Lessons from a fallen unicorn

When Elizabeth Holmes was nine and was asked what she wanted to be when she grew up, she would say she wanted to be a billionaire. Twenty years later she was Silicon Valley’s first female billionaire entrepreneur, controlling a company worth an estimated US $9 billion, on paper at least.

Holmes dropped out of Stanford College to pursue an idea she had to develop a revolutionary blood testing machine that could conduct sophisticated blood tests from just a finger prick. Her company, Theranos raised about US $700 million from well-known and successful venture capitalists, including Rupert Murdoch. Holmes was feted as the next Steve Jobs and her face adorned magazine covers. Barack Obama made her a presidential ambassador for global entrepreneurship.

There was one problem. The technology that Holmes was trying to develop did not work. Holmes would not budge from her idea that the machine should be small and portable and should only use blood obtained from a finger prick. These parameters proved impossible for the teams of engineers that were employed to create and test the machine. The tests were unreliable because the blood had to be diluted so much.

Spectacular rise and fall

So, how did Holmes and her company come to be so popular and raise so much money? Holmes lied about the technology and the results of the blood tests. She lied to her employees, the company board, investors, customers and regulators. It wasn’t until a Wall Street Journalist, John Carreyrou, was tipped off about the concerns from some ex-employees when investigations started. His task was made difficult due to Theranos hiring America’s top lawyers, who threatened and intimidated anyone from talking with him. Holmes even reached out to one of her investors, Rupert Murdoch whose News Corp owned the Wall Street Journal, to stop the story. However, with the backing of his editor and employer, the investigative story which questioned Theranos’ claims was eventually published, and the web of lies that had been woven started to fall apart.

In September 2018 it was announced that Theranos was being wound up. Federal prosecutors had filed criminal charges against Holmes and her ex-boyfriend, who was the company’s former number two executive, for defrauding investors. All the investors lost their money. Rupert Murdoch sold his stake back to the company for US $1 shortly after the story broke, so he could claim a tax loss.

Warning signs

So, how was the fraud allowed to continue for so many years, and why did so many get conned when there were so many warning signs? If any employees questioned the technology, they were fired on the spot. Ex-employees raising concerns on social media were slapped with law suits and threatened. Holmes would not allow the engineering team to collaborate with the chemistry team. Both teams communicated through her as the CEO. She also created a second engineering team to compete against the original team, again without allowing any collaboration.

Theranos lured some big names to serve on the board, including Henry Kissinger, George Schultz (former Secretary of State), and William Parry (former Secretary of Defense). However, the board members did not have the knowledge to understand the technology and question the results. If a director did ask too many questions or show any doubt over the claimed progress, they were removed from the board and forced to sign a confidentiality agreement. Holmes was allowed to force through a resolution that gave her 100 votes for every share she owned, giving her 99 per cent of the voting rights. When he was later questioned about board deliberations in a deposition, George Schultz said: “We never took any votes at Theranos. It was pointless. Elizabeth was going to decide whatever she decided.”

Lack of due diligence and governance

Holmes and Theranos were allowed to thrive during the years when there was an investor frenzy to be part of the next tech company to come out of Silicon Valley. Startups such as Uber and Spotify were raising significant private capital and Holmes convinced influential investors that Theranos was the next big thing. Holmes modelled herself on Steve Jobs, to the extent of wearing black turtleneck jumpers and drinking kale juice. There was a fear of missing out and therefore some investors did not conduct sufficient due diligence. Where doubts were raised as part of the due diligence, these were ignored by those deciding to invest.

Some may believe entrepreneurs need freedom to follow their instinct and make quick decisions, without the need to burden them with a bureaucratic governance process. However, it was this “fake it until you make it” mentality that enabled Holmes to sell the story in the hope that technology would catch up. Truth is, you need to give entrepreneurs enough slack to be entrepreneurial, but you also need a governance process that keeps them accountable.

The regulators did not act sufficiently on the concerns that were raised. The health regulators did not follow up promised test results and eventually made concessions. It is unknown if there was any financial regulatory oversight or if there was a financial audit ever completed. The revenue and profit projections provided to potential investors were wildly exaggerated and should have raised some doubts.

Lessons for entrepreneurs
  • Exponential innovation is unusual. Most innovation, in IT and other disciplines, is incremental. An advancement that works is far more valuable than blue sky promises of transformation.
  • Accepting responsibility, sharing information and being accountable are clearly fundamental requirements of good leaders.
  • Good governance is paramount. Boards must have suitable skill sets, in order to fully understand the company’s position and to help guide it forward. Board members must ask questions to be suitably informed and to be able to protect the company. If they cannot act bona fide in the interests of the company, act for a proper purpose, and exercise independent judgement, they should step aside. The days of Boards rubber stamping executive strategies are gone.
  • Embrace a positive corporate culture – encouraging diversity of thought, collaboration, constructive dissent and transparency – is critically important to a company’s success.

Carreyrou has released a non-fiction book on the demise of Theranos – ‘Bad Blood, Secrets and Lies in a Silicon Valley Startup’ – and a movie is planned starring Jennifer Lawrence as Holmes.