In a spectacular fall from grace, after a four-month trial in San Jose, California, Elizabeth Holmes was convicted early this year on federal criminal charges of defrauding investors in connection with her failed blood testing business, Theranos.
How did Holmes go from being the youngest self-made female billionaire in the world and a celebrated entrepreneur, appearing on magazine covers and being one of Time Magazine's "100 Most Influential People," to convicted felon? What lessons can be drawn from this contemporary Greek tragedy, which will be the subject of a feature film starring Louisville native and Oscar winner Jennifer Lawrence as Elizabeth Holmes?
Holmes dropped out of Stanford nearly 20 years ago to start a new company that would become Theranos. Her original idea, a medical patch drawing blood through microneedles, evolved into the small Edison blood-testing device she called the "iPod of healthcare." Holmes claimed that her machines could perform hundreds of tests from just a few drops of blood using a finger prick, which would revolutionize the multibillion dollar blood-testing market.
Theranos imploded over a three-year period following an October 2015 Wall Street Journal report questioning the company's technology. It turned out that the Theranos machines could only perform a dozen tests, not hundreds, and without reliable results.
Theranos secretly used commercially available blood-testing machines made by others, rather than its own, to perform tests, even staging fake demonstrations.
Theranos raised nearly $1 billion from investors. According to the Wall Street Journal, media mogul Rupert Murdoch and families tied to the Amway, Cox Enterprises and Walmart fortunes each invested at least $100 million.
Safeway, Inc., a supermarket chain, agreed to add testing clinics to its grocery stores, spending $300 million on store renovations in the failed partnership according to prosecutors. Walgreens, which agreed to a significant pilot project for in-store blood testing, later sued Theranos for $140 million in damages.
How did Holmes rise so quickly and gain the trust and support of so many powerful people before Theranos unraveled? She was the charismatic wunderkind who emulated Apple's Steve Jobs, dressing only in black and wearing turtlenecks.
She allegedly slept four hours a night and kept to a strict green juice diet. She was known for her unblinking stare and speaking in a deep baritone that some say was not her real voice. The former CEO of Safeway testified at trial about her power to control the room like U.S. presidents.
In the male-dominated Silicon Valley startup world, she was a trailblazing figure. The Theranos story paralleled the business disruption narratives that created so much wealth in high tech businesses. And Theranos, with a valuation of more than $9 billion at its peak, became the elusive Silicon Valley unicorn startup.
What can we learn from Theranos? First, you cannot understate the importance of due diligence and the need to ask hard questions. Holmes told potential investors and business partners that she could not disclose how the technology actually worked because it was a protected trade secret.
There was no peer-reviewed research to support the business plan. Silicon Valley venture capital firms passed on the investment for this reason.
Second, organizations benefit from a healthy corporate culture. The atmosphere at Theranos was marked by fear, paranoia and secrecy, and criticism of the business was not tolerated.
Employees were fired for raising concerns. Holmes demanded complete loyalty, saying she was building a religion, and anyone who did not believe in it should leave.
Third, having relevant industry expertise at the board level enhances effectiveness and oversight of management. Fortune called the Theranos board, which included former U.S. cabinet secretaries and military leaders, "the most illustrious board in U.S. corporate history."
However, the board lacked experience in health care and medical devices. When one board member, a former Apple senior executive, challenged Holmes, he was asked to resign.
Fourth, there are limits to the "fake it till you make it" culture of Silicon Valley startups. Obviously there is a difference between entrepreneurial optimism and criminal fraud Also, how can a business fake it in health care, where the diagnosis and treatment of patients may be impacted?
Finally, character matters. The heart of the government's case was that Holmes intentionally lied about Theranos and its prospects. She made the risky decision to testify at trial, taking the stand for seven days, and jurors did not find her testimony to be credible.
There is more to come in this fascinating story. While Holmes was convicted of defrauding investors, she was acquitted on charges related to defrauding patients, and the jury deadlocked on other investor counts.
Prosecutors indicate they will not retry Holmes on those counts. How will the mixed verdict affect her likely appeal and sentencing, which is scheduled for September.
Former Theranos President Sunny Balwani, Holmes' erstwhile boyfriend, faces a separate criminal trial later this year. Holmes testified that she was a victim of Balwani's abusive behavior.
We will see how the Holmes trial impacts the strategy and arguments of the parties in the Balwani case.
Originally Published by Louisville Business First, April 27, 2022
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