Elizabeth Holmes and Theranos: The real story behind one of the biggest scams
Introduction
Established in 2003 by a 19-year-old Stanford dropout, Elizabeth Holmes, Theranos was touted as one of the most pioneering technology in the healthcare startup space. At its peak, Theranos was valued at $10 billion dollars with marque personalities such as Robert Mudroch and Henry Kissinger as investors and board members.
Elizabeth Holmes, Founder of Theranos
However, by March 2018, the firm including Holmes were battling multiple litigations of massive frauds by federal organizations such as the SEC and were forced to shut operations on August 31, 2018.
So, what happened? Let us take a look.
To begin with, Theranos worked in the largely lucrative blood testing market, wherein it proclaimed to have built a product which would simply require a minuscule amount of blood drawn from a fingertip prick as opposed to the so-called draconian method of withdrawing large amount with needles. Their technology would bring relief to millions of patients across the world who have to regularly go through blood testing by putting Theranos devices at their homes, which in turn would generate results immediately and send it across to the doctors, who would respond accordingly thereby reducing time and effort in the entire process.
The company worked in an extremely lucrative space and its technology was deemed to be so revolutionary that it was able to raise over $700 million dollars from marquee investors at a peak valuation of $10 billion dollars in 2013–14. Some of the investors including the likes of Larry Ellison, the founder of Oracle, Tim Draper, media mogul Rupert Mudroch, Mexican billionaire Carlos Slim and John Elkann, the owner of Fiat Chrysler Automobiles.
Apart from such big names as investors, the firm also had some luminaries on its board of directors, which included James Mattis — Head of US Central Command in Afghanistan and late member of Donald Trump’s cabinet, George Shultz — Reagan’s foreign policy drafter and Henry Kissinger from the Watergate scandal.
It was however in 2015, that the real story began to unravel. It turned out that the technology and product that Theranos claimed to have pioneered was not working at all. In-fact, they had been lying not only about the work-ability of the product, but they had lied to the investors too by providing them with fake information with respect to the revenues and inner workings of the company. To top it up, the company had even lied to the federal agencies and had put the lives of several patients in jeopardy by providing them with fake results. All in all, the company was running on a web of lies and hypocrisy.
But the real question that arises is why and how this scam was allowed to run for so long, why didn’t people understand, why didn’t the board members or investors ask questions? To understand the story, we first need to understand the child prodigy behind it.
Elizabeth Holmes — The Personality
Born in a middle-class family with illustrious roots, Elizabeth Holmes was an overtly competitive and ambitious personality from a very early age. This would naturally play out in her life later on with disastrous consequences.
Her competitive nature was so fierce that she would run through glass doors after losing games with her cousins. In terms of her ambition, a particular incident stands out. At age 9 or 10, she was asked what she wants to become; without batting an eyelid, she said, ‘I want to be a billionaire’. Her nature can be attributed to the fact that her forefathers had been illustrious men from both her father’s and mother’s side, but both her grandfathers had lost money by living debauched and worthless lives.
From an early age, her lifestyle was work hard, sleep little, which pretty much continued at her work life at Theranos too. She received straight As in school, finally getting into Stanford in 2002 to study chemical engineering. Here, she worked in the research lab under Channing Robertson, Associate Dean and star faculty with a pedigree at Stanford’s School of Engineering. Robertson had guided Larry Edison, the founder of Oracle during his early days and he would soon Look towards Holmes as a similar prodigy. His praises of her would soon open doors and become one of the many reasons for such star investors coming on board to support her venture.
Channing Robertson
Holmes was a big fan of Steve Jobs to such an extent that she emulated Steve Jobs in everything that she did, right from the turtleneck to hiring the same marketing agency, to changing cars every 6 months to have no number plates to calling her product the ‘I-pod of healthcare’.
On a personal note, Holmes had a strong and forceful personality with a deep voice that resonated and had that gravitational pull with people that she dealt with. But beyond this lay a very different woman, a woman who would lie and harass people to get her work done, to accomplish that the competitive and ambitious personality desired.
All these personality traits and her secret relationship with a man two decades her senior — Sunny Balwani were creating havoc at Theranos, setting it up on a path to certain doom.
Theranos’s Culture and Sunny Balwani
Elizabeth Holmes dropped out of Stanford post her first year in college to set up Theranos along with Shounak Roy, a Ph.D in chemical engineering from Stanford. However, the culture and ethics practices at Theranos was so toxic that Shounak would soon leave followed by hordes of other employees. Let’s take a look.
The first product that Theranos built was called Therapatch, which would draw blood painlessly through the skin using microneedles. So promising was the technology that by the end of 2004, she had raised $6 million from VCs including the famous Tim Draper. However, the culture and ethical practices that were being built at Theranos were just not ideal for a startup in the healthcare technology space where the lives of millions can be impacted.
To begin with, the product never worked and it never did till the company closed down in 2018. This is because of Holmes ambitious nature and her desire to create a place and name for herself in the world. She was asking her engineers to work on a technology that was extremely difficult given the complexities involved in bloody testing. To top it up, the engineers were never given time, rather they were forced to build something which could be shown to potential investors and clients. At every meeting, either the results were faked or some excuse was given to avoid showing the results.
Apart from faking results, the employees were also asked to fake the numbers with potential investors. When employees resisted with such practices, they were simply fired and threatened not to reveal anything using strong-arm legal tactics.
