You‘ve likely heard bits and pieces about the dramatic rise and fall of Theranos and its founder Elizabeth Holmes. But as someone who has analyzed countless startups in Silicon Valley, I wanted to give you an in-depth insider‘s account into exactly how this fraud occurred and why the system failed so catastrophically.
Overview
Theranos reached a peak valuation of $9B based on claims of revolutionary blood testing technology requiring only a finger prick. But it was marketing theatrics, not working products. As media exposed reality, Theranos dissolved while Holmes faces criminal fraud charges. We‘ll analyze what enabled this unprecedented fraud.
The Origin Story
Even as a child, Elizabeth Holmes expressed ambitions to become a billionaire tech entrepreneur like her heroes Jobs and Gates. She fixated on a vision to dramatically simplify blood testing by extracting tiny volumes from finger pricks rather than traditional venipuncture.
But at Stanford, professors repeatedly warned 19-year old Holmes that her core concept was scientifically invalid and the technology simply could not work. Unfazed, she took the implausible idea and forged ahead to start Theranos with Professor Channing Robertson.
| Year | Key Events |
|---|---|
| 2003 | Holmes drops out of Stanford as a sophomore to found Real-Time Cures (later Theranos) with seed funding from Robertson |
| 2004 | Theranos raises $6 million Series A from investors enthralled with Holmes‘ vision |
| 2007 | Holmes files for aggressive, sweeping medical patents covering blood testing with tiny samples |
| 2010 | Theranos raises $45 million Series C, now has over $92 million funding |
| 2013 | Theranos announces Walgreens partnership to deploy blood testing centers nationwide |
| 2014 | Theranos worth estimated $9 billion, Holmes net worth ~$4.5 billion on paper |
| 2015 | WSJ investigation exposes realities about Theranos devices and testing |
| 2016 | Walgreens terminates Theranos partnership as scandals grow |
| 2018 | Theranos officially announces dissolution, Holmes net worth basically zero |
The Non-Existent Technology
Holmes envisioned a compact device that could quickly perform hundreds of diagnostic tests on tiny blood samples. But extracting sufficient volumes from capillaries rather than veins was impossible with existing science. There was simply no proven method to process such minute samples and obtain accuracy comparable to standard equipment.
I‘ve seen companies tackling seemingly impossible ideas before, but the red flags with Theranos went far beyond generalized scientific skepticism. The foundational "Edison" device at the core of Theranos‘ claims faced both theoretical and engineering challenges experts said were insurmountable.
Yet Holmes raised $45 million Series C funding in 2010 without ever having to substantiate claims with data from working prototypes. She kept pitching the intriguing idea to mask the invalid premise.
Cultivating a Culture of Secrecy and Deception
Holmes fostered an intense cult-like culture at Theranos where employees were pressured to validate her vision rather than ask hard questions. Few employees had sufficient vantage to comprehend systemic deceptions since departments were siloed by design. Engineers might be assigned to develop sample processing for tiny volumes without knowing the downstream analyzers couldn‘t reliably test such samples.
Secretiveness meant most investors couldn‘t peek behind the curtain either. Holmes directed employees to stage fake demonstrations when investors visited Theranos. Blood samples were covertly tested on unmodified commercial analyzers rather than imaginary Theranos inventions to dupe backers like Walgreens.
Employees quickly learned to suppress doubts about Holmes or her claims. Questioning either risked rebuke and dismissal. It became clear she prioritized PR mythmaking over candor even when science said otherwise.
The Facade Crumbles
In 2015, ten years after Theranos was founded, John Carreyrou of WSJ began investigating strange anecdotes from ex-employees about failed audits, inappropriate testing procedures, even implausible stories about battlefields deployments.
Carreyrou revealed Theranos generated massive volumes of flawed test results despite publicly claiming groundbreaking accuracy. His reporting proved accusations that Theranos was actually using competitors‘ equipment for most consumer tests rather than trailblazing Theranos devices.
With the veil lifted, Theranos collapsed as $700 million in investments evaporated. Holmes awaits criminal sentencing for fraudulently projecting technological progress that never transpired over 15 years.
You may wonder how so many backers failed to see through the Theranos smokescreen. We‘ll analyze the dramaticvariations between East Coast vs. West Coast investors funding perspectives to understand why.
An East vs. West Coast Divide
Having worked with investors across both coasts, distinct mentalities emerge. East Coast investors tend to emphasize financial track records, seeking hard evidence that a startup can scale profitably. They apply rigorous skepticism wanting proof-of-concept data.
By contrast, West Coast investors like those funding Theranos fixate more on ambition and compelling narrative. Sometimes called "cringe-worthy optimism", they idolize entrepreneurial vision over commercial viability. Vague hype excites them even lacking substance.
| Type | Funding Mindsets | Representative Investors |
|---|---|---|
| East Coast | Financially focused, profit-driven, show-me-the-money culture | Fidelity, T. Rowe Price, Hancock Ventures |
| West Coast | Idolize speed and disruption, general optimism | Tim Draper, Chamath Palihapitiya, Marc Andreesson |
Tim Draper called Holmes "the next Steve Jobs", typifying West Coast thinking: valuing big dreams over practical rigor. Contrast that with Fidelity which avoided Theranos due to extreme secrecy.
Regionally distinct attitudes explain why Theranos flourished in Silicon Valley while facing skepticism back East. When fundraising in San Francisco and Palo Alto, Holmes gained uncritical backing that New York and Boston would have denied.
Key Takeaways
You might ask how Holmes raised $45 million for Theranos post-IPO in 2014 from the likes of Cox Enterprises without proving clinical utility. She pitched big dreams while obscuring realities. Being Silicon Valley, most bit eagerly without probing.
The lessons are clear. Scientific credibility and ethical responsibility matter just as much as compelling vision. Investors should temper optimism by vetting objectively, even when tantalized by a enthralling story. Impossible ideas face impossibly high burdens of proof.
Or as one East Coast investor told me: “If it seems too good to be true, it always is.”
