Theranos, the Scammers of Silicone Valley

In 2003, the dot-com bubble was burst, and investors had become much more restrained with their money. Silicon Valley, however, was just getting started. Apple had only recently introduced the iPod, Google was establishing itself as the go to internet search engine, and Facebook would not be founded for another year and 8 more would pass before its IPO. Christensen had just published The Innovator’s Solution, and wary investors were seeking opportunities in the tech sector where they saw the potential for disruptive innovation. It was in this environment that Elizabeth Holmes would drop out of Stanford’s School of Engineering to start what she believed would be a revolutionary company, Theranos. According to Holmes, Theranos would disrupt diagnostic blood testing by replacing the need to draw vials of blood using needles (phlebotomy) with just a single finger prick. More so, the results of hundreds of diagnostic tests would be processed using a device slightly larger than a desktop computer, and ready almost immediately. This groundbreaking technology would help identify health issues sooner, allowing doctors to initiate potentially lifesaving protocols earlier. In addition, it would allow patients requiring regular monitoring to test their own blood more frequently while sparing them countless trips to the doctor’s office and the discomfort of the needle. In short, Elizabeth Holmes and Theranos were going to make diagnostic blood testing as it was known seem like a byzantine artifact, and investors jumped aboard. Yet fifteen years after Elizabeth Holmes founded Theranos, it dissolved having never delivered to its promise,1 and in just a few months, July 2020, the United States District Court for the Northern District of California is scheduled to begin U.S. vs. Holmes, where Elizabeth Holmes and her business partner and lover Sunny Balwani face multiple counts of wire fraud, and up to 20 years in prison if convicted.2 In his book, Bad Blood: Secrets and Lies in a Silicon Valley Startup, Wall Street Journal investigative reporter John Carreyrou details Theranos’s and Elizabeth Holmes’s rise to prominence, along with the crucial role he played in their subsequent downfall. 

           Holmes grew up in a well-connected upper-class family. Her father was an executive with ENRON before moving onto senior positions within government agencies3, and her mother a staffer on Capitol Hill.5 With her piercing blue eyes and deep baritone voice, Elizabeth Holmes is almost universally described as determined, intelligent, charming, and intimidating. She seems to be a masterful storyteller and influencer. At the age of 19 and a recent college dropout, she was able to use her family connections and stories about her own fear of blood and needles, as well as her experience working as a lab intern in Asia during the SARS epidemic, to woo several high profile and deep pocketed investors and board members.3 Theranos’s early investors included Rupert Murdoch, the Walton family (owners of Walmart), the DeVos family including Betsy DeVos (currently Donald Trump’s secretary of education), Robert Kraft (the owner of the New England Patriots), and several other prominent Silicon Valley investors.4 “Its board included the former secretaries of state George P. Shultz and Henry A. Kissinger, two former United States senators, and Gen. Jim Mattis, the current secretary of defense.”4 By 2014 Forbes magazine declared Elizabeth Holmes “the youngest self-made female billionaire in the world”, and Fortune named her to their 40 under 40 list.5 

Elizabeth Holmes has a deep appreciation for the power of the facade. Very few people truly know her, many viewed her as a visionary, yet she has a reputation among former employees as being a tyrannical dictator. In Theranos, communications were closely monitored, secrecy ruled the office culture, and Holmes and Balwani often fired dissidents swiftly and without remorse. Several former Theranos employees even suspect that her unique deep voice is not her natural one, but rather an act.6 She was an admirer of Steve Jobs, and created her persona in his image, down to the ubiquitous black turtlenecks and her ability to keep people at arm’s length. “Like Jobs…Holmes also paid indefatigable attention to her company’s story, its ‘narrative’. Theranos was not simply endeavoring to make a product that sold off the shelves and lined investors’ pockets; rather, it was attempting something far more poignant. In interviews, Holmes reiterated that Theranos’s proprietary technology could take a pinprick’s worth of blood, extracted from the tip of a finger, instead of intravenously, and test for hundreds of diseases—a remarkable innovation that was going to save millions of lives and, in a phrase she often repeated, ‘change the world.’...In a technology sector populated by innumerable food-delivery apps, her quixotic ambition was applauded. Holmes adorned the covers of Fortune, Forbes, and Inc., among other publications. She was profiled in The New Yorker and featured on a segment of Charlie Rose.”3 As good as Holmes was at crafting and sustaining her fa?ade however, she also had a blind spot that would ultimately become her downfall. The Theranos technology simply did not, and more importantly would never, work. Holmes pressed on with the planned roll-out, with either an unflappable belief that the technology would catch up with the promises, a shear unwillingness to compromise on her vision, or simply a desire to remain on top at all costs.

