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First blood: What ambitious businesses can learn from Theranos

5th Jul 2019
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The much-hyped startup Theranos raised hundreds of millions in investment all based on a lie. Ultimately, the story is about how growth targets can metastasize if not properly set and controlled. In his monthly column, Alastair Barlow dissects the case to extract a few key lessons for ambitious businesses.

Theranos and its founder Elizabeth Holmes had a bold and admirable vision: to automate and significantly reduce the cost of blood testing, making it available to the masses and provide more real-time monitoring of personal health for faster therapy.

There was one problem: it didn’t work as advertised.

Theranos’s ‘revolutionary’ technology was centred on a portable mini-lab named Edison (after America’s greatest inventor, Thomas Edison) with which they claimed they could perform over 200 tests with a tiny nanotainer of blood taken from just a finger-prick rather than through venepuncture (the traditional way of sticking a needle in and taking much larger blood samples).

The real test figure was around a dozen and Theranos relied heavily on other companies to supplement this figure.

At the heart of this fiction was Elizabeth Holmes, who founded the company at 19 after dropping out of Stanford in 2003. She had no medical training, no business experience and no engineering background. And yet, she managed to convince investors to part with over $900m to try to transform the $70bn blood testing industry.

But Holmes and Theranos’s story is more than just the fraud. In John Carreyrou’s excellent expose of Theranos, Bad Blood, the writer detailed a business rendered completely dysfunctional by a reckless, almost delusional pursuit of growth.

Holmes and her right-hand man (and lover!) Sunny Balwani presided over a ruthless culture of growth at all costs. Creating an actual functioning product and Theranos employees were secondary considerations.

Before diving into the story further, let’s consider some key facts to set the scene:

  • Theranos raised $900m investment.

  • At its peak in 2015, there were 800 staff in the business.

  • It had a valuation high of $10bn in 2015. Only three years later it was worthless!

  • An all-star advisory team included U.S. Secretary of State George P. Shultz, William Perry (former U.S. Secretary of Defense) and many other diplomatic and military persons.

  • Experienced investors such as the Walton family and Rupert Murdoch invested over $100m.

  • They claimed the company generated over $100m in 2014, when in reality it was just over $100k.

  • On 15 June 2018, Holmes and former COO Sunny Balwani, were indicted on multiple counts of wire fraud.

Ultimately, Holmes was fined $500,000 and barred from serving as an officer or director from a publicly traded company for 10 years. She was also required to return 18.9m shares and relinquish voting control. The company ceased trading and was unable to find a buyer and so was dissolved in September 2018.

There are so many lessons to learn and early signs of fraud to look out for from this incredible but disappointing story. My four key takeaways are:

“Massive fraud” : The importance of governance and control 

“Massive fraud”. That’s how the American Securities and Exchange Commission (SEC) described Theranos in a 2018 press release.

The deceit around the Edison was enormous and deliberate, and defrauded investors out of hundreds of millions of dollars, not to mention customers who used and relied on their services. But how and why could fraud happen on this scale?

The ‘fraud triangle’, first put out in the 1950s by criminologist Donald R. Cressey, is a good way to view how fraud can be reasoned. These three stages are:

  1. Incentive or pressure;

  2. Perceived opportunity; and

  3. Rationalisation.

Fraud generally starts with an incentive or pressure to perform. In the case of Theranos, there was both the altruistic incentive to make the world a better place, but ultimately it was investor pressure what done it. Holmes had sold the product as already functioning and was eager to maintain her Silicon Valley hero status.

Most organisations have some form of governance framework wrapped around them which prevents the opportunity for fraud to take place. In the case of Theranos, Holmes was such a dominant CEO, that there was a huge opportunity to override any controls in place and thus create plenty of opportunities to bend reality.

Rationalisation comes down to human behaviour. In the case of Elizabeth Holmes, she still maintains she did nothing wrong, which indicates she is still able to rationalise her actions as appropriate.

These three points are key for any investor or board member to consider when assessing the risk of fraud in their portfolio.

Storytelling: Challenge face value 

Elizabeth Holmes was a fantastic storyteller: she spoke with passion, conviction and inspired her team, the public and investors. On this basis, she raised hundreds of millions of dollars, made it on the cover of Forbes, Vanity Fair, Fortune, Business Insider and Wired.

