:  when and how is someone finally going to blow the whistle on this?  And also, given that I knew the whole thing doesn't start to unravel until 2016 or so, how is it going to take that long for this to come out?  Part of the answer is the insane security and non-disclosures put in place in addition to borderline-unethical legal pressure brought on potential whistleblowers by lawyers like David Boies.  But there are other causes as well, including:

• People wanted her vision to be true.  My wife is a borderline diabetic who has to give a lot of blood -- she was very passionate about this technology.
• Companies like Walgreens operated from a fear of missing out.  They had a lot of clues there were problems, but if they didn't pursue it, what if it really did work and their competitors did the deal instead?
• The oddest cause of all (and one Carreyrou does not really dwell on) was that rich older men fell for Holmes hard.  Hardened, seasoned business people time and again fell under her sway and followed her almost like a cult leader and helped protect her from accountability.  The list is like a who's who:  Larry Ellison, Steven Burd (CEO of Safeway), Rupert Murdoch, David Bois, James Mattis, George Schultz, Henry Kissinger -- the list goes on and on.  She had the highest power board I have ever seen at any company ever and she completely dominated them.  On the other hand, I don't think there is a single young female in the story who fell for her BS for more than a few months.

One other note that I think is worth mentioning:  Rupert Murdoch gets a lot of cr*p for being the poster child of destructive corporatization of media.  In this story, he was the single largest investor in Theranos with $125 million of his money in the company.  He was one of the older men who fell totally for Holmes.  But when Holmes came to him several times asking him to shut down an out of control reporter at Murdoch-owned WSJ, Murdoch said no, despite the fact that this reporting would eventually make Murdoch's $125 million investment worthless.

Apparently, Google is building a huge a showy hub for its corporate aircraft.  Does this strike anyone else as an anachronism, from the folks who bring us Gmail and Google groups?  It's like the Fedex having a Pony Express account.

By the way, if anyone read the fabulous book "Barbarians and the Gate," they** will remember RJR Nabisco's construction of a corporate aircraft palace in Atlanta marked the beginning of the end of that company's fiscal extravagance.

** I know this is grammatically incorrect, but I am exhausted with English's lack of a third person singular gender-neutral pronoun and hate saying "he or she."  English is a language built bottom up from actual usage, so lacking any better idea, I support "they" as the solution.

If you have worked in a large corporation, you probably have witnessed some end of quarter or end of year sales push, to buff up the current period's results.  People who buy cars often get the advice to buy at the end of the month or year to take advantage of this motivation.  A great example of this was in the book Barbarians at the Gate, where RJR would load the channel at the end of each quarter with tons of extra inventory to buff up quarterly profits.  Of course, this just creates the incentive next year to load the channel even more to top the previous quarter's profits that were pumped up by loading.

All of this is both rational and irrational.  From a shareholder standpoint it is irrational -- the end of the reporting period is arbitrary and all the company is doing is shifting some sales a few days, rather than generating new ones.  It can even be negative for shareholders, as in the RJR case when loading caused inventory to sit on shelves for longer and get stale and thereby less appealing to customers.   For employees of the company, this can be entirely rational depending on their incentives.  While pulling sales forward to get a better grade or commission for this quarter feels good now, it can make the next quarter harder.  But who knows what will happen in the next quarter?  In a high turnover world, I could be in a new job or new company next quarter.  Anyone who has worked with corporate incentive programs knows that it is impossible to eliminate all the unintended consequences -- all one can do is minimize them.

But supporters of government superiority to private enterprise argue that this is exactly why government is superior, because it does not have these short-term focused goals.  HAH!

Politicians are among the worst at this.  It used to be they would do short term things to get elected, leaving the following election to take care of itself.  Now, they will take short term actions just to dominate the current news cycle.  Next week? That's an eternity, we have problems now.  Every single action taken over the last two years by both this and the previous administration and the current one relative to the economy have been totally short-term focused.  Let's bail everyone out.  Moral hazard?  That's the next administration's problem.  Just look at cash for clunkers, where the government paid $4000 for cars that blue-booked for $1500 all to pull September sales into August.  But they won the news cycle in August!

But the actual reason for my rant is a note I got from the Arizona Department of Revenue.  Apparently they have a program where large filers have to do a special report to pre-pay June sales tax** collections by June 29  (rather than by July 20 when they would usually be due).  As is so often the case, the law has been changed such that a special requirement for large filers had its threshold changed such that small-medium filers like myself also now have to play.  This is a sort of 13th report one must file (we file reports monthly) and the processing of it takes a lot of private time, plus the state has to hire a number of temps and pay overtime to receive this filing.

So why the special requirement?  Well, Arizona is on a July-June fiscal year, so June 29 is just about the end of their fiscal year.  And they are on a cash accounting basis (like most governments) so any cash that comes in the door, even if it is for a pre-payment of a future liability, counts as current period income.  This means that the state is spending a lot of overtime money shifting income by 21 days just to make its current period look better -- just like RJR or any other dynsfunctional private company.

But what makes this even more short term is that it only works once -- the first time.  It will make the first year this trick is applied look better, but then every year after will go back to being the same, with July losses to the prior year offset by June gains from the forthcoming year.  In fact the only way this game can work twice is if the threshold for pre-paying is lowered -- which is why I am having to fill out an extra form and pay a large bill 3 weeks in advance.  Arizona is looking for another one time gain.  And the larger the gain, the harder it will be to unwind this stupid costly process in the future.

** Footnote:  Actually we don't have a sales tax but a "transaction privilege tax."  However, that term gets me so infuriated, as it is based on the premise that private commercial transactions can be made only as a privilege granted by the government, that I refuse to use the term.  Right from the AZ DOR web site:  "the tax is on the privilege of doing business in Arizona."  Barf.  Don't let anyone tell you Arizona is a wild, libertarian, free market state.