The Illusion of Charisma and The Fallacy of a Good Idea: The Story of Theranos

On paper, it seemed like Theranos was a company that could not fail. They had a revolutionary product that was able to conduct blood analysis, a process that is usually costly and time consuming, with only a few drops of blood in a couple of minutes. Theranos’ invention would have completely revolutionized the medical industry and changed medicine as we know it. It’s founder, Elizabeth Holmes, was a Stanford dropout and was just 19 years old when she founded the company in 2003. By 31, she was a billionaire and Theranos was valued at over $9 billion, granting it “unicorn” status. Holmes became one of the greatest entrepreneur stories that Silicon Valley had ever seen and Theranos was destined for future greatness. However, there was just one issue: Theranos’ product never worked.

In late 2015, a Wall Street Journal article was published depicting how Theranos’ attempts to make their revolutionary product had been a complete failure. Results from the machine varied wildly and, oftentimes, did not yield results at all. By the end of 2015, the company and its founder became subjects to a federal investigation and their labs were shut down. Today, Elizabeth Holmes has a total net worth of $0 and Theranos has been completely liquidated. One of Silicon Valley’s greatest success stories is no more. When it was all said and done, Holmes’ investors had lost an estimated $600 million, Holmes was forced to pay a $500,000 fine, and was barred from serving as a chief executive for a public company for ten years.

Looking back on the foundations of Theranos, it is amazing how the public never saw something like this occurring. For one thing, Holmes, the founder of the company, is not a doctor. In fact, she does not hold a degree of any kind. She dropped out of Stanford to focus on Theranos full-time after studying chemical engineering there. Her boyfriend and Theranos COO, Ramesh Balwani, does possess two undergraduate degrees in information systems and artificial intelligence, as well as a graduate degree in business administration, but lacks medical credentials as well. And yet, the public and Theranos’ investors never saw an issue with the fact that a college dropout and a business student had solved an issue that actual doctors had been trying to solve for decades. In addition to this, Theranos’ investors never saw the actual manufacturing of the product. Holmes kept the research labs of Theranos away from the public eye and did not allow outsiders to view them. This was a practice used by Steve Jobs, who Holmes had a deep admiration for. In fact, Holmes would often exclusively wear black turtleneck sweaters and would talk in a deeper voice in interviews to sound more like Jobs.

Despite the founder not holding a medical degree and the company never having a working product, the company reached a valuation of $9 billion and Holmes became a celebrity, giving TED talks and speaking at high profile conferences. How is this possible? How did a college dropout convince media mogul Rupert Murdoch, education secretary Betsy DeVos, and the Wal-Mart founding Walton family, just to name a few, to give her hundreds of millions of dollars? Unfortunately for Theranos’ investors, they fell under the illusion of charisma. While Holmes could not tell you how to make blood analysis more cost-friendly, she could absolutely convince you that she can. Holmes was a ruthless businesswoman who knew exactly how to get her way. Look at the board of directors of Theranos. It consisted of public figures like former Secretaries of State Henry Kissinger and George Schultz, state senators, including Georgia Senator Sam Nunn and former Defense Secretary William Perry. These were influential people who could bring additional investors to the table. But do you notice something weird about that board? There are no doctors, nobody with any medical experience. That entire board has as much medical experience as Holmes herself. Holmes knew this. She knew that she could not have anybody on that board who could test her medical knowledge and inquire about the medical legitimacy of the product. Elizabeth Holmes knew what to say to the right people and it made her billions.

In addition to her charisma, Holmes knew that her idea would sell itself. The idea of faster blood analysis at a lower cost is any doctor’s dream product. In addition to that, she knew the market for this kind of product would be enormous. Along with doctors, her product could be used by any patient who needs on-the-go blood tests, such as those who suffer from diabetes. This is what caused Walgreens to put early versions of Holmes’ product in many of their stores. This is just in the U.S; with more time, who knows how far Theranos could have expanded their products?

The story of Theranos and Elizabeth Holmes is a captivating one. In fact, a book has been released by the Wall Street Journal writer who first broke the case called “Bad Blood.” In addition, there is a movie set to be made about Holmes, with the CEO being played by Jennifer Lawrence. However, while Theranos may end up being nothing more than an interesting book or movie to the average individual, it should serve as a warning to any startup investor. The story of Elizabeth Holmes should show every venture capitalist that a charismatic leader does not make a company great. Additionally, the story of Theranos should show investors that a good idea does not automatically make a good product. Theranos’ investors lost hundreds of millions of dollars investing in an idea. In the startup world, every investor is looking for the next big thing, the next great idea. But Theranos should be an example to every investor that the next big idea does not mean the next big startup. It is important that investors focus on the company itself by examining the financial data, the actual numbers. When you lose focus of these things and start to focus on the surface materials, that is when you end up like the investors of Theranos.

References

Auletta, Ken, “Blood, Simpler,” The New Yorker, Published: December 15, 2014, Accessed: December 5, 2018, https://www.newyorker.com/magazine/2014/12/15/blood-simpler

Khan, R, “Theranos' $9 Billion Evaporated: Stanford Expert Whose Questions Ignited The Unicorn's Trouble,” Forbes, Published: February 17, 2017, Accessed: December 5, 2018, https://www.forbes.com/sites/roomykhan/2017/02/17/theranos-9-billion-evaporatedstanford-expert-whose-questions-ignited-the-unicorn-trouble/#3e0b80ec6be8

Simon, S., “Reporter John Carreyrou On The 'Bad Blood' Of Theranos,” NPR, Published: June 23, 2018, Accessed: December 5, 2018, https://www.npr.org/2018/06/23/622795416/reporter-john-carreyrou-on-the-bad-blood-of-theranos

Sheetz, M., “Secretary DeVos, Walmart heirs and other investors reportedly lost over $600 million on Theranos,” CNBC, Published: May 4, 2018, Accessed: December 5, 2018, https://www.cnbc.com/2018/05/04/theranos-devos-other-investors-reportedly-lost-over-600-million.html