The Fall of Theranos: The Gap Between Innovating and Optimizing

The troubles at blood-testing company Theranos continue to mount as CEO Elizabeth Holmes waits to hear if the Centers for Medicare and Medicaid Services will propose sanctions that could ban her from the diagnostics business and stop her start-up from receiving payments from Medicare. With its vision of providing comprehensive health screenings with only a few drops of blood, this former biotech darling was once valued at close to $9 billion. The promise of Theranos, of being able to streamline preventive medical care in ways previously unimaginable, seemed world changing. But after failed inspections and the threat of government sanctions, it’s looking like the dream of Theranos was just that, a dream. The evidence is mounting that the closely guarded process by which Theranos claims to be able to run a myriad of tests from a few drops of blood amounts to a fairly scattershot approach to preventive care.  

In my earlier posts chronicling the downward spiral of HR software start-up Zenefits into the ash heap of former Silicon Valley sweethearts, I discussed how the lack of an exhaustive vision can be a death knell for young start-ups, particularly when their growth goes into hyperdrive. So what’s going on here? Has Silicon Valley just become Vegas for every young wannabe entrepreneur with a half-good idea?

As a recent New York Times op-ed piece explored, the downfall of Theranos can’t only be chalked up to the foolhardiness of youth. When Elizabeth Holmes founded Theranos in 2003, she was a nineteen-year-old Stanford engineering dropout with dreams of revolutionizing health care, but since then, she has curated a board of directors whose faces could make up a veritable Mount Rushmore of business, international politics, and strategy legends. Among them are such heavyweights as Bill Frist, Henry Kissinger, and Sam Nunn. With this combination of experience (although little of it based in medicine), it got me wondering: If the young CEO had the gravitas to put together this board of directors, men who negotiated detailed international treaties and complex legislation decades before she was born, then why did they not push for more attention to detail regarding the scientific accuracy and reliability of their tests? Theranos should have obsessed over these details, when in reality it seems they were sorely neglected.

For decades, big companies thrived and survived by building formidable “castles” to protect their positions. Competitors were thwarted by incumbents exploiting competitive advantages, erecting steep barriers to entry, and building powerful organizations with scope, scale, quality, and efficiencies that could resist disruption. But these castles were not built for today’s rapid and seismic market evolution, and as a result, many have seen their walls breached.

It was in the world of massive, seemingly impenetrable, bureaucratic medical laboratories that Ms. Holmes saw the weakness she could exploit. Small start-up businesses like Theranos thrive and survive by creating discontinuous innovations—sidestepping barriers to entry by creating new markets, wresting customers away from established organizations by offering them compelling new value propositions (like pain-free blood testing). But companies like Theranos have their own Achilles’ heel. They are organized for innovation, but not for efficiency and attention to detail.

While these companies have the ability to pivot more quickly than their larger, more established peers, they struggle with—or sometimes completely avoid—developing the ability to optimize operations by becoming as efficient as possible as quickly as possible once a disruptive innovation has proven successful. The problem here is with Theranos’ “success.” In offering a radically new approach to medical testing that positively transforms the patient experience, Theranos succeeded. But that success matters little if the test results for life-threatening illnesses are unreliable.

A decade plus of academic research is illuminating the fact that what organizations must develop to be successful in the long run is the capacity to become ambidextrous: those who cultivate this quality can optimize organizational efficiencies and quality services for their customers and devote resources to riskier endeavors that become the source of new innovations (experiment). Furthermore, companies that can successfully pull this off once can replicate the process for future cycles of innovation/optimization.

Unfortunately, Elizabeth Holmes is not instilling confidence that she can lead the organization through the tensions in these inherently oppositional activities. If she were hyping a compelling new app or game and it just wasn’t ready for prime time, we probably wouldn’t blink an eye. But the consequences of this business reach much further. She has shown that she can innovate (the experimentation side of the equation) but her ability to optimize seems weak, a catastrophic failing if you hold people’s health in your hands.

One hopes Holmes will learn from this humiliating debacle. After all, the wisdom to innovate and optimize—rather than only innovate—is most often forged by years, even decades, of failing and regrouping. Most start-ups now need to do both. It wasn’t until Steve Jobs was ousted and then returned to his company that the vision of Apple truly blossomed. From what past mistakes in the field of biotechnology and life could Holmes draw upon to improve the process? She and her board members should have been paying obsessive attention to not only disrupting a bloated, byzantine health care industry but also following through on the heady promises the company made to those who trusted them: namely that they would take a commitment to their well-being seriously. Optimizing your company’s processes might not land you many headlines, but failing to do so certainly will—just for all the wrong reasons.

