For those who have been following this week’s food fight between Theranos and The Wall Street Journal, there are illustrative lessons to be learned surrounding the power of disruption.
Theranos is a white-hot biomedical startup that has become the tech success story darling of the decade, founded by a bright Stanford drop out named Elizabeth Holmes. Theranos, which began in her dorm room, was designed to simplify and disrupt the very lucrative field of blood testing. Instead of having to fill several vials with blood extracted by needles in a doctor’s office, Theranos would only need a finger prick at a local Walgreens. From that, their unique (and proprietary) technology called Edison would use a minute sample of blood to generate up to 240 tests. On its face, Theranos would revolutionize medicine in a fashion unseen in generations. Best of all, they would get the tests back faster and maintain a high degree of accuracy.
Theranos soon raised $400 million in funding and soon had a valuation of $9 billion, making Holmes a billionaire in her own right in her early 30’s. She soon became the voice of her generation and she and her black turtleneck could be found up on the dais at major tech or medical conferences. Her photo shoots often had her looking wanly into the distance as if she saw something in the future that nobody else could discern. The story of how Ms. Holmes founded Theranos bubbled virally throughout Facebook and on to other online communities. She quickly became a superstar of her own right and often found on a variety of media outlets.
However, The Wall Street Journal article throttled Theranos to the core. In it, writer John Carreyrou charged that the technology does not live up the hype because instead of using Edison, they were using preexisting technology for the great majority of their medical tests. As for Edison, it was only being used for 15 of the 200 tests and there were concerns that the medical accuracy was off when judged against traditional blood testing machinery.
Worse, Theranos’ response has been more damning than the allegations. Holmes has suggested that there are companies that would like to see Theranos fail. They have charged that The Wall Street Journal is a tabloid. However Theranos has failed to agree to publish their findings within peer reviewed journals. They have also refused (as of this printing) to compare their results to their traditional rivals to address accuracy. When it comes to Edison, Theranos is secretive to a fault about its propriety technology, which will do more harm than good.
Theranos can bullet-point all the rebuttals it wishes in a PR campaign, but if the science is bunk they know their goose is cooked. Unlike a newly hyped product that tanks, Theranos focuses on life and death issues. Faulty data from incorrect blood tests could lead to an erroneous medical diagnosis. In this case, a false positive might lead to the difference between having and not having diabetes.
Worse, the legal fallout from this would be catastrophic and Elizabeth Holmes would become the face that launched a thousand lawsuits. If the Edison technology by Theranos is little more than medical vaporware, Elizabeth Holmes will join Stanley Pons and Martin Fleischmann (the disgraced inventors of cold fusion from the 1980’s) in a special ring of hell as opposed to having a special island getaway on Mustique.
So what happened? This is where Theranos has become its own worst enemy. The Wall Street Journal story alleges that employees at Theranos (who are unnamed in the article) understood that their technology, while promising, simply failed to live up to the hype. Might this simply be a case where aspirations were way ahead of the available technology, like introducing a personal computer in 1950 as opposed to 1980? Is this a situation where a company and a culture believed its own hype even when a simple investigation proved otherwise?
However, by stonewalling and pointing fingers at The Wall Street Journal, Elizabeth Holmes has thrown up a big red flag to federal regulators and the investment community. Her board, which seems better suited for nuclear disarmament talks than a biotech start up, needs to step up. To move past this crisis, the proof would be found in the pudding. They need to show how their propriety technology works and not hide behind the legalese of trade secrets. The technology at Theranos either works or it doesn’t and people want answers now.
This brings us to another storied disruptor, Elon Musk of Tesla. Consumer Reports, which was initially blown away by the Model S, removed its vaunted “recommended” rating in a stunning turnaround. The magazine noted that “the main problem areas involved the drivetrain, power equipment, charging equipment, giant iPad-like center console, and body and sunroof squeaks, rattles, and leaks.” Boiled down to its basics, The Model S might be cool to test drive but it soon begins to have the very problems that Musk himself once mocked the Detroit automakers.
Musk responded that the issues were with older versions of the Model S and these problems have been resolved. However, what is troubling is that the downgrade was prompted by 1,400 reader comments, which caused Consumer Reports to rethink their rating.
Today the average car is on the road for 11.6 years before it joins the junk heap or is sold to Asia or South America. Based on what Consumer Reports has written about Tesla, would the Model S rival the average lifespan of a current car on the road today? So instead of creating the future, Musk may have created a very expensive and problem-plagued 1981 Chevy Citation.
This brings us to the larger Achilles Heel of disrupters. Disrupting the marketplace today is one thing—but product durability is the key to long term sustainability. Henry Ford, Steve Jobs, and the pantheon of great entrepreneurs had both. Theranos and Tesla now have question marks over their brands.
However, the great concern is that both Theranos and Tesla might suffer from the “IKEA Syndrome.” Furniture at IKEA may look cool and you can see the intelligence in the design, but we all know it lacks the durability of what is found at Thomasville. If the Wall Street Journal article holds up, then Theranos is in big trouble. Tesla needs to address their quality control issues with something more than a tweet. These are unforgiving times. Unless somebody moves quickly, both Tesla and Theranos may discover that simply being a marketplace disrupter may not be enough.