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Goodbye East Paly

In early 2008, Theranos moved to a new building on Hillview Avenue in Palo Alto. It was the Silicon Valley equivalent of moving from the South Bronx to Midtown Manhattan.

Appearances in the Valley are paramount and for three years Theranos had been operating on the wrong side of the tracks. The “tracks” in this case were Route 101, otherwise known as the Bayshore Freeway. It separates Palo Alto, one of the most affluent towns in America, from its poorer sibling East Palo Alto, which once held the dubious distinction of being the country’s murder capital.

The company’s old office was on the East Palo Alto side of the four-lane highway, next to a machine shop and across the street from a roofing contractor. It wasn’t the type of neighborhood wealthy venture capitalists liked to be seen in. The new address, by contrast, was right next to the Stanford campus and around the corner from Hewlett-Packard’s plush headquarters. It was pricey real estate that signaled Theranos was graduating to the big leagues.

Don Lucas was pleased with the move. During a conversation with Tony Nugent, he made clear his disdain for the old location. “It’s nice to finally get Elizabeth out of East Paly,” he told Tony.

The move was not fun for the person who had to make it happen, however. That job fell to Matt Bissel, the head of IT. Bissel was one of Elizabeth’s most trusted lieutenants. He’d joined Theranos in 2005 as employee number 17 and took his duties seriously. In addition to being responsible for the company’s IT infrastructure, his role also included security. He was the one who’d done the forensic analysis of the computer evidence for the Michael O’Connell lawsuit.

Planning the move had taken up a big chunk of Matt’s time over the past several months. On Thursday, January 31, 2008, everything finally seemed ready. The movers were scheduled to arrive first thing the next morning to haul everything away.

But at four that afternoon, Matt got pulled into a conference room with Michael Esquivel and Gary Frenzel. Elizabeth was conferenced in by phone from Switzerland, where she was conducting a second demonstration for Novartis some fourteen months after the faked one that had led to Henry Mosley’s departure. She’d just learned that the landlord would charge them rent for the month of February if they didn’t clear the premises by midnight. There was no way she was going to let that happen, she said.

She instructed Matt to call the moving company and have the movers come immediately. Matt thought the odds that would happen were very low but agreed to try. He stepped out of the conference room and made the call. The moving company’s dispatcher laughed at him. No sir, rescheduling a corporate move at the eleventh hour wasn’t possible, he was told.

Elizabeth was undeterred. She told Matt to call another moving company she had once used and to give them the job. Unlike the first company, this one wasn’t unionized. She was sure it would be more flexible. But when Matt called the second moving company and explained the situation, a person there strongly advised him to drop the idea. Unionized moving companies were all mob controlled, the person said. What Theranos was proposing to do risked devolving into violence.

Even after hearing that sobering answer, Elizabeth wouldn’t let it go. Matt and Gary tried to reason with her by citing other obstacles. Gary raised the issue of their stockpile of blood samples. Supposing they managed to get a crew to come that day; the movers wouldn’t unload everything at the new address until tomorrow, he pointed out. How would they keep the blood at the proper temperature in the meantime? Elizabeth said they could use refrigerated trucks and keep them running in the parking lot overnight.

After several crazed hours, Matt was finally able to talk some sense into her by pointing out that even if they somehow cleared the building by 11:59 p.m. that night, they would still have to conduct walkthroughs with state officials to demonstrate that they had properly disposed of any hazardous materials. Theranos was a biotech company, after all. Those walkthroughs would take weeks to schedule and no new tenant would be able to move in until they had occurred.

In the end, the move took place the next day as originally planned, but the episode was the final straw for Matt. Part of him admired Elizabeth. She was one of the smartest people he’d ever met and she could be a really inspiring and energizing leader. He often joked that she could sell ice cream to Eskimos. But another part of him was tiring of her unpredictability and the constant chaos at the company.

One aspect of Matt’s job had become increasingly distasteful to him. Elizabeth demanded absolute loyalty from her employees and if she sensed that she no longer had it from someone, she could turn on them in a flash. In Matt’s two and a half years at Theranos, he had seen her fire some thirty people, not counting the twenty or so employees who lost their jobs at the same time as Ed Ku when the microfluidic platform was abandoned.

Every time Elizabeth fired someone, Matt had to assist with terminating the employee. Sometimes, that meant more than just revoking the departing employee’s access to the corporate network and escorting him or her out of the building. In some instances, she asked him to build a dossier on the person that she could use for leverage.