What We Can Learn About Culture from Zenefits

The story of Zenefits’ spectacular growth and downfall is the start-up train wreck du jour that no one can stop watching. An extensive piece in Business Insider last week cataloged once more the lurid details many have been poring over—tequila shots in the office, young employees treating their Arizona outpost as a frat house—and a former sales manager is quoted as saying: “When we were smaller, we could act the way we were acting in the office. I don’t think Parker did a good job of growing up. He let things get out of control. There comes a point where hypergrowth achieves diminishing returns.” The story also outlines some more subtle cultural failures that plagued the start-up over the last year, the pulling back of vacation time, and the clawbacks on sales bonuses that demolished morale. It’s easy to see how the superfast growth—spurred on by Vegas-style VC funding—taxed the company’s resources to the breaking point; but did it have an even more deadly effect on the young company’s culture, destroying it before it had the chance to grow to maturity?

When Aristotle declared that “nature abhors a vacuum,” he was speaking to the way in which nature requires every space to be filled with something, even if only air. The same principle goes for cultures, as they too abhor a vacuum. Organizations growing quickly without a core set of clearly articulated and reinforced values to guide the behaviors necessary for sustaining the growth will experience a cluster of values that saturates the culture anyway. As we saw at Zenefits, this osmosis-like effect draws in values that communicate to everyone “This is the way we do things around here.” And this is why it seemed acceptable for guys to leave their used condoms in the office stairwells.

Weak cultures are those in which little agreement exists and where the effort toward the vision is fragmented and often dissipated through conflicting agendas, blaming, and unclear communications. Another Zenefits employee is quoted in the BI article as saying that a “culture of dishonesty” had emerged, in which industry regulations were ignored and products were mischaracterized to customers. It’s easy to see how such a culture wouldn’t be sustainable.

Strong company cultures are those consciously embedded with only the values that support the organizational vision, where everyone agrees about their importance. In these organizations, you can feel the human energy that flows from this alignment.

In the broadest sense, culture is the personality of the organization, the shared beliefs, and the written and unwritten policies and procedures that determine how the organization and its people behave and solve business problems. Culture provides meaning, direction, and clarity; it is the human glue that mobilizes people to aim for the vision.

To understand an organization’s culture is to remain focused on the five elements that create it and their attendant questions:

• Shared values: What do we think is important?
• Beliefs: How do we think things should be done here?
• Norms: What are the unwritten rules: the dos and the don’ts?
• Heroes: Who are the people who personify our culture and serve as role models for others?
• Systems: What do we do to influence people through our written and unwritten policies?

In the end, it all comes down to behaviors: “the way we do things around here.” The answers to these questions need to be put into action as a living, breathing part of the organization’s day-to-day functioning. Zenefits suffered from what is practically a Silicon Valley cliché at this point: a company culture that—infused by too much money and too much growth too fast—went from fun and inspiring to chaotic and dispiriting in a heartbeat.

The gap between the plan and reality of organizational performance is often significant and has been the subject of countless articles and books on motivation, leadership, management skills, and other elements heaped onto the “soft side” pile of organizational performance variables, in other words, the culture. At its most rudimentary, a “hard” strategy may look concrete, with its definitive goals, data, and spreadsheets, but it’s actually an abstraction. It is an idea for the future and has no real existence in the organization or in the marketplace. The organization’s culture, however, is a living, breathing, dynamic force that has a life of its own, operating independently of all plans and projections yet determining the success or failure of those plans.

I am currently a co-investigator of a large study of Fortune 500 CEOs aimed at exploring how these men and women are managing change in a world turned upside down by massive disruptions. One unexpected finding from my interviews is the extent to which they understand the importance of a perfectly “tuned” culture that’s aligned with the organizational transformation these disruptions demand. Our preliminary results, and countless other studies over the past fifteen years, continue to be sobering. They dispel the myth that culture is not a “hard” business issue. Cultures with values, beliefs, norms, heroes, and systems that support high performance significantly impact the financial metrics that matter to most executives.

The importance of company culture cannot be minimized, because a growth vision will fail unless the culture directs and sustains individuals’ behaviors, on a daily basis, in pursuit of strategy. While these intangibles may be far harder to measure than sales volume or return on equity, they are often the key factors in one organization’s competitive advantage over another. The difference between success and failure can often be attributed to a limited set of organizational characteristics. When they are combined, they create culture.

Many organizations emphasize values such as quality, customer service, teamwork, respect for the individual, and innovation—themes with broad appeal that can help people feel they are reaching higher goals for themselves. But all too often these values are communicated merely as organizational spin control in the form of annual reports, recruitment sections of the corporate website, and token discussion at management retreats. They fail to become alive, to be fully infused in the fabric of their culture. And nothing is more dangerous to a company’s survival.

