Thursday, June 21, 2018

Theranos and O-rings: A Note on Disaster Avoidance

On a cold Florida morning in late January 1986, the space shuttle Challenger lifted off from Cape Canaveral.  Just over a minute into the flight the vehicle blew apart and disintegrated, killing all 7 astronauts.  The immediate cause of the failure was a breach in a joint of the solid rocket booster resulting from O-rings that had stiffened and shrunk in the cold.  The maker of the O-rings was Morton Thiokol.

The evening before, knowing that temperatures at launch time could be as low as 30F, NASA and Thiokol representatives conducted a lengthy conference call.  NASA had an ambitious flight schedule and wanted to launch.  Thiokol engineers knew that the O-rings might fail in the cold and came armed with data.  There was shouting, maybe some table pounding.  NASA pressed.  The Thiokol engineers dug in.  Management backed its engineers.  "We all knew if the seals failed the shuttle would blow up," one engineer remembered.

And then something happened.  Thiokol management caved, overruling its engineers.  The launch was approved.

I sometimes think of this reversal as a “Morton Thiokol Moment”—when you absolutely, positively know the right thing to do but let yourself get talked out of it anyway.  Maybe it's pressure.  Maybe exhaustion.  Maybe the other side is so adamant that it creates a bit of doubt.
The next day, the inevitable happened.  "When we were one minute into the launch,” a Thiokol engineer recalled, “a friend turned to me and said, 'Oh God. We made it. We made it!'  Then, a few seconds later, the shuttle blew up. And we all knew exactly what happened."

The O-ring at Theranos
The Challenger story came to mind the other day when I read John Carreyrou’s fascinating Bad Blood, about the collapse of medical device manufacturer Theranos.  The immediate cause of this corporate disaster—the O-ring, if you will—was the company’s CEO, Elizabeth Holmes.  Described as a sociopathic liar, she managed to consume a billion dollars in a failed attempt to create a blood-testing product, in the process putting thousands of lives at risk.  With criminal proceedings still underway, she and her COO may yet end up in jail.

Carreyrou takes us back to March 2008.  Holmes had raised about $42M, a lot of money but nothing like the billion she would eventually pry loose from investors like Rupert Murdoch, Betsy DeVos, and Walmart's Walton family.

The company’s head of sales and general counsel approached the Theranos board saying that “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.” This wasn’t the first time the board had heard this complaint.

The board’s chair was Donald Lucas, a veteran venture capitalist known for mentoring Larry Ellison and serving as an Oracle director.  “Lucas convened an emergency meeting of the board in his office on Sand Hill Road,” Carreyrou writes. “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.”  The group soon reached consensus, deciding to remove Holmes as CEO.

“They called in Elizabeth to confront her with what they had learned and inform her of their decision,” Carreyrou continues.  “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.” 

For Theranos, it was a Morton Thiokol moment.  The board absolutely, positively knew the right thing to do.  Not only was Holmes way out of her depth, but she had proven herself to be deceptive.  She'd lost the trust of her colleagues.  

But the board caved anyway.

Seven years and almost a billion dollars later--Holmes having brilliantly reconstructed her board around fawning octogenarians from the Hoover Institute--the Theranos ship blew apart and is, even as I write this, disintegrating.

Theranos's funding history

We've seen plenty of Morton Thiokol moments in America.  I remember the My Lai Massacre.  Abu Ghraib Prison.  Enron.  The mortgage meltdown.  More recently, Facebook and privacy.  Purdue Pharma and opioids.  Russian interference in our democracy.  Immigrant children separated from their parents.  You have to believe, in every case, that there was a moment when smart, experienced, accomplished people knew the right thing to do and caved anyway. 

We like to blame our disasters on O-rings, but our fate almost always lies in our own hands, when we know the right thing to do and, in the moment when it matters most, fail to do it.