Theranos, the biotech startup that once promised revolutionary blood test technologies to the world, came to an end after evidence of its fraud finally came to bear. Journalist John Carreyrou unravels the rise and downfall of the company, once valued at $9B, in his book Bad Blood: Secrets and Lies in a Silicon Valley Startup. This post summarises a few factors that enabled Theranos’ rise, and several red flags that warranted greater scrutiny from cautious investors (in hindsight).
An Exuberant Valuation
Several factors contributed to Theranos’ disastrous overvaluation. These include:
- Bias by story and social proof: Many investors were captured by the vision and charisma of Theranos CEO Elizabeth Holmes. This was further enforced by the reputation of well-respected board members and announcements of significant deals in partnership with reputable organisations. Some investors relaxed their scrutiny and caution because other significant players had also entered the foray.
- Information asymmetry: Theranos did not disclose peer
review results appropriately, avoided validation from external investors,
bypassed regulator scrutiny, skewed performance results and financial
forecasts to their liking, and engaged in false advertising. Management by
fear and intimidation, extensive non-disclosure agreements and the threat of
litigation allowed Theranos to suppress and separate individuals from
raising concerns collectively.
- Simple psychological denial and the fear of missing out: Even
as the evidence against Theranos mounted, many investors and directors
remained in denial, demonstrating unwavering belief in the technology’s
future potential. Other investors and backers while concerned, chose not to
back out in the off chance that Theranos did indeed deliver on its promise.
- Poor moral compass and environment: Arguably, CEO Elizabeth Holmes and COO Ramesh Balswani’s chance encounter and relationship fuelled their ambitions and enabled each other’s unethical behaviours. The people we spend our time with, whether by choice or not, can have tremendous effects on our trajectory in life and work.
Early Red Flags
Despite Theranos’ unethical practices and suppression of information, there were early signs that should have triggered greater concern and scrutiny from major investors and partners. These include:
- Relevant interest and expertise: The board directors, CEO
and COO had no medical training or experience in medical devices or
healthcare industries. Likewise, no investor with experience in
biotechnology, healthcare or medical devices had invested in the
company.
- Signs of poor management: The founder held 99% of voting
shares. Workforce turnover across all levels of staffing was high. The CFO
had left the company very early in the start-up’s lifecycle. The firm’s
culture and the attitude of employees often appeared muted and
downtrodden.
- Poor track record, evidence and validation: Theranos was
always unclear about its underlying science, product performance and
competitive advantages (under the veil of ‘trade secrets’). Pilot programs
with healthcare service providers were usually unrenewed or terminated.
Flagship products did not obtain regulatory approval. External experts and
investors were not allowed to validate its products.
- Excitement for insufficient reasons: The firm’s momentum rested mostly on the technology’s promise, the charisma of its founder, optimistic financial projections, expected deals with major partners (that were always delayed and never realised), and the glowing reputation of backers with no experience in the industry.
References
Carreyrou, J. (2018). Bad Blood: Secrets and Lies in a Silicon Valley
Startup.
Ritholtz, B. (2018). Theranos’ Fatal Flaws were in Plain Sight, Bloomberg Opinion. Available at <https://www.bloomberg.com/opinion/articles/2018-05-30/theranos-fatal-flaws-were-in-plain-sight>
blinded by greed and fear of missing out on the next big thing, these investors were. but at the end of the day, every start-up investor knows 9 out of 10 are going to fail, but still chooses to gamble in hopes of hitting it big.. plus, this one had a female and a minority at the helm, so investing in them also scored other kinds of points and credibility.
she took the age-old snake oil selling profession, added a “.com” to it, and tried to cash out for millions…perhaps she did if she was smart enough to hide some of that money.