The Downfall of Elizabeth Holmes: Lessons From Theranos
Theranos was said to develop a revolutionary lab test that could screen a variety of conditions using a single drop of blood. Indeed, this was a cost-efficient solution — the characteristic of big tech — so investors loved what the charismatic Elizabeth Holmes presented. Actually, this young founder fashioned herself after Steve Jobs, who is an Apple visionary. Based on those claims, Theranos hit a valuation of $9 billion but failed to transform the health care years later. There are a lot of lessons to draw from Theranos, but here are what I think are critical for leaders of fast-growing businesses.
Elizabeth Holmes, Theranos founder and chief executive, is one of the most notorious entrepreneurs of her generation.
She ascended the ranks of Silicon Valley quickly, and at a young age, principally because of what was thought to be her company’s breakthrough blood testing technologies. However, as rapidly as her achievements and accolades came, they diminished when she and Theranos were suspected of fraudulently describing company capabilities, and eventually charged with crimes. Once the darling of the tech community, Elizabeth Holmes is now an example of what can go wrong when entrepreneurs get in over their head.
It is hard to believe that Theranos was valued at more than $9 billion just a few years ago.
Today, it’s worth less than nothing. What happened? Elizabeth Holmes founded the company in 2003 after dropping out of Stanford University. She had an idea to make blood tests faster and easier through new technology she called “the Edison machine.” Theranos promised that its Edison test could quickly detect conditions such as cancer and diabetes without the hassle of needles. As it turned out, however, the company was operating on a foundation of lies and half-truths that have caused the one-time Silicon Valley darling to become a cautionary tale.
Around August 2018, Theranos announced quietly that it was closing its operations and Elizabeth Holmes faced criminal fraud accusations along with another top official.
It was alleged that she defrauded investors besides doctors and patients. The company’s progress did not work out as planned but its leadership was being accused of lying about the technology. Since self-made women billionaires are not too common yet, her story gained more attention, more because she is a woman. The Theranos story could leave a legacy behind other women entrepreneurs’ journey since and it will be wise on their behalf to learn the real lessons from the fall of Holmes.
Now, rather than serve as a source of undying inspiration, Elizabeth Holmes provides entrepreneurs with five cautionary lessons to learn from when building a business.
Theranos raised millions of dollars from investors with promises of disrupting the laboratory testing industry with fast, accurate results. However, the promise never became a reality because there were problems with its technology from day one. So, what lessons can other entrepreneurs learn from the Theranos affair? Let’s find out!
Theranos Lessons #1: Raising Capital Isn’t a Cure-all
The fallout from the Theranos disaster is a warning sign for startup companies to rein in their money-raising, especially in the early stages. Large investments also come with high expectations, and it’s human nature not to want to disappoint those who have put themselves and their assets on the line for us. The bigger the bucks, the higher the pressure. When a huge amount of money is riding on your success, anything less than a homerun becomes a failure, making it more likely to swing for the fences.
While startups need cash to grow excess cash and attention from investors can undermine its founders’ focus.
Generally, VCs and angel investors target both young and serial entrepreneurs with promising business ideas. As a result, a founder with an innovative idea may get tempted by the hype, constant inflow of investments as well as spiking valuation. Investors hope to monetize as quickly as possible and this can put a lot of pressure on the founders and the team. It’s the pressure from impatient investors that forced Theranos and its team to run as fast as it could thus pushing it on a slippery slope and on to its ruin. They were probably not given enough time to mature the business model and perfect its technology.
Many entrepreneurs make the mistake of assuming that raising capital will solve an organization’s most meaningful challenges.
In 2010, Theranos raised $45 million in investment capital. Over the next 8 years, the company would raise a total of $400 million. Otherwise had Theranos delivered a diagnostic test as promised, this would have achieved significant economies of scale. The goal was to use a single pinprick of blood to get a wide range of results. But it didn’t work out as expected. This provides a big lesson to investors, entrepreneurs and managers that they should avoid exposing startups to excessive funding and huge expectations on early-stage startups.
If you aren’t finding product–market fit, surely more money will help you hire the engineers and product managers to fix it.
If you aren’t hitting your sales targets, more money will allow you to hire an experienced VP of Sales while retaining existing salespeople. If you aren’t generating press attention, raising a large round of funding will show the media that your organization is worth covering. In truth, however, raising capital from investors can exacerbate existing problems, especially if they are related to company culture or flaws in leadership. Theranos should serve as an example for other entrepreneurs that capital is not a cure-all. Before establishing a relationship with investors, business leaders should first ensure that the fundamentals of the business are strong.