There was one case in particular that Matt regretted helping her with: that of Henry Mosley, the former chief financial officer. After Elizabeth fired Mosley, Matt had stumbled across inappropriate sexual material on his work laptop as he was transferring its files to a central server for safekeeping. When Elizabeth found out about it, she used it to claim it was the cause of Mosley’s termination and to deny him stock options.

Matt had reported to Mosley until he left and thought he’d done an excellent job of helping Elizabeth raise money for Theranos. He clearly shouldn’t have browsed porn on a work-issued laptop, but Matt didn’t think it was a capital offense that merited blackmailing him. And besides, it had been found after the fact. Saying it was the reason Mosley was fired simply wasn’t true.

The way John Howard was treated also bothered him. When Matt reviewed all the evidence assembled for the Michael O’Connell lawsuit, he didn’t see anything proving that Howard had done anything wrong. He’d had contact with O’Connell but he’d declined to join his company. Yet Elizabeth insisted on connecting the dots a certain way and suing him too, even though Howard had been one of the first people to help her when she dropped out of Stanford, letting her use the basement of his house in Saratoga for experiments in the company’s early days. (Theranos later dropped the case against its three ex-employees when O’Connell agreed to sign his patent over to the company.)

Matt had long wanted to start his own IT consulting firm and he decided this was the time to walk away and do it. When he informed Elizabeth of his decision, she looked at him in utter disbelief. She couldn’t comprehend how he could possibly trade in a job at a company that was going to revolutionize health care and change the world for that. She tried to entice him to stay with a raise and a promotion, but he turned her down.

During his last couple of weeks at Theranos, what Matt had seen happen to numerous other employees started happening to him. Elizabeth wouldn’t speak to him anymore or even look at him. She offered one of his IT colleagues, Ed Ruiz, his position if Ed agreed to dig through Matt’s files and emails. But Ed was good friends with Matt and refused. In any case, there was nothing to find. Matt was squeaky-clean. Unlike Henry Mosley, he was able to keep his stock options and to exercise them. He left Theranos in February 2008 and started his own firm. Ed Ruiz joined him a few months later.

THERANOS’S NEW OFFICE in Palo Alto was nice, but it was actually too big for a startup that had just shrunk back down to fifty people after the Ed Ku layoffs. The main floor was a long rectangular expanse. Elizabeth insisted on clustering employees on one side of it, leaving a big empty stretch of space on the other. Once or twice, Aaron Moore tried to put it to use by coaxing several colleagues into a game of indoor soccer.

Aaron grew closer to Justin Maxwell and Mike Bauerly after Ana Arriola’s sudden departure. Ana hadn’t given any of them a heads-up that she planned on quitting. She’d just marched out one day and hadn’t come back. It unsettled Justin the most because Ana was the one who’d talked him into leaving Apple to come to Theranos, but he tried to maintain a positive attitude. He told himself that if the company was moving to prime Palo Alto office space, then it must be doing something right.

Shortly after the move, Aaron and Mike decided to conduct some informal “human factors” research with two of the Edison prototypes Tony Nugent and Dave Nelson had built. It was engineering-speak for putting them in people’s hands and seeing how they interacted with them. Aaron was curious to know how people handled pricking their fingers and the subsequent steps required to get the blood into the cartridge. He’d pricked his own finger so much while running internal tests that he no longer had any feeling in it.

With Tony’s permission, they put the Edisons in the trunk of Aaron’s Mazda and drove up to San Francisco. Their plan was to take them around to friends’ startups in the city. First, they stopped at Aaron’s apartment in San Francisco’s Mission District to do some staging. They placed the machines on the wooden coffee table in Aaron’s living room and made sure they had everything else they needed: the cartridges, the lancets to draw the blood, and the small syringes called “transfer pens” used to put the blood in the cartridge.

Aaron took photos with his digital camera to document what they were doing. The Yves Béhar cases weren’t ready yet, so the devices had a primitive look. Their temporary cases were made from gray aluminum plates bolted together. The front plate tilted upward like a cat door to let the cartridge in. A rudimentary software interface sat atop the cat door at an angle. Inside, the robotic arm made loud, grinding sounds. Sometimes, it would crash against the cartridge and the pipette tips would snap off. The overall impression was that of an eighth-grade science project.

When Aaron and Mike arrived at their friends’ offices, they were greeted with chuckles and cups of coffee. Everyone was a good sport, though, and agreed to go along with their little experiment. One of the stops was at Bebo, a social networking startup that was acquired by AOL a few weeks later for $850 million.