In February of 2015, Elizabeth Holmes’s fame and influence were at their peak with announced plans to introduce the Theranos devices across the country in partnerships with Walgreens and Safeway. She was the talk of the town in political and investment circles, and even campaigned with the Clintons. However, she was also making false claims about success Theranos was having in the field, including with deployed military, and was engaging in a secret love affair with her second in command, Sunny Balwani.  It was at this time that John Carreyrou, an award-winning investigative journalist with The Wall Street Journal, got a call from a doctor who had helped him with a prior story. Dr. Adam Clapper had recently read a New Yorker profile of Holmes and posted to his blog, Pathology Blawg, in response, pointing out the lack of peer-reviewed data and asserting his overall skepticism about Theranos’s ability to deliver to its claims. This post attracted the attention of some other skeptics whom Holmes had slighted in the past, and who had in turn been attempting to expose Theranos’s deception for years only to be thwarted by its powerful legal team and ever more frustrated by its growing success. After coming across Dr. Clapper’s post, they contacted him encouraging him to pursue the story. Dr. Clapper decided this was perhaps something Mr. Carreyrou would be interested in investigating. When he contacted Carreyrou, Carreyrou’s curiosity was immediately piqued. He wondered how such a young college drop-out could possibly be behind such ground-breaking science, when breakthroughs of a similar scale invariably take many years, and often decades, of formal training and research. Carreyrou decided the story was indeed worth following up on. It became the story that would cement his career.

In his book, Carreyrou writes about the strong-arm tactics Theranos and its high-powered lawyers used throughout its meteoric rise to bully employees and prevent whistleblowers from coming forward. As is often the case, would-be whistleblowers were threatened, intimidated, and confronted with costly lawsuits. Several believed they were being followed and some even feared for their lives. One employee went so far as to commit suicide. His widowed wife was certain he was distressed over having unknowingly helped perpetrate a lie that could cause harm to others, but too scared to come forward in fear that Theranos’s lawyers would ruin his family. Theranos used many of these same tactics to intimidate and shut down Carreyrou and others as they attempted to investigate and expose Holmes’s deception from the outside. Elizabeth Holmes had become a media darling with connections at the highest levels, and effectively wielded her influence to eliminate all detractors. Investors and board members did not ask a lot of detailed questions because the science was complicated, Ms. Holmes was very convincing, and ultimately, they were motivated by money. It would not have taken much digging to learn that the science was dubious, many of the claimed successes were false, or that Holmes and Balwani were having an affair that could compromise the future of the company. Carreyrou offers several stories to illustrate the level of loyalty Holmes had established with her supporters, and in particular the highly esteemed Theranos board members. In possibly the starkest example, one of the board members, former secretary of state George Schultz, refuses to listen to his own grandson Tyler, a Theranos employee, who tried to warn him on several occasions that the technology was not working. Tyler, unable to convince his grandfather of Holmes’s deceit, would later prove critical in Carreyrou’s investigation and subsequent depositions leading to the indictment of Holmes and Balwani. As a result of his actions, Tyler is now estranged from his grandfather. In another, after determining revenue projections provided by Holmes were grossly exaggerated, the board decides her lack of experience is a liability and agrees to remove her as CEO. They confront her with their decision, but after a two-hour meeting Holmes emerges having convinced them to let her remain on as CEO. One board member stated that, “Elizabeth used just the right mix of contrition and charm to gradually win [them back]…A much older and more experienced CEO skilled in the art of corporate infighting would have been hard-pressed to turn the situation around like she had”.5 In fact, the board members were universally emphatic with their praise. One board member, a four star general, ironically went so far as to say, “[Elizabeth] has probably one of the most mature and well-honed sense of ethics – personal ethics, managerial ethics, business ethics, medical ethics that I’ve ever heard articulated”.6 Despite Holmes having such powerful supporters, with persistence and help over the course of two years Carreyrou was able to expose the fact that the Theranos technology was not the disruptive innovation it claimed to be. While Holmes continued to staunchly defend Theranos, Carreyrou was able to eventually gather enough data and witnesses (and the attention of the FDA) to expose her beyond any doubt. Theranos investors have subsequently lost nearly all of their investments, and the only question remaining is whether Holmes is a na?ve optimist who got in over her head, or a sophisticated fraudster who bilked some of the world’s most wealthy and powerful people. Carreyrou makes a convincing case for the latter. 