You want to define the terms, not let the investor define them.
It is really very simple. The earlier you raise capital, the less say you have on the terms at which you raise said capital. Every investor has one thing in mind, one goal, which is returning their money to their limited partners. You are focused on raising a few million for your startup, but don’t forget that the investor you are pitching also has investors who gave them significantly more money in order to invest and yield maximum returns. If you come to the investor super early, with no validation or traction, the risk for that investor is significantly higher. That means that if you do convince them to take out their check book despite the high risk, they have the leverage to write the check on their terms. In other words, you need that investor more than he needs you.
Theranos Lessons #2: Never Promise Too Much
Entrepreneurs are ambitious, enthusiastic and optimistic — often unrealistically so. It’s so easy to overpromise results that doing so is something of an occupational hazard for CEOs of fast-growing companies. But be forewarned: Once a promise is on the table, it creates serious pressure for the company to meet potentially unrealistic goals — and that’s the danger zone.
Before long, even well-meaning CEOs can find themselves cutting corners, making bad choices and standing behind claims that border on fiction.
Holmes’ story underscores why it’s critical to keep a sharp eye on the line between aspirational thinking and the truth. In his bestselling book Originals: How Non-Conformists Move the World, Adam Grant points out that entrepreneur Rufus Griscom of Babble.com took the exact opposite approach with his investors. He always started by revealing what could go wrong in his business. This strategy worked very well for him: He ultimately earned the trust of execs at Disney, which bought his company for $40 million.
Theranos and Elizabeth Holmes failed to manage investors, media and partners’ unrealistic expectations.
Actually, the public would not have judged it harshly had it been less bold in its claims. The company would be given a chance to improve its technology and rectify any know errors. Further, Holmes’ invention was regarded by Ian Gibbons, the chief scientist as more of an idea than reality but he tried everything possible and exhausted every option because he was bound by the scientific method. Entrepreneurs are confident, enthusiastic, and optimistic — to a fault. CEOs of fast-growing businesses frequently succumb to the temptation of overselling outcomes since it is so easy to do so. But be aware that once a promise has been made, there is tremendous pressure on the firm to achieve potentially unattainable objectives — and this is where things can go wrong.
It is understandable that people find it hard to overlook the temptation to achieve big results quicker.
While it is not too bad an idea to go into an overdrive for the results, it is also important to see that you don’t ignore the reality while striving for them. If you lose sight of reality while trying to achieve the ambition, there is a high risk that you end up as an underachiever. A reality check is very important while making a tall promise because it adds to the pressure to perform. There lies a key lesson. Don’t lose track of reality even if that brings a temporary discomfort. When leaders start believing in their hype without realizing it or stop paying attention closely enough, this causes serious problems at fast-growing companies since there may be no one left who knows how things work anymore.
Delivering what you say you’re going to deliver impacts your personal credibility.
As an entrepreneur, you need to promise your customers a specific experience with your products or services. Now, imagine that before launching you had positioned yourself as an affordable version of a luxury product without any sacrifices in quality. However, once you launched, your customers found that things were very different — perhaps you weren’t as affordable as they had assumed, or maybe the quality didn’t live up to the hype. Whatever the case, you now find that you have overpromised — you claimed to deliver something and then did not do so. That causes severe damage to your brand. Many startups may never recover from such a misstep. Once damaged, consumer trust can be incredibly hard to rebuild, and that’s essentially what overpromising and underdelivering does: it erodes trust and corrupts your brand.
Theranos Lessons #3: Maintain Integrity Broadly
In Elizabeth Holmes’ case, the intent to defraud holds serious weight and could perhaps lead to up to 20 years in federal penal complex and hundreds of thousands of bucks in fines. At the foundation of the fee is an absence of integrity that can absorb an impact on any entrepreneur. As an entrepreneur, integrity is needed to develop an even brand, each on-line and off, and with that comes honesty and the flexibility to face by actions (or inactions) and make corrections as wanted along the system.
Honesty (with yourself and others) is always the best policy.
Elizabeth Holmes should have been upfront with investors from the beginning and not started a snowball of lies that would eventually turn into an avalanche. If she had told the truth from day one, she and her company would not be in their situation. Rather than trying to fool everyone, she could have established Theranos’ reputation for integrity by presenting its technology honestly and transparently. Clearly, it was a bad idea from the start for Elizabeth Holmes to base her business on a product that didn’t work as claimed when starting out — this led directly to all of the problems with secrecy and dishonesty down the road.
