Startups: Bad blood and fraud at Theranos
Elizabeth Holmes was supposed to be “the next Steve Jobs,” said Katie Thomas and Reed Abelson in The New York Times. At 19, the Stanford dropout with a fear of needles founded the biotech startup Theranos, promising a revolutionary new blood test that with just “a single finger prick” could cheaply detect conditions from diabetes to cancer. Holmes’ “striking stage presence” and Jobs-ian black turtlenecks “captivated investors,” helping her raise more than $700 million; soon she was gracing magazine covers and being touted as the world’s youngest self-made female billionaire. It all turned out to be an “elaborate, years-long fraud,” said John Carreyrou in The Wall Street Journal. After a series of exposés in 2015, Holmes, now 34, was accused last week by the Securities and Exchange Commission of faking data and lying to cover up the fact that Theranos’ allegedly groundbreaking “Edison” blood analyzer never actually worked; the company was secretly running most blood tests on other firms’ machines. Theranos also vastly exaggerated its revenues, telling investors that it would generate $100 million in 2014; the actual figure was barely $100,000. Holmes has settled with the SEC for $500,000 and is banned from serving as an officer at a public company for 10 years. Theranos, which was once worth $9 billion, has all but collapsed.
“How did Theranos fool so many for so long?” asked Jeremy Samuel Faust in Slate.com. People did indeed notice that “there was never any published scientific literature to support the claims the company made.” But time and again, when asked to explain how its blood-testing technology worked, the company “hid behind the same smokescreen”: It couldn’t reveal proprietary “trade secrets.” Credulous journalists and investors took the bait, dazzled by Holmes’ “virtuosic” PR skills and a star-packed board that at one point included Henry Kissinger and current Defense Secretary James Mattis. But ultimately, they wanted to believe that a little Silicon Valley startup could fundamentally disrupt the health-care industry. That allowed Theranos to play “by a different set of rules.” Holmes wasn’t just building some gimmicky social app, though, said Matt Levine in Bloomberg.com. She was gambling with people’s health. In 2013, Theranos partnered with Walgreens, despite knowing its own blood-testing machines didn’t work. It was later forced to void tens of thousands of tests. “Building a fake blood-testing company that raises hundreds of millions of dollars from investors is bad. Building a fake blood-testing company that performs fake blood tests on thousands of people is much worse.”
But then, Silicon Valley has always revered a “fake it till you make it” culture, said Erin Griffith in Wired.com. Founders are supposed to dream big, the thinking goes—“so what if someone stretches the truth a little in pursuit of world domination?” That may be fine for the countless startups that fail, but when firms can raise billions with little scrutiny, there will be more avoidable scandals—like Uber’s shady tracking practices, Zenefits’ compliance cheating, and Lending Club’s loan doctoring. “The scale of Theranos’ alleged fraud is unusual. But the forces behind it are not.” ■