Just last week, Ramesh Balwani, a former top executive at Theranos, was found guilty of 12 counts of fraud. Theranos has been in the news for several years now because it is one of the biggest cases of fraud in Silicon Valley history. Its CEO, Elizabeth Holmes, was convicted of four counts of fraud and acquitted of four counts back in January. Each of Mr Balwani’s 12 counts and Ms Holmes’ 4 counts carry with it a possible sentence of twenty years in prison. They will both be sentenced later this year.
The name Theranos is a portmanteau of “therapy” and “diagnosis”, and the company’s aim since the beginning was to disrupt the blood test. The problem with blood testing is that it requires a lot more blood than is ideal, which not only increases costs but can even discourage people from seeking medical care. Thus, when Theranos entered the picture and claimed to perform comprehensive blood testing using 1/100th to 1/1000th of the amount of blood that would ordinarily be needed for similar tests, it seemed too good to be true. Theranos claimed that it could collect enough blood to perform medical tests from little more than a finger prick, enough to fill minuscule “nanocontainers” instead of the several vials usually required. Thus, Theranos would be a boon for everybody involved: patients would experience less pain, lose less blood, and be more willing to get checked earlier; costs would be driven down across the entire supply chain. Theranos promised to make the dated, barbaric process more modern and humane.
Naturally, everybody wanted in on this incredible technology. Within eight months of founding Theranos, Holmes had secured over 6 million USD in investment, and within six years, she had raised 96 million USD in venture capital. State). Investors included Rupert Murdoch, the Walton family (Walmart’s founders), and Carlos Slim (the world’s richest man from 2010-2013). In 2014, Holmes signed a deal with Walgreen’s (a massive FMCG/pharmacy chain in the United States with over 9,500 locations across the country). She was on the cover of Fortune, Forbes, T: The New York Times Style Magazine, and Inc. Holmes was even named the youngest female self-made billionaire, as Theranos was valued at 9 billion USD, and Holmes’s stake in the company was about 50%. It seemed that Theranos had everything: the money, the board, and the brilliant CEO at its masthead, so what went wrong?
Innovation and Exaggeration
There was one thing Theranos did not have: technology that worked. By 2015, Theranos had 800+ employees, had received 400 million USD in investment, and was offering more than 240 tests that scanned for everything from syphilis to cancer. But its ground-breaking technology, the cornerstone of the entire company, was used for only about 15 tests. In fact, Theranos performed the vast majority of its tests with traditional machines purchased from Siemens. They even used these purchased machines, not their own devices, when undergoing trials for regulatory approval (a big no-no). They lied through their teeth. Many of Theranos’s employees genuinely wanted to change the world, and they did not want to break the law, so they filed complaints to regulators, and some talked to the press. When The Wall Street Journal published an exposé in October of 2015, the house of cards that Elizabeth Holmes built began to fall apart. Silicon Valley has been built on innovation and exaggeration. If you are not talking about how your technology will change the world, you will not garner any interest from investors. But as the Theranos case shows, even exaggeration has its legal limits.