Silicon Valley Hubris

Reason has just published a video of a conversation between their Nick Gillespie and the Wall Street Journal‘s John Carreyrou, author of Bad Blood, an upcoming book on the rise and fall of Theranos founder Elizabeth Holmes.

For those who aren’t familiar with the story, Holmes dropped out of Stanford while still in her teens, and created a company that she claimed would revolutionize healthcare by allowing consumers to perform their own diagnostic tests with just a single drop of blood from their finger. She claimed that this technology would “democratize healthcare” by giving consumers near-instant access to their results, allowing them to take control of their lives. Holmes raked-in millions of dollars from investors, and even talked Walgreen’s into a partnership whereby they’d install her blood testing equipment in their stores.

The media and the market loved the story so much that Theranos’ valuation jumped to over $9 billion, and Holmes’ striking blue eyes were soon gracing the cover of Forbes magazine as she was recognized as the world’s youngest self-made billionaire. And who could blame them? It was a story that fit so many tropes: the Ivy League drop-out who dressed and behaved like a female Steve Jobs; the plucky disruptor bringing us the hidden wonders that the incumbents can’t or won’t deliver; and the self-described “iron woman” who would smash the glass ceiling that had previously kept women out of influential positions in STEM.

But perhaps not surprisingly, the whole thing was based on a lie. The technology simply didn’t work, and no matter how appealing people might have found Holmes’ wide-eyed vision, the whole concept was little more than wishful thinking. As the noose tightened and it became obvious that the company couldn’t deliver, Holmes surrounded herself with more and more yes-men, including a boyfriend-cum-enforcer who did his best to keep the increasingly skeptical employees in line. Eventually, regulators from both the financial and healthcare sectors smelled a rat, and Holmes may now face criminal charges on top of the public disgrace that she has suffered.

So how did this happen? Gillespie and Carreyrou have their ideas, but I’ll add my own: Silicon Valley’s success in software has led them (and others) to believe that they have the answers to everything, and that real-world problems can be solved with the kind of disruption that is so much easier to pull off in the abstract world of code.

Look at Google: Years ago, they announced that they would solve the so-called energy crisis by creating renewable technologies. It wasn’t quite that easy. And after figuring this out, they shifted to trumpeting how they buy all their energy from renewable sources. This slick move quietly side-stepped the difficult issue of how to make this work, and instead threw their advertising income at corporate virtue signalling in the hope that no-one would notice the difference.

Or look at Elon Musk: Because he could manufacture a boutique automobile with a high sticker price, he believed he could easily enter the world of high-volume car manufacturing, ignoring the years and years that it took General Motors, Ford and the rest to achieve mastery of what is in fact a very difficult problem. Yes, I too liked to mock the old school producers with their crazy work rules and cost structures, but in the end, they do know something about how to produce reliable and consistent cars.

The reality is that success in software—and in particular software where a strong network effect ensures that the marginal leader eventually becomes an invulnerable monopolist—is not a predictor of a company’s ability to solve other problems. Google is so fat, dumb and happy that they can throw their money at any problem they like, with no real market pressures to keep them lean or focused. They can dabble at anything, but they will no more be experts in energy or life extension than a millionaire dilettante will be a great artist because he hires a famous painter as a part-time teacher.

Theranos lasted as long as it did because we have become blinded to the reality by the blazing success of a few Silicon Valley stars. Real problems take real study and real application, and there are few shortcuts. We are so in love with the misunderstood idea of “disruption” (about which I’ll write more soon on my business blog) that we expect miracles. Shame on Holmes for trying to fool us, but shame on us for falling for it.

 

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