Theranos and Elizabeth Holmes’ fairy tale rise and sudden fall have laid bare the dark underbelly of Silicon Valley.
Once billed as a miracle company, Theranos took the phrase “fake it till you make it” to the extreme. The medical start-up rode the pinnacle of success to a $9 billion valuation in 2014—until it fell from grace the next year. And now Holmes, the founder and CEO of the now-defunct health technology company, will spend more than 11 years behind bars for fraud.
Nineteen-year-old Holmes, a chemical engineering Stanford University drop-out, established the firm worth $9 billion in 2003. In 2015, Forbes magazine trumpeted her as “the world’s youngest self-made female billionaire” in the US, while Inc. magazine called her the “next Steve Jobs” as she adopted his signature black turtlenecks, and used the same marketing firm that he had used.
Back in 2014, Elizabeth Holmes was over the moon at just thirty years old. A blood-testing system developed by Theranos, Edison, claimed to rapidly and effectively detect cancer and diabetes with only a few drops of blood.
However, soon Holmes was exposed as a fake. Reports published by the Wall Street Journal revealed that Theranos had dramatically exaggerated its technology's capabilities.
By 2018, Holmes’ $9 billion miracle company had collapsed. And last Friday Federal Judge Edward Davila sentenced her to 11 years and 3 months’ imprisonment, saying: “Failure is normal. But failure by fraud is not OK.”
Here are 5 hard lessons to learn from Therano's collapse and Holmes’s fall from grace.
1. If you aren't honest, even the best advisors can’t help
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).
Despite surrounding herself with outstanding mentors, Holmes could not benefit from their advice. Holmes allegedly kept employees and advisors in the dark about their organization's challenges, as has been alleged in a number of reports.
Since she wasn't honest with her board, she wasn't able to benefit from their experience. While discussing mistakes and failures may be uncomfortable for entrepreneurs driven to succeed, business leaders must seek advice when things go wrong. Doing so is in the best interest of the organisation, its employees and its investors.
2. Credibility is a key factor for strong business partnerships
The US Securities and Exchange Commission alleged that Holmes misled business partners like the drugstore giant Walgreens. Holmes claimed that the Theranos minilab was capable of testing for roughly 200 diseases. The SEC's report revealed that, in reality, the device could test for roughly 20 diseases.
Walgreens chose to sue Theranos for $140 million in 2016, claiming a breach of contract. Though the parties settled out of court, it seems clear that Holmes misled her business partners into believing that her company was capable of providing services that it was years away from being able to provide. Legally, this sort of misrepresentation is known as fraud.
3. Huge capital isn't a safety valve
In 2010, Theranos raised $45 million in investment capital. Over the next eight years, the company would raise a total of $400 million. Many entrepreneurs make the mistake of assuming that raising capital will solve an organisation's most meaningful challenges.
The thinking goes like this: 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.
4. Shirking responsibilities means losing credibility
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 organisation 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.
5. Stability is important, more than the rise
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, Holmes may have missed her opportunity to fail fast. As a result, she and her company failed big.
Had Theranos operated with more transparency, it's conceivable that the organisation would have been able to solve some of the problems that caused the company to under-deliver later on.
During a tough time, rather than opting for deception and manipulation, 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 the professional hurdle.