What family businesses can learn from Theranos

By Barbara Spector

Like many Americans, I was obsessed by the story of Theranos and its young founder, Elizabeth Holmes, in mid-March. My book club read Bad Blood: Secrets and Lies in a Silicon Valley Startup, by John Carreyrou, the Wall Street Journal reporter who in late 2015 broke the news that the technology developed by the blood-testing company didn’t work as advertised. We had a lively discussion, led by a member of our group who’s a serial entrepreneur. Then I watched not one, but two Theranos documentaries, which aired on TV less than a week apart: The Dropout, on ABC’s 20/20 on March 15, and The Inventor, on HBO March 18. I became so engrossed in the story that I began listening to the six-episode podcast version of The Dropout, which aired in January and February.

At first blush, the Theranos story doesn’t seem to have much to do with family businesses. After all, the now-defunct company was a startup, not a multigenerational family firm. But in fact, the more you learn about what happened at the company, the more you realize the story is actually a family business cautionary tale.

Lesson 1. Poor stewardship of family wealth can have ramifications for generations.
Elizabeth Holmes’ great-great-grandmother on her father’s side was Bettie R. Fleischmann, daughter of Charles Fleischmann, the founder of Flesichmann Yeast Co. Carreyrou wrote in his book that Elizabeth’s father, Christian Holmes IV, blamed his grandfather and father for squandering the family’s wealth through overspending, alcoholism and multiple marriages.

Joseph Fuisz, the son of an old family friend who would be sued by Theranos over a patent dispute, told ABC reporter Rebecca Jarvis that Christian Holmes IV “had a real sense of entitlement in terms of the traditional importance of his family, that it sort of eroded over the years.”

In an interview in the New Yorker in 2014, Elizabeth — who had dropped out of Stanford University’s chemical engineering program before completing her second year — hinted at pressure to succeed when she was growing up.

“I grew up with those stories about greatness,” she told reporter Ken Auletta, “and about people deciding not to spend their lives on something purposeful, and what happens to them when they make that choice — the impact on character and quality of life.” Though she mentioned “character” in that interview, was she actually taking from those family discussions that she needed to generate wealth at any cost?

Lesson 2. NextGens don’t necessarily inherit their ancestors’ brains or skills.
One of the first investors in Theranos was Donald Lucas Sr., a Silicon Valley investment banker who was an early investor in Oracle. On The Dropout podcast, Lucas said he overlooked Elizabeth’s lack of business experience because of the Fleischmann connection and because her great-great-grandfather, Dr. Christian Rasmus Holmes (husband of Bettie Fleischmann), had established Cincinnati General Hospital and the University of Cincinnati Medical School. Thus, Lucas figured, Elizabeth had business and medicine in her genes. “So she came by both of these, the two things that were necessary here, quite naturally,” Lucas said.

In the real world, NextGens need to earn credibility by working hard, succeeding on their own merits and stumbling a few times along the way. Wealthy parents can offer financial assistance, but inevitably the offspring will be judged on their own record.

Lucas’ naïveté was compounded by his selective assessment of Elizabeth’s ancestry. As noted above, her family tree included some slackers as well as some successes. And, interestingly, her father had been an executive at Enron — which went bankrupt in 2001 after an accounting fraud scheme came to light.

Lesson 3. Private companies need the right people on their boards.
The Theranos board of directors was full of boldface names. Among them were former U.S. Secretary of State George P. Shultz, former U.S. Secretary of State Henry Kissinger, former U.S. Secretary of Defense William Perry, former U.S. Senator Sam Nunn, former U.S. Senator Bill Frist and Marine Corps General James Mattis (later secretary of defense under President Donald Trump).

Impressive though these names were, none of them had the right background to provide effective oversight of a 21st-century health technology company. In fact, this may have been part of Elizabeth’s game plan. The group of older white men (and they were all older white men) may well have felt protective of the young white woman. Even if they knew the right questions to ask, they may have been reluctant to ask them, or too ready to believe her answers.

The right board might have been able to steer Theranos on the right path, by changing its business plan or removing its CEO. The Theranos experience should serve as a warning to family businesses whose boards consist of prominent community members or friends of the family, rather than those who can provide effective oversight and hold the CEO accountable for results.

Lesson 4. NextGens who challenge their elders should be taken seriously.
One of the whistleblowers who exposed the failures and deceptions at Theranos was Tyler Shultz, grandson of board member George Shultz. Tyler joined Theranos as an young intern after an inspiring conversation over dinner at his grandfather’s home. He later became a research engineer at the company.

When Tyler, who had graduated from Stanford University with a biology degree, realized what was actually going on at Theranos, he contacted state regulators, using an alias. He then attempted to raise the issues with Elizabeth but was ignored. After he resigned his job at Theranos, he got in touch with Carreyrou and became an important source for the Wall Street Journal reporter.

Tyler tried to warn his nonagenarian grandfather about the situation at Theranos, but the former Secretary of State didn’t believe him. At one point, Tyler visited his grandfather to discuss the matter — and was surprised by two Theranos attorneys who had been hiding upstairs.

The result was a rift between Tyler and his grandfather and about half a million dollars in legal fees incurred by Tyler’s parents when Theranos threatened to sue him for violating a non-disclosure agreement.

Eventually, Tyler and George Shultz repaired their relationship. George Shultz resigned from the Theranos board before the company collapsed, and he told his grandson he was proud of him.

The moral for family business leaders? Don’t discount what your NextGens are saying just because they’re young. Examine the evidence they’re presenting and consider that they just might be in a better position to know than you are.