The Fall of Elizabeth Holmes and Theranos

September 16, 2016

TechCrunchFor Silicon Valley entrepreneurs, establishing a clear narrative around a startup’s foundation and purpose is essential to success. Few people understood this concept better than Elizabeth Holmes, CEO of the formerly acclaimed blood-testing firm Theranos. She founded her company in 2003 at the age of 19 after dropping out of Stanford University’s School of Chemical Engineering. Holmes left college early because she claimed to discover a revolutionary new method for medical testing: rather than drawing a significant amount of blood from a patient, her system required just a small pinprick on one’s finger.

Theranos quickly became a Silicon Valley “unicorn” startup thanks to Holmes’ keen sense of salesmanship. Her initial pitch earned $6 million from investors, marking the start of a more than $700 million investment bonanza. But even from the beginning, Theranos didn’t act like a normal business. While Holmes praised the company publicly, potential investors were not allowed to learn how the technology at Theranos actually worked. This practice is relatively common in Silicon Valley among tech startups, but in the medical field it’s unheard of to withhold such information. But it wasn’t just investors who remained ignorant of Theranos’ business model: engineers and medical staff at the company were reportedly banned from speaking to each other about their work as well.

As government groups like the FDA began to question this culture of confidentiality, Theranos continued to gain prestige and cash at an astonishing rate. Holmes fashioned herself as the medical industry’s Steve Jobs, even going so far as to copy the late Apple CEO’s famed preference for black turtleneck sweaters. The board at Theranos became packed with high-rollers from Washington while representatives from the medical field remained sparse. Walgreens eventually partnered with the company to install more than 100 Theranos Wellness Centers in stores throughout Arizona. At one point, a representative from the investment firm Google Ventures visited one of these stations to test the company’s medical testing methods. The prospective investor then had several large vials of blood drawn from his arm, far more than the pinprick that Theranos advertised.

This small discovery soon turned into a widespread revelation once a reporter from the The Wall Street Journal began a series of articles centered on Theranos’ suspect methods. According to him, the firm had relied on Holmes’ marketing magic in order to sell a process that simply didn’t work. Medical experts claim that it’s impossible to collect a reliable blood sample simply from a pinprick since most detailed analyses require larger portions in order to reach a reliable conclusion. The investigation by the Journal proved to be devastating for Theranos, with the value of the $9 billion company soon tanking to almost nothing. Holmes suffered a similar blow: in the wake of the scandal Forbes changed her net worth from $4 billion to zero. While Theranos remains in business today, it stands more as a cautionary tale about the dangers of believing the hype in Silicon Valley.

Questions:

 

  1. Should Holmes and her colleagues at Theranos face criminal charges for misleading the public as well as investors?
  2. What can companies like Theranos teach us about the power of marketing and branding?

Source: Nick Bilton, “Exclusive: How Elizabeth Holmes’s House of Cards Came Tumbling Down,” Vanity Fair, October 2016. Photo by TechCrunch.

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