My wife and I went for a run together last week, and, on our walk home, we started talking about Elizabeth Holmes. The new docudrama about her and Theranos, “Dropout”, just dropped on Showtime, so it was on the top of our minds.
“I think we should watch it (Dropout),” Blossom said to me. “What do you think?”
“Yeah, but what do you think we’ll learn? We’ve already read “Bad Blood”, and we’ve watched the documentary (“The Inventor”), so maybe we’ll learn something, but not much,” I said.
Blossom said, “Have you ever wondered how she thought she’d get away with it?”
Eventually, you’re gonna get found out if you commit fraud.
“You know, it still blows me away how often you see stuff like what Holmes was doing. And, each and every time, the CEO thinks they’ll be able to hide it from the investors, or their customers, or their employees.
“And yet, each and every time, they get found out,” I said. “Look at what just happened with ‘Tom’. There’s no way he’s going to get away with it.”
Tom was a CEO I’d just stopped working with because I believed he was committing fraud. He needed a part time CFO to help him, so I recommended he work with Tina, who had been my Controller.
Tina called me about one week after she started working with Tom, and said, “I can’t close the books on January. Here’s what I found.”
Tina then went through the issues she had uncovered, and none of them were good. Tom had recently moved to Florida, and he was working out of a home office, so he was charging the company rent. He had also charged the company for re-roofing his house. There was a laundry list of expenses charged to the company credit card with no sign off from another executive.
When Tina asked Tom where was the board’s approval for his rent and re-roofing expenses, he literally had no answer. When Tina asked where the sign off for his credit card expenses were, he said there wasn’t any.
Tom’s customer base is the US government. The contracts he is bidding on are huge. He is going to get audited, and he is going to get found out.
It’s the same with Holmes. It was inevitable that she was going to get found out. Yet, she likely somehow, just like Tom, believed she could get away with it.
Investor oversight in startups can be unbelievably bad.
“Back to Theranos,” I said to Blossom. “The bigger issue is where is the investor oversight?
“Everyone involved gets so drunk on the money (they’re going to make) that they forget to do their jobs. Look at who Tom’s investors are. He has some Tier 1, Sand Hill Road VCs, and they’re nowhere to be found.”
“You really think that’s it?” Blossom asked me.
“I do,” I said. “VCs are under so much pressure to show increased valuations for their portfolio companies, many of them don’t dig in, or they just ignore the problem.
“The valuation of Theranos kept going up, and none of the investors was asking the tough questions. The board had impressive people on it, like Henry Kissinger, but none of them were expert in what Theranos was doing.”
Fall on your sword as soon you identify something’s wrong.
The moral of the story is that you can’t just turn your integrity on and off. You either have integrity or you don’t have integrity.
Let’s assume that Elizabeth Holmes started Theranos truly believing she could deliver on her promises. Her integrity was tested when Theranos couldn’t meet the claims.
This was the moment of truth. Holmes had the choice of telling the truth, or going down the slippery slope of hiding the truth and hoping she could eventually fix the problem before she was found out.
You will have your moment of truth too. Inevitably, something significant will go wrong in your company. It's at this point you'll have to choose to either hide the truth from your board and investors or tell them honestly about the challenges you are facing.
Now, here's the interesting thing. Experienced investors are expecting there to be problems in your company. Yes, they will ask you tough questions about what went wrong and why it went wrong. However, as long as you have a sensible plan going forward, you'll likely find a lot of support.