Talented advisors are useless if you aren’t honest.
Theranos assembled an all-star board of directors, featuring some of the most respected leaders from all walks of life. Directors included George Shultz (former Secretary of State), James Mattis (the current Secretary of Defense) and Dick Kovacevich (former CEO of Wells Fargo). However, despite surrounding herself with outstanding mentors, Elizabeth Holmes was not able to benefit from their advice. As has been alleged in a number of reports, she kept employees and advisors in the dark about the challenges her organization was facing. Since she wasn’t honest with her board, she wasn’t able to benefit from their experience.
False narrative do not survive. Theranos hid many of its technical problems from the public and the regulatory authorities for too long.
Under the guise of protecting its IP, it prohibited any scrutiny of its technology. But once the truth came out (which it always will), the collapse of the firm’s reputation has been swift and brutal. The lesson: while entrepreneurs do not need to provide all negative information to the public, creating a false narrative about your firm that directly contradicts reality is a very dangerous strategy. It will rarely succeed. If the allegations about Theranos turn out to be true, it is likely that the firm will face multitudes of lawsuits from customers and investors.
Elizabeth Holmes shirked her responsibilities as the leader of an organization that was supposedly focused on helping people to inexpensively live healthier lives.
She appears to have intentionally created a highly secretive organization that operated in the shadows of the tech world for roughly 10 years. Along the way, she manipulated investors, business partners and journalists while knowingly offering a product that was unreliable. As a rule, people prefer leaders who admit to making mistakes and who take responsibility for their actions when mistakes occur. In contrast to Elizabeth Holmes is Mark Zuckerberg, who helms Facebook. After realizing that his organization made a serious mistake in failing to properly react to a user data breach, he took full responsibility for his organization’s actions, taking out full-page newspaper ads apologizing to Facebook users.
Theranos Lessons #4: Don't Become Drunk with Success
As mentioned earlier, Holmes chose to operate in “stealth mode” for nearly 10 years of the company’s history. Stealth mode is startup speak for operating under the radar. As a result of opting to operate secretly and withhold important information from employees and advisors, Elizabeth Holmes may have missed her opportunity to fail fast. As a result, she and her company failed big.
The most dangerous time for any company is when it has achieved a high level of success because the top leaders tend to relax and let their guard down.
Overconfidence can lead you astray in several ways: First, this kind of thinking may cause executives to stop looking at market signals that might indicate trouble ahead; second, overconfidence causes companies to rest on their laurels instead of continuing efforts necessary for growth — as happened with Theranos; third, once they reach a target number that was set early on (e.g., revenue goal or valuation), entrepreneurs often suspend critical analysis and planning activities out of an unwarranted belief that things will continue going well indefinitely into the future.
As a CEO of a disruptive company, you constantly hear people saying that they can’t get it done or that they need more resources or that you are pushing too hard.
You can start to believe that talking people off the ledge is all it takes. Get the complainer feeling good about himself and they will get it done. Or fire him. Slowly, the CEO gets isolates into a fantasy cocoon of her own making. If you product team is telling you something, listen. Maybe you have the wrong people but you just might have the wrong culture or have picked the wrong problem. The first released iPhone was compromised in many ways before later releases made it great. There are limits to the level of technical risk achievable in ambitious version 1.0 product. Elizabeth Holmes lacked a basic recognition of the technical risks and engineering leadership.
Innovation is a high-risk business, where high rewards and equally deep setbacks can arrive suddenly.
Theranos claims that it is trying to introduce extremely innovative technology that uses a fundamentally different approach to testing than that used by traditional laboratories. But there are inherent risks in such innovation; one of the founders of the firm, Dr. Ian Gibbons, committed suicide in 2013 because “nothing was working”. Entrepreneurs need to have the right mind set so that they are ready to confront the highs and lows that a new technology will encounter. As the chief executive and founder, Elizabeth Holmes had a moral and fiduciary duty to protect the company and stand good on its claims. To plead ignorance of where it was failing may have had some truth, but every leader must be prepared to take the good with the bad and be honest in declaring both.
I’ve come to realize that the move-fast mentality can make some people speed-blind if they are not careful.
The problem is that you easily confuse a massive output with a good outcome. To some, this might be a somehow banal realization. Still, in my experience from talking to other founders in similar situations, it’s an insight that needs to be repeated. The success of a startup depends on making quick decisions. The success of a scale-up depends on whether you make the right decisions. The outcome becomes more important than the output. In particular, demos are false data points — unreliable and untrustworthy as they rarely solve any of the hard technical challenges.