She convinced some top journalists, decorated military officials, senior politicians and statesmen. She also convinced the FDA (Food and Drug Administration) and CMS (Centers for Medicare and Medicaid Services) to approve drugs and operations.

In the US, private companies are not required to file audited financial statements, but more bizarrely, none of the Theranos investors had ever requested audited financial statements or asked whether the company even used an outside accountant to verify the financial information that was provided to them. As time went on, her evasion became more noticeable as explanations became even vaguer.

A key lesson here is to not confuse confidence, charm and conviction with accuracy, truth and some hard facts – dig a little deeper, maybe even a lot deeper, and for goodness sake, understand the product and look at the f*cking numbers!

Conspiracy, concealment and power 

The Edison was shrouded in secrecy and Holmes deliberately made teams work in silos so they couldn’t connect the dots. Employees were under strict instructions as to what they could and couldn’t do and say when it came to regulatory (FDA and CMS) visits.

Holmes’s control circumvented the role of good corporate governance of a growing organisation in a regulated environment. Overall, this utter dominance led to the investment of hundreds of millions of dollars, all predicated on lies.

Company culture is important. In Theranos, many experienced investors and advisors stopped looking at the point of Elizbeth Holmes, but if they had probed a little deeper, they would have discovered a toxic culture.

Be mindful of collaboration and relationships at the top of the organisation and the potential to conspire. Good corporate governance is important in both public and private companies to steward the company. and should be appropriately independent for the size and complexity of the business.


The whistleblowing team of Erika Cheung and Tyler Shultz (grandson of advisor George Shultz) were hugely important in the Theranos case. The pair potentially saved further investors losing millions and, more importantly, patients being incorrectly diagnosed through the amateur equipment and sub-standard processes.

While Theranos had their employees wrapped up in water-tight non-disclosure agreements and the powerhouse of David Boies behind them as General Counsel (controversially also a board member and shareholder who took half their fees in equity), confidentiality contracts are not valid as a whistleblower. As such, Erika and Tyler were, notwithstanding threats of lawsuits to silence them, ultimately protected by the law through whistleblowing.

In the same SEC press release where Holmes and Sunny were charged with “massive fraud”, Jina Choi, Director of the SECs San Francisco Regional Office said “The Theranos story is an important lesson for Silicon Valley…Innovators who seek to revolutionise and disrupt an industry must tell investors the truth about what their technology can do today, not just what they hope it might do someday.”

A powerful lesson to any entrepreneur that has any type of pressure to report growth.

Holmes has maintained her innocence throughout. The trial will commence in August 2020 where she faces up to 20 years in prison for fraud. On the other hand, the whistleblowers have launched the company Ethics in Entrepreneurship to support others in the same situation they faced.

There is so much more to this story than this article can describe – if you want to know more about Theranos then watch the HBO documentary “The Inventor: Out for Blood in Silicon Valley” which will be out in the UK later this year.

Replies (2)

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By Simpkins
11th Jul 2019 11:29

Read the book a couple of months ago, a real page turner with quite a few WOW moments . Something everyone should read, interestingly no formal CFO for most of the fund raising period. In fact she fired the first CFO when he dared to question the numbers she was presenting.

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By edhy
12th Jul 2019 11:28

It was not ambition, it was not bold and admirable vision, it was not pursuit of growth but it was simply fraud, crime. It was serious crime as lives were at risk due to misdiagnosis. Altruistic incentive? Just a Joke. Sure rationalization comes down to human behavior, people justify murders as well.

How the investors were convinced; simply greed on their part, and greed almost always is coupled with myopia. She was fantastic actor. Most of the commentaries post-fraud still present her in positive tones or as victim of circumstances. Why so: because she was young, pretty, aping Steve Job’s dress style, a lady in boys startup world living American dream. We better call a spade a spade.

What is most disturbing is that she is still free and likely to get away with very light punishment. American justice system puts handcuffs on Dominique Strauss-Kahn on complaints of a maid but the lady with serious fraud is out waiting for trial.

If there is lax governance, fraud is bound to happen (Murphy’ new law).

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