What Comes Before a Fall: Lessons from the Growth and Crash of Zenefits

If you have even a passing interest in the tech industry and start-up culture, you’ve certainly heard about the unfolding crisis at formerly golden start-up Zenefits. The company—a producer of web-based software to help small businesses manage their human resources operations—made big news last year when they raised $500 million in one round of funding, at a valuation of $4 billion. The growth of the company over the past couple of years has been astronomical: they went from a total of fifteen employees at the end of 2013 to a reported sixteen hundred late last year. Perhaps unsurprisingly, the growth has caused some serious issues, and CEO and founder Parker Conrad was asked to step down two weeks ago amid scandalous reports of employees being encouraged to cheat on their insurance broker licensing exams (even being given software to help them do so), overimbibing during the workday from company-provided kegs, and having sex in the stairwells of the office building.

Conrad’s resignation from the company allegedly brought tears of relief—not sadness—from beleaguered employees, many of whom are wholly unqualified for the work they’ve been asked to do (a reported 80 percent of Zenefits’ Washington transactions were claimed to be unlicensed). Strangely for a technology company, Zenefits seems to have attempted to solve its woes by adding even more employees to fix problems manually, rather than fully debugging systems when breakdowns took place.

Some of the details of Zenefits’ (and Conrad’s) downfall may be shocking—drinking on the job as a company norm, disregard for regulations in a company that handles something as sensitive as health insurance—but to anyone accustomed to working with entrepreneurs, especially those operating in the high-stakes pressure cooker of Silicon Valley, this outcome is anything but a surprise.

Certainly Zenefits’ rise and crash was helped along by the trend of outrageous VC funding for Silicon Valley start-ups, but the heart of their problems is nothing new. This is simply what happens when there is not an effective, embedded vision at the crucial juncture where scaling meets speed. Zenefits began as a Software as a Service company devoted to helping small businesses combat the onerous red tape of HR issues, health coverage in particular. An honorable enough mission. But as they scaled with lightning speed, they began taking on businesses with hundreds of employees, long before they were equipped with the culture necessary for handling them and the organization’s scaling to that level. Growth became the only imperative, at the cost of quality, employee morale, and even lawful practices.

The current climate in Silicon Valley prizes the “get big fast” mentality, but it’s worth asking, is growth always the ultimate goal? David Packard, the cofounder of Hewlett-Packard (HP), wrote in his memoirs that over the years he and Bill Hewlett had “speculated many times about the optimum size of a company.” They “did not believe that growth was important for its own sake” but eventually concluded that “continuous growth was essential” for the company to remain competitive. One reason growth was a matter of survival was because HP “depended on attracting high-caliber people” who wanted to “align their careers only with a company that offered ample opportunity for personal growth and progress.” Growth for the sake of attracting and keeping great people would become a factor for virtually all firms in technology-driven fields. When the firm introduced “the HP way” in 1957—essentially a manifesto for its future—it emphasized growth “as a measure of strength and a requirement for survival.” While Carly Fiorina trash-talked the original culture and called it an adorable artifact of an older time, she was no paragon of leadership during her tenure there, and the company suffered under her watch.

Most companies understand that growth is essential for survival for the very reasons Packard put so succinctly above. But few know how to reconcile the need for growth with the external and internal pressures to grow very quickly—especially with a group of big-time venture capitalists breathing down one’s neck. Building any large and sustainable corporation requires a considerable organizational transformation rather than a predictable set of linear stages. Building it quickly diminishes the odds that it can weather the growing pains of that transformation, as we can see so clearly in Zenefits’ unraveling. “More businesses die from indigestion than from starvation,” Packard said.

Start-ups are not just large businesses in miniature, and their trajectories do not necessarily point to either size or longevity. Rather than relying on opportunistic adaptation to exploit niche opportunities, their existence depends much more on formulating and implementing ambitious strategies that prepare the firm for the longer term. Put another way, the transition of a fledgling business into a large, well-established corporation requires nothing less than a series of fundamental yet relatively seamless transformations, nearly impossible to pull off in a period of eighteen months or so as Zenefits attempted to do.

Well-articulated visions guide these transformations so they are not experienced as traumatic surprises. Unfortunately, there are relatively few exceptional entrepreneurs with the capacity to conceptualize, articulate, and relentlessly manage with a vision and survive the steep challenges wedded to accelerated growth.

Maybe—just maybe—there’s a degree of maturity, insight, and future focus that’s not just about EBITA growth. Zuckerberg got that in his twenties, and he turned Facebook into a growth machine. The Google guys got it too, in their youth. They were smart enough to turn the reins over to Eric Schmidt, who would successfully guide the firm’s growth.

But perhaps the real lack of maturity rests with shortsighted venture capital firms and boards. They’re the ones who drove the wild growth and then kept Mr. Conrad in place until the shooting star was crashing back to Earth.