Theranos Lessons #5: Make Data-driven Decisions
Initially, the management of Theranos presented itself as the transformative agent of healthcare but it didn’t have any clinical data to back its technology. As a result, Elizabeth Holmes and her team made erratic decisions that were not backed by any data hence the premature release of its testing devices. This strategic error has led to a lot of sanctions and hefty fines.
On the other hand, maybe Theranos failed to make its data available to the public or use it because that could have undermined its astronomical valuation.
Still, its investors would not have allowed it but the right course was to use and share its not-up-to standard data. Such transparency would have encouraged trust among its investors, partners, creditors, regulators and patients. Tech entrepreneurs have been disparaged for their “fake it until you make it” culture and their propensity to sell sweet dreams long before they are realized. In the case of Theranos, this practice was intolerable because it directly endangered patients’ lives.
Ensure you are meeting gold standards of quality, credibility, and safety for your industry. Prove your high standards by publishing the results or information in a peer-reviewed journal.
A significant issue that The Wall Street Journal and others raised was whether or not Theranos’ technology actually worked. Certainly, startups working in competitive categories are not going to publish proprietary data without appropriate IP protection. However, Theranos’ secrecy combined with the lack of support in peer-reviewed journals or scientific evidence was damning enough to get journalists to investigate. Additionally, the technology was deployed despite Theranos employees spotting discrepancies in the test results, which could have led to patients being misdiagnosed.
Startups are prioritizing data and transparency after the blood-testing company’s mercurial rise and fall.
Gone are the audacious timelines of solving cancer tomorrow or getting self-driving cars by Christmas. In the years since the Theranos scandal broke, startup communications professionals say they field more questions on transparency and data, particularly those working in life sciences. Theranos was infamous for a culture of internal secrecy, former employees testified in the trial. It sequestered its R&D lab, called Normandy, on a different floor from the rest of the company, and didn’t allow for much communication between the clinical and R&D sections. It also lacked the peer-reviewed research that would’ve been expected from a company of its age.
If data-driven product management had a mantra, it would be “test early and pivot quickly.“
Failure is an essential part of learning and growth. Product managers should not have to come up with a perfect idea on the first try. Instead, they should be encouraged to treat everything as an experiment — iterating quickly in short build/measure/learn cycles. Amazon CEO Jeff Bezos considers Amazon‘s experimental culture to be a significant strategic advantage and a major reason why the company reached $100 billion in sales faster than any other company.
Many of the stories about Elizabeth Holmes suggest that she never intended to deceive anyone. But, the road to hell is paved with good intentions. It’s easy for entrepreneurs to get caught up in their own vision and very tempting for them to want to “tweak” the facts to support their goals. A few white lies can quickly take a burgeoning business to criminal behavior — and that’s a path of no return.
Theranos is not the first startup to make mistakes in its early growth phase.
However companies that successfully developed sustainable business models sourced funding after hitting specific milestones, made data-driven decisions, didn’t scale an unproven business model too soon and founders managed their stakeholders’ expectations. A startup’s cumulative outcomes of decisions made determine whether it will succeed or fail. Lessons picked from Elizabeth Holmes as well as the rise and fall of Theranos can help future innovative companies escape similar outcomes and live up to their potential.
Readers must remember that one’s integrity is most tested during times of struggle.
Entrepreneurs struggling to build a successful business could easily find themselves in situations similar to those Elizabeth Holmes faced when building Theranos. When times get tough, rather than opt for deception, manipulation and puffery, entrepreneurs should opt for transparency. Reaching out to advisors, partners and employees and asking for advice and help is often the best way to overcome professional hardship.
The tragic story of Elizabeth Holmes and Theranos provides entrepreneurs with valuable business (and life) lessons.
You can avoid the mistakes of Theranos by understanding and applying lessons discussed in this post: don’t promise more than you can deliver, don’t become overconfident after success, look before you leap, don’t lose touch with reality, be honest with yourself, and others about what you’re doing at every step along the way, and don’t get paralyzed by perfectionism or fears that are holding you back from succeeding in business!
Behaving as if she was the smartest and most charismatic person in the room, she made critical mistakes. Anyone of them is deadly, but all of them? Theranos didn’t have a chance.
It was dark side of Silicon Valley. This was Theranos, a fraudulent company with an incapable leader that simply survived many deadly mistakes far longer than normal. What do you think about Elizabeth Holmes? Share your thoughts below, I’d glad to hear from you 🙂
Digital Dandy. Hacker From Heart. Workaholic. Coding Artist. Self-made.