As the day progressed, it became apparent that one pinprick often wasn’t enough to get the job done. Transferring the blood to the cartridge wasn’t the easiest of procedures. The person had to swab his finger with alcohol, prick it with the lancet, apply the transfer pen to the blood that bubbled up from the finger to aspirate it, and then press on the transfer pen’s plunger to expel the blood into the cartridge. Few people got it right on their first try. Aaron and Mike kept having to ask their test subjects to prick themselves multiple times. It got messy. There was blood everywhere.

These difficulties confirmed what Aaron already suspected: the company was underestimating this part of the process. To assume that a fifty-five-year-old patient in his or her home was going to immediately master it was wishful thinking. And if you didn’t get this part right, it didn’t matter how well the rest of the system functioned; you weren’t going to get good results. When they got back to the office, Aaron passed on his findings to Tony and Elizabeth, but he could tell they didn’t think they were a priority.

Aaron was getting frustrated and disillusioned. He’d initially bought into Elizabeth’s vision and found work at Theranos exciting. But after nearly two years, he was getting burned out. Among other issues, he didn’t get along with Tony, who’d become his boss. To get out from under him, he had asked to transfer from engineering to sales. He’d even spent a recent Saturday driving around shopping for a suit in the hope that Elizabeth would let him tag along on her trip to Switzerland. She didn’t, but she seemed to at least be taking his transfer request under advisement.

A few days after the San Francisco excursion, Aaron was sipping a beer at home and downloading the pictures he’d taken when an idea for a joke came to him. Using Photoshop software, he took one of the pictures—it showed the twin Edison prototypes sitting side by side on dinner mats on his coffee table—and made a fake Craigslist ad. Above the photo and under a headline that read, “Theranos Edison 1.0 ‘readers’—mostly functional—$10,000 OBO,” he wrote:

Up for grabs is a rare matching set of Theranos point-of-care diagnostic “Edison” devices. Billed as the “iPod of healthcare,” the Edison is a semi-portable immunochemistry platform capable of performing multiplexed protein assays on a fingerstick sample of human or animal whole blood…

I bought these units recently when I thought I was at risk of succumbing to septic shock. Now that I’ve tested my protein C and realized that I’m safely in the 4 ug/mL range, I no longer need a pre-production blood analytic device. My loss is your gain!

$10k for the pair, $6000 apiece, OBO—would also be willing to consider trade for a comparable pre-clinical diagnostic device (i.e., Roche, Becton-Coulter [sic], Abaxis, Biosite, etc.). Comes with a supply of single use cartridges, pelican shipping cases, AC adapter, EU power adapters, and assorted blood collection accessories, leeches, etc.

Aaron printed out the mock ad and took it with him to work the next day. When Justin and Mike spotted it on his desk, they thought it was hilarious. Mike decided it deserved a bigger audience and posted it on the wall in the men’s room.

Then all hell broke loose. Someone took the ad down and brought it to Elizabeth, who thought it was real. She convened an emergency meeting of the senior managers and the lawyers. She was treating it as a full-blown case of industrial espionage and wanted an immediate investigation to find the culprit.

Aaron decided he better fess up before things got further out of control. He sheepishly came forward and confessed to Tony. It was meant as an innocent prank, he explained. He thought people would find it amusing. Tony seemed understanding. He’d taken part in a few pranks of his own at Logitech when he worked there. But he warned Aaron that Elizabeth was furious.

Later in the day, she called Aaron into her office and stared at him with dagger eyes. She was deeply disappointed in him, she told him. She didn’t find his little stunt funny at all, and neither did other employees. It was disrespectful to the people who’d worked so hard to make the product. He could forget about joining the sales team. She couldn’t put him in front of customers. This showed he represented the company poorly. Aaron went back to his cubicle with the knowledge that he was now squarely in Elizabeth’s doghouse.

A MOVE TO SALES would probably have been ill-advised anyway. Unbeknownst to Aaron, trouble was brewing in that corner of the company. A new employee named Todd Surdey had come on board to head up sales and marketing, a role previously played by Elizabeth herself.

Todd was the consummate sales executive. Before joining Theranos, he had worked at several established companies, including most recently the German enterprise software juggernaut SAP. He was fit and good-looking, wore nice suits, and rolled up every day in a fancy BMW. During lunchtime, he pulled a carbon fiber road bike out of his trunk and went on rides in the nearby hills. Aaron liked to cycle too and accompanied Todd a few times in an attempt to buddy up to him before his prank put him in the penalty box with Elizabeth.