Strength in Numbers: Lessons from the Downfall of Mark Driscoll

First, I have a confession to make. I know I promised you a full-on mean woman this week, but when I reexamined my top candidate, she simply didn’t fit the bill. The woman in question has done some reprehensible things, to be certain, but held up next to men like Charney, Arnell, and Jobs? She’s a pussycat. The challenge to find a major league mean woman is telling, but I vow to keep working on it. For now, I want to return my focus to combatting mean. The strategies I’ve shared so far have been geared toward employees of mean men who find they’re unable to leave their situation as immediately as they’d like and need some coping skills. But what happens when it’s not just your financial and career well-being that’s threatened by the mean man but your entire community, and your friends, family, and faith are on the line?

Mark Driscoll started a Bible study class in his home in the Wallingford neighborhood of Seattle in 1996. By August of 2014, he’d grown his operation, Mars Hill, into a megachurch, at its height counting thirteen thousand attendees across five states. He preached to a packed crowd at Seattle’s CenturyLink Field (home of the Seahawks), guested on prime-time national television, threw out the first pitch at Mariners’ baseball games, and turned his brand into a franchise. Brand is Driscoll’s word, by the way, not mine. Among the other Mars Hill pastors, he would often refer to himself as “The Brand,” making it crystal clear that Mars Hill would always be about “me in the pulpit holding the Bible.”

His precision branding, matched with his ability to scale his enterprise, would make any business entrepreneur blush with envy.

Driscoll appealed to the young families who showed up to worship with him in jeans and flip-flops, those disenchanted with more established versions of organized Christian movements. Known as the “hipster pastor” with his charismatic, edgy rhetoric, dressed-down blue jeans style, and family of seven, Driscoll knew and embodied his market. He had a reverence for Jesus and a seeming irreverence for everything (and everyone) else. He enjoyed being outrageous, and it worked for him. Yoga, for example, was “demonic.” Increasingly, his writing and sermons took on strong misogynistic overtones: he famously called America a “pussified nation” and claimed that mainstream Christianity characterized Jesus as “an effeminate-looking dude,” and a “neutered and limp-wristed Sky Fairy of pop culture.”

Driscoll declared that anointing a woman as an Episcopal bishop was akin to choosing “a fluffy baby bunny rabbit as their next bishop to lead God’s men.” He joked onstage that wives who denied their husbands oral sex whenever it would please them were sinful, his unique interpretation of a verse from the Song of Solomon.

His outward style charmed many, but behind the scenes, he was often vicious, abusive, and controlling. Those who disagreed with him were shunned by the church, ensuring that other members would know what was in store if they came forward.

Fearful of his influence, many church members felt forced to complain indirectly or through third parties. But Driscoll’s strategy for defusing the discontent was to claim that he wasn’t sure how to respond since his dissenters remained anonymous.

Singularly, disaffected congregants felt powerless against the megachurch, a dynamic Driscoll was counting on. What he underestimated, however, was what would happen when they banded together.

As complaints about Driscoll reached a fever pitch, a large crowd started protesting during Sunday services, holding signs reading “We Are Not Anonymous.” Others started to directly and openly call for Driscoll’s resignation.

After eighteen years of stunning growth at Mars Hill, the groundswell of disgruntled congregants began to drive other churchgoers away. Within months, attendance and giving had plummeted so fast that church elders announced it would have to close several Seattle branches and cut its staff thirty to forty percent.

Driscoll had a knack, like many mean men, for deflecting blame. In 2013, Christian radio host Janet Mefferd accused him of plagiarizing fourteen pages of his book A Call to Resurgence from another preacher. She pushed Driscoll during an interview to be contrite. He apologized but peppered his concession with indignation.

He got in yet more book-related trouble in 2014 when he was accused of misappropriating $200,000 in church funds to get his book Real Marriage on the New York Times bestseller list via shady marketing tactics.

Each new accusation emboldened more critics, and by August 2014, Driscoll was hounded by the new accounts that emerged almost daily of his bullying, abuse, and outrageous behavior with congregants.

Driscoll resigned in October 2014 amid allegations of emotional abusiveness, plagiarism, and misogyny—with congregants fleeing to other houses of worship or losing faith altogether.

Driscoll ultimately wasn’t taken down by the church’s governing body but by those who—in small groups or individually—found their power in numbers and through their collective voice of public dissent. Driscoll’s charisma and normally effective ability to flip he blame to deflect culpability was drowned out beneath the indignation of those he’d harmed.

Sure, there were Christian media heavyweights calling him out for plagiarizing others’ work and his smarmy misogyny. But what brought him down was his arrogance and abusiveness, as well as those current and former followers who shouldered the risk of condemnation from others and stood together and exercised their power.

The pattern of abusive behavior employed by mean men to get and retain power means that there will inevitably be a long line of victims in their wake. Alone, each victim may feel powerless, but together—as we saw with Driscoll and with the recent Bill Cosby imbroglio—they can be a powerful force.