           How is it that so many rich and powerful people with a history of investment, entrepreneurial, and bureaucratic success at the highest levels were fooled for so long by such a young college dropout? These are investors who surely performed due diligence before investing significant sums of money in Theranos, and board members who were heads of state and high-ranking military officials. How could they all have missed the red flags? At least part of the answer lies in corporate governance. While the board consisted of highly experienced businessmen and bureaucrats, none of the them were scientists or physicians, and certainly none had any expertise in phlebotomy.6 In addition, Holmes was the majority shareholder, so could make decisions independently without needing the board’s approval. In hindsight, this was clearly a recipe for disaster as the board had no ability to provide the oversight and governance required to prevent the sort of deception in which Holmes engaged. They simply trusted her.

From an investor standpoint, Theranos fit the description of a disruptive innovation perfectly. Its technology would make blood testing cheaper and more accessible, addressing a segment of the market previously overlooked. People who had a fear of needles, or those without adequate access to healthcare, could walk into their neighborhood drug store and have their blood tested via a finger prick. In addition, it would offer the instant gratification of near immediate results at a fraction of the cost of a traditional blood test. “A typical lab test for cholesterol can cost fifty dollars or more; the Theranos test at Walgreens costs two dollars and ninety-nine cents.”5 The story was compelling, and it seems likely that investors were confident in its validity because the company had such a high profile board. Malcolm Gladwell argues in his book, Talking to Strangers, that human beings tend to “default to true”8. In the absence of glaring evidence that someone is lying, humans assume they are being told the truth and explain away doubts they may have. One can see how investors may have defaulted to true when doing their due diligence on Theranos, particularly when looking at the makeup of the board of directors and the praises they showered upon Holmes. While the claims being made by Holmes about Theranos clearly should have attracted more investor scrutiny, most ostensibly assumed that with such established and high-profile individuals on the board, they must be true. Plus, secrecy and early setbacks when developing innovative technology was not only normal but considered crucial in the fast paced and highly competitive world of high technology that is Silicon Valley. A critical point many investors apparently overlooked (and which regulators struggled with) is that Theranos was not a software company like its neighbors, but rather a blood testing medical device manufacturer. In the highly regulated and slow-moving market of healthcare laboratories, secrecy and setbacks were not a sign of fast paced innovation, but rather should have been an indication that something was amiss. Investors and board members alike were blinded by Holmes’s charisma and fooled by her compelling, but mostly made up, stories. 