Todd’s two sales subordinates were based on the East Coast, where all the big pharmaceutical companies were headquartered. One of them was Susan DiGiaimo, an employee who operated out of her home in New Jersey and had worked for Theranos for nearly two years. Susan had accompanied Elizabeth on numerous sales pitches to drugmakers and had listened uncomfortably as she promised them the moon. When the drugmakers’ executives asked if the Theranos system could be customized to suit their needs, Elizabeth would always answer, “Absolutely.”

Soon after he started, Todd began asking Susan a lot of questions about the revenues Elizabeth was projecting from her deals with the drugmakers. She kept a spreadsheet with detailed revenue forecasts. The numbers were big, in the tens of millions of dollars for each deal. Susan told Todd that, based on what she knew, they were vastly overinflated.

Moreover, no significant revenues would materialize unless Theranos proved to each partner that its blood system worked. To that effect, each deal provided for an initial tryout, a so-called validation phase. Some companies, like the British drugmaker AstraZeneca, weren’t willing to pay more than $100,000 for the validation phase, and all could walk away if they weren’t happy with the results.

The 2007 study in Tennessee was the validation phase of the Pfizer contract. Its objective was to prove that Theranos could help Pfizer gauge cancer patients’ response to drugs by measuring the blood concentration of three proteins the body produces in excess when tumors grow. If Theranos failed to establish any correlation between the patients’ protein levels and the drugs, Pfizer could end their partnership and any revenue forecast Elizabeth had extrapolated from the deal would turn out to be fiction.

Susan also shared with Todd that she had never seen any validation data. And when she went on demonstrations with Elizabeth, the devices often malfunctioned. A case in point was the one they’d just conducted at Novartis. After the first Novartis demo in late 2006 during which Tim Kemp had beamed a fabricated result from California to Switzerland, Elizabeth had continued to court the drugmaker and had arranged a second visit to its headquarters in January 2008.

The night before that second meeting, Susan and Elizabeth had pricked their fingers for two hours in a hotel in Zurich to try to establish some consistency in the test results they were getting, to no avail. When they showed up at Novartis’s Basel offices the next morning, it got worse: all three Edison readers produced error messages in front of a room full of Swiss executives. Susan was mortified, but Elizabeth kept her composure and blamed a minor technical glitch.

Based on the intel he was getting from Susan and from other employees in Palo Alto, Todd became convinced that Theranos’s board was being misled about the company’s finances and the state of its technology. He took his concerns to Michael Esquivel, the general counsel with whom he had established good rapport.

Michael, it turned out, was developing his own suspicions. During a lunchtime run with a colleague from the new office to the Stanford Dish and back, he mentioned not feeling too good about Theranos’s pharmaceutical partnerships. He wouldn’t say more, but the colleague could tell something was bothering him.

In March 2008, Todd and Michael approached Tom Brodeen, one of Theranos’s board members, and told him the revenue projections Elizabeth was touting to the board weren’t grounded in reality. They were hugely exaggerated and impossible to reconcile with the unfinished state of the product, they said.

Brodeen was a seasoned businessman in his mid-sixties who had headed one of the big consulting firms as well as several technology companies. He hadn’t been on the Theranos board long, having joined at the request of Don Lucas in the fall of 2007. Given how new he was as a director, he advised Todd and Michael to take their account directly to Lucas, the board’s chairman.

Coming just months after Avie Tevanian had raised similar concerns, Lucas took the matter seriously this time. In a way, he couldn’t afford not to: Todd was the son-in-law of one of Theranos’s investors, the venture capitalist B. J. Cassin. Cassin and Lucas were longtime friends. They had both invested in Theranos at the same time, during the startup’s Series B round in early 2006.

Lucas convened an emergency meeting of the board in his office on Sand Hill Road. Elizabeth was asked to wait outside the door while the other directors—Lucas, Brodeen, Channing Robertson, and Peter Thomas, the founder of an early stage venture capital firm called ATA Ventures—conferred inside.

After some discussion, the four men reached a consensus: they would remove Elizabeth as CEO. She had proven herself too young and inexperienced for the job. Tom Brodeen would step in to lead the company for a temporary period until a more permanent replacement could be found. They called in Elizabeth to confront her with what they had learned and inform her of their decision.

But then something extraordinary happened.

Over the course of the next two hours, Elizabeth convinced them to change their minds. She told them she recognized there were issues with her management and promised to change. She would be more transparent and responsive going forward. It wouldn’t happen again.

