The demise of a Silicon Valley start-up called “Theranos” has renewed doubts about whether business and philanthropic purposes can really mix.
Although nonprofits have long relied on payments for the services they provide or the goods they produce, critics have denounced the “marketization of the nonprofit sector” as having the potential to corrupt charities, causing them to be more attentive to their customers than those who need their help. Income from commercial activities – now more than half the revenues nonprofits receive –can, in other words, be another type of “tainted money,” just like gifts from controversial donors.
This concern has become especially pronounced as “social entrepreneurship” has grown in popularity as a way of addressing social problems. Though details vary, advocates of “social entrepreneurship” seek to do more than develop sources of earned income for nonprofits; they also want to apply management techniques used by innovative businesses to philanthropy. Some even would like for-profit companies to provide services charities have customarily offered, arguing they are likely to be more creative, sustainable, and successful.
To many, the saga of Theranos demonstrates what is wrong with this approach. Theranos aimed to revolutionize blood testing with a new machine that could cheaply and conveniently diagnose numerous, potentially fatal illnesses with only a few drops of blood. Its founder was a Stanford drop-out, Elizabeth Holmes, who had a gift for self-promotion and styled herself as a latter-day Steve Jobs, Apple’s legendary CEO. In 2015, President Obama named her an “Ambassador for Global Entrepreneurship.” Within a decade of its 2003 founding, the privately-owned Theranos was valued at $10 billion and Holmes had become the wealthiest self-made woman in the United States.
But as Wall Street Journal reporter John Carreyrou revealed first in an award-winning series of articles and later in a book, Bad Blood, the company had a big problem: its invention never worked. In the wake of this revelation and subsequent regulatory sanctions, Theranos’ worth plummeted and last September, it went out of business. Holmes lost her fortune and is now facing federal charges of fraud and conspiracy that could bring up to twenty years in jail.
This saga seemingly supports those who believe asking businesses to tackle social problems will merely create opportunities for organizations to put profits ahead of serving the public. Or for the people leading them, like Holmes, to enrich themselves, while claiming to be trying to help others.
However, the real lesson may lie elsewhere.
One reason is that most of the blood-testing in the United States is already conducted by businesses, such as Quest Diagnostics and Lab Tech. While these companies have not been problem-free, they have avoided the kind of misbehavior in which Holmes and her associates allegedly engaged. This suggests that the troubles at Theranos were due to something other than profit-seeking and private ownership.
Perhaps Holmes (and her principal associate, Ramesh “Sunny” Balwani) may simply have been especially greedy and crooked, and viewed starting a company as a better way to get wealthy than running a philanthropy. The portraits of the pair drawn by Carreyrou and others depict people of very questionable character and integrity, who should never have been leading a social-purpose business, or perhaps any other kind. But Theranos also had a board that included Henry Kissinger, George Shultz, James Mattis and other who had served the public; in addition, the company obtained millions of dollars in financing from experienced Silicon Valley investors, such as a principal funder of Oracle. Based on the public record, their “due diligence” clearly left a lot to be desired. But such failures of governance are not exclusive to the business world. Nonprofits have also suffered the consequences of having unscrupulous leaders, unchecked by their boards or donors.
There was also a failure of government oversight. Companies like Theranos, which was seeking to develop a new technique for blood-testing, are regulated by two different federal agencies, the Centers for Disease Control (for laboratories) and the Food and Drug Administration (for medical devices), as well as state government agencies. All of them did watch over Theranos, but until the facts started appearing in print, were deceived by its leadership in all but one case: a Defense Department examination that blocked use of the Theranos machine in Afghanistan (but which did not get much attention outside the Pentagon). This does indeed offer a lesson, but more about the fallibility of government regulation than the relative trustworthiness of for-profits or nonprofits.
What the Theranos story really shows is how tempting – for both for-profits and nonprofits – innovation has become. Once, it was highly suspect; Mary Shelley’s 200-year-old novel Frankenstein was meant to warn of the baleful results that might come from unrestrained efforts to improve upon nature. Not until the late 19th century (and largely in reaction to the determinism of Darwinism) did innovation begin to acquire a better reputation. Today, the quest for “the new new thing” (to use business writer Michael Lewis’ words) is endemic, not just in Silicon Valley, but throughout American society, in its charities as well as its businesses. Theranos promised a way to “change the world” – a phrase Holmes used – and reaped success as a result, even though it lacked the ability to do so.
“Changing the world” is also a claim made frequently these days for philanthropy and social entrepreneurship. Theranos is just a recent example of why such aspirations deserve to be taken skeptically. “Marketization” may not be nearly as corrupting – or tainting – for philanthropy as raising expectations that are unlikely to be achieved.
Leslie Lenkowsky, Ph.D., is an Indiana University expert on philanthropy and public affairs and a regular contributor to these pages. He writes frequently on philanthropy and public policy.