Theranos effectively hid the fact that its device did not work using deception and non-disclosure agreements. For example, they maintained two separate blood labs. One contained working, more traditional commercial diagnostic equipment manufactured primarily by Siemens, and the other housed the proprietary Theranos devices. When FDA inspectors would come to inspect the lab, Theranos employees were instructed to only show them the one containing the Siemens equipment. Since the scope of the inspectors’ responsibilities was simply to validate that the company was following appropriate lab protocols, they were satisfied with what they were shown. The fact that from what they saw Theranos was not doing anything particularly innovative was of no concern to them. When employees themselves raised any concerns with the performance of the Theranos devices, they were belittled, fired, and reminded of the NDA they had signed; sycophants were regularly promoted regardless of their skills or experience. Neither Holmes nor Balwani would acknowledge any of the issues reported by employees, and both were unwilling to compromise on Holmes’s vision, even as it became obvious that it was not achievable. In one example, an employee who had become concerned with the inconsistent test results as well as Holmes’ unwillingness to take his concerns seriously, sent e-mails to Holmes and Balwani detailing the issues he had identified. Worried he might be culpable should Theranos find itself in future legal trouble he also forwarded these e-mails to his own private e-mail account. Soon thereafter he was called into a meeting with Holmes and the corporate lawyers, who informed him he was being let go, and that they would sue him if he didn’t destroy the e-mails he had sent to his personal account. It was clear they had been monitoring his e-mail, and likely the other employees’ e-mails as well. The employee consulted his own lawyers who strongly recommended that, based on the NDA he had signed, he destroy the e-mails and avoid any further action against the company. Carreyrou covers many similar stories in his book. Theranos invested millions in retaining one of the top Silicon Valley law firms who staunchly protected the company, effectively preventing would-be whistleblowers (both inside and outside of the company) from exposing the problems with the technology even as Holmes made audacious claims about the success it was having in the field. In the end it took Carreyrou getting one of these former employees to speak with him anonymously at great personal risk to finally knock over the first domino in the outing of Theranos’s and Holmes’s deception.

To conclude, it is now clear that Elizabeth Holmes was not a genius disrupter, but instead the most successful fraudster to ever emerge from Silicon Valley, and that the Theranos technology was never anything more than a buggy prototype. Holmes and her cohort Sunny Balwani exhibited many of the same sociopathic traits displayed by other famous fraudsters like Bernie Madoff and Billy McFarland (CEO of Fyre and the doomed Fyre Festival). These were charismatic leaders with compelling visions and the ability to recruit devoted supporters, but who did not have the expertise to deliver on their respective visions. Whether done intentionally, or just out of blind faith that their ideas would ultimately prove successful no matter what, they deceived investors, released employees who raised concerns, promoted sycophants, and pursued paths that resulted in financial and in some cases physical harm to others for their own personal gain. Many of their former employees have tarnished reputations due to their association with them from which they may never recover. Holmes and Balwani each face 20 years in prison for the role they played in the rise and fall of Theranos; like Madoff and McFarland are being held accountable for their actions and the harm they caused others. Who knows where they and Theranos would be today if Dr. Clapper had not happened upon the Vanity Fair article about Holmes, and felt compelled to express skepticism of her claims on his blog? It appears Holmes’s and Balwani’s lawyers will argue that had Carreyrou not damaged their reputation with his Wall Street Journal articles, Theranos would have ultimately proved successful. Given how masterful Holmes and Balwani had been with their deception up until that point, it seems more likely they would still be in business, continuing to defraud investors out of even more money.

References

1Carreyrou, John (Sept. 5, 2018. "Blood-Testing Firm Theranos to Dissolve". Wall Street Journal.

2Rodrigo, Chris Mills (July 1, 2019). "Theranos founder Elizabeth Holmes to face trial on fraud charges next July". TheHill. Retrieved March 25, 2020.

3 Bilton, Nick (October 2016). "Exclusive: How Elizabeth Holmes's House of Cards Came Tumbling Down". Vanity Fair. Retrieved March 26, 2020.

4Abelson, Reed (May 4, 2018). "Caught in the Theranos Wreckage: Betsy DeVos, Rupert Murdoch and Walmart's Waltons". The New York Times. Retrieved March 26, 2020.

5Auletta, Ken (December 15, 2014). "One Woman's Drive to Revolutionize Medical Testing". The New Yorker. Retrieved March 26, 2020

6Carreyrou, John (2018). “Bad Blood: Secrets and Lies in a Silicon Valley Startup”. Knopf. ISBN 978-1524731656.

7Couzin-Frankel, Jennifer (May 18, 2018). "The Rise and Fall of Theranos". Science. Retrieved March 28, 2020

8Gladwell, Malcolm (September 10, 2019). “Talking to Strangers”. Little, Brown and Company. ISBN 978-0316478526.

9Bilton, Nick (February 21, 2019). “’She Never Looks Back’: Inside Elizabeth Holmes’s Chilling Final Months at Theranos”. Vanity Fair. Retrieved May 3, 2020