Brodeen wasn’t exactly dying to come out of retirement to run a startup in a field in which he had no expertise, so he took a neutral stance and watched as Elizabeth used just the right mix of contrition and charm to gradually win back his three board colleagues. It was an impressive performance, he thought. A much older and more experienced CEO skilled in the art of corporate infighting would have been hard-pressed to turn the situation around like she had. He was reminded of an old saying: “When you strike at the king, you must kill him.” Todd Surdey and Michael Esquivel had struck at the king, or rather the queen. But she’d survived.

THE QUEEN DIDN’T WASTE any time putting down the rebellion. Elizabeth fired Surdey first and Esquivel a few weeks later.

To Aaron Moore, Mike Bauerly, and Justin Maxwell, this new purge was one more negative development. They weren’t privy to what had happened, but they did know that Theranos had lost two good employees. Todd and Michael weren’t just nice guys they got along with, they were smart and principled colleagues. In Mike Bauerly’s words, they were cut from good cloth.

The firings caused Justin to further sour on Theranos. The staff turnover was like nothing he’d ever experienced before and he was troubled by what he saw as a culture of dishonesty at the company.

The worst offender was Tim Kemp, the head of the software team. Tim was a yes-man who never leveled with Elizabeth about what was feasible and what wasn’t. For instance, he’d contradicted Justin and assured her they could write the Edison software’s user interface faster in Flash than in JavaScript. The very next morning, Justin had spotted a Learn Flash book on his desk.

Elizabeth never reprimanded Tim, even when obvious examples of his duplicity were brought to her attention. She valued his loyalty and, in her eyes, the fact that he never said no to her reflected a can-do attitude. It mattered little that many of his colleagues thought Tim was a mediocrity and a terrible manager.

There was one incident involving Elizabeth herself that also didn’t sit well with Justin. During an email exchange one evening, he asked her for a piece of information he needed to write a section of software. She responded that she’d look for it when she was back at work the next morning. The clear implication was that she had gone home. But minutes later, he stumbled on her in Tony Nugent’s office down the hall. Justin got angry and stormed off.

Elizabeth came by his office a little later to say she understood why he was upset, but she warned him, “Don’t ever walk off on me again.”

Justin tried to remind himself that Elizabeth was very young and still had a lot to learn about running a company. In one of their last email exchanges, he recommended two management self-help books to her, The No Asshole Rule: Building a Civilized Workplace and Surviving One That Isn’t and Beyond Bullsh*t: Straight-Talk at Work, and included their links on Amazon.com.

He quit two days later. His resignation email read in part:

good luck and please do read those books, watch The Office, and believe in the people who disagree with you…Lying is a disgusting habit, and it flows through the conversations here like it’s our own currency. The cultural disease here is what we should be curing before we try to tackle obesity…I mean no ill will towards you, since you believe in what I was doing and hoped I would succeed at Theranos. I feel like I owe you this bad attempt at an exit interview since we have no HR to officially record it.

Upset, Elizabeth called him into her office, told him she disagreed with his criticism, and asked him to resign “with dignity.” Justin agreed to help smooth the transition by sending his colleagues an email with detailed instructions about where to find the various projects he’d been working on. But as he sat down to write it, he couldn’t resist including a few personal thoughts on the state of those projects, earning him one last reprimand from Elizabeth.

Aaron Moore and Mike Bauerly stayed at Theranos a few more months, but their hearts were no longer in it. One of the nice features of the new office was that it had a big terrace above the building’s entrance. Mike had furnished it with deck chairs and a hammock. Aaron and Mike would retreat there for long coffee breaks, the afternoon sun pleasantly warming their faces as they bantered.

Aaron felt someone needed to tell Elizabeth to pump the brakes and to stop pushing to commercialize a product that they were still trying to get to work. But for her to listen, the message had to come from one of the three senior managers—Tim, Gary, or Tony—and none of them were willing to tell her. Tony, who was under a lot of pressure from Elizabeth, finally had enough of hearing Aaron’s complaints and asked him to leave the company. “Go find a place where you can be a big fish in a small pond,” he told him.

Aaron agreed that it was time for him to go. To his surprise, Elizabeth tried to convince him to stay. It turned out she thought highly of him despite his prank. But his mind was made up. He resigned in June 2008. Mike Bauerly followed in December. Every member of the Apple contingent had now moved on, marking the end of a chaotic period for the company. Elizabeth had survived an aborted board coup and was back firmly in control. Remaining Theranos employees looked forward to calmer and quieter times. But their hopes would soon be dashed.

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