This problem was compounded by the utmost secretive practices followed at Theranos, where employees were constantly monitored along with their mails and social media presence. All this led many people including Shounak to leave the company within a couple of years.
Elizabeth Holmes and Sunny Balwani
However, Holmes was never alone in running this firm. She had an advisor, Sunny Balwani, a man who was 2 decades her senior and her boyfriend as well. Balwani had made his money when a firm he worked with, CommerceBid sold out and he pocketed around $40 million. Although earlier, he worked at Theranos behind the scenes by offering advice to Holmes, he would officially join the company in September 2009, only to create more chaos.
He added on to the already existing toxic and patronizing culture at Theranos, where only people who agreed with Holmes and Balwani and followed their orders irrespective of the legality or the sanity of those orders survived. Everyone was forced to work crazy hours to the extent that Balwani would even check the register of people’s timings.
Such a toxic environment was compounded by various ethical mis-deeds being done by Holmes and Balwani, which is discussed next.
Problems at Theranos
Fudging numbers to raise more money, lying to federal agencies about the quality and methodology of their product, lying to partners about the feasibility of the product and sending false results to patients were some of the normal ethical practices at Theranos. Let’s delve a little deeper into them.
As discussed earlier, the machines were always in the prototype stage, were never fully functional and feasible. However, Holmes would portray that their proprietary devices were fully functioning and in line with their new technology wherein a blood from a single fingerpick could provide results for 200+ tests.
Walgreens, the pharmacy retail giant wanted to use this promising new technology in their stores wherein people could come, get their fingers pricked for a multitude of tests and collect results in a faster turnaround time. They planned to roll it out in all their stores nationwide and paid Theranos $100 million in innovation fee and an additional loan of $40 million.
Walgreens wasn’t the only retail chain to get charmed by Holmes’s deep voice, Safeway, a grocery chain fell into this trap too. The CEO, Steve Burd believed in employees’ health and welfare and also saw Theranos as a way to turn around his fledging business. He got so swayed by Holmes and the promised technology that he revamped half of his 1700 stores to make space so upscale clinics at a cost of $350 million. Since the technology was never ready, Holmes kept on delaying the opening of the clinics and when she finally did it under pressure, the blood was withdrawn in the same old way and sent to Theranos company labs, wherein they were tested on normal commercial machines rather than their proprietary machines.
Later on, they even started testing some tests on their machines, wherein the results were extremely flawed with patients running helter-skelter after seeing abnormal results. One patient spent more than $3000 dollars to make sure she was okay after her first test at Theranos had shown signs of huge abnormality.
Even James Mattis, the head of US central Command and later member of Donald Trump’s cabinet got swayed her and allowed use of this technology in a limited manner in the war fields in Afghanistan. Offcourse, it was never used, since there was no technology per se.
James Mattis
To resolve their problems of faulty machines, Theranos even went to the extent of buying machines from SEIMENS and reverse engineering them to work and patent as their own, again with disastrous results.
When it came down to lying to investors, they were shown projections which were way off the mark. For example, Partner Fund were shown revenue projections of gross profits of $165 million on revenues of $261 million in 2014 and gross profits of $1.08 billion on revenues of $1.68 billion in 2015, which got them $96 million valuing the firm at $9 billion.
Revenues were projected on the basis of already signed agreement with multiple partners who would use their technology. When asked for these agreements, they were simply told that it was being vetted by lawyers. In reality, nothing existed except the deal with Walgreens, Safeway and the Army, which came in at a very late stage.
But the lies could not last long. Also, her ambitious and vindictive nature were creating a horde of enemies, who would soon start to unravel the mystery of the hottest startup in the Valley.
Richard Fuisz and the fall of Theranos
An arrogant, vain, prideful and vindictive man would soon set off a chain of events, which would blow the lid on one of the most elaborative scams in the startup valley. Let us see how.
Richard Fuisz
Richard Fuisz and his family met the Holmes in 1980s as neighbours, where they became close friends. While the Holmes were struggling for money, Richard, a licensed doctor had sold multiple companies in the medical space and was extremely rich. Richard was also an opportunist and was always on the lookout for making money. One such opportunity presented itself when he heard about Theranos from his wife and he immediately went ahead and filed a patent for a missing element in the Theranos system. The patent was filed in 2006, which became public and came to Elizabeth’s notice in 2008.
In 2011, Holmes had filed a lawsuit against Richard for stealing her idea and despite the fact that it was not stolen and a simple opportunist move, Richard Fuisz agreed to an out of court settlement. This is because Holmes’s high-powered attorney team subdued them and got the better of them. Although Richard was defeated and lost morale, he could never forget Theranos and constantly monitored them. By this time, Holmes was extremely famous and the media were touting her as the next Steve Jobs.
It was one such article in the WSJ which attracted the attention of a medical blogger, who mentioned the discrepancies in Theranos’s technology saying that some things were just not possible. By this time, Richard had managed to speak to some disgruntled employees who had left the organization in light if the malpractices taking place there. Richard connected with the blogger who soon introduced him to John Carreyrou, an investigative journalist and reporter with the WSJ.
Finally, it was John Carreyrou, who would take the investigations forward and meet with all the disgruntled employees through Richard. By this time Holmes had gotten wind of the journalist snooping behind their back. They started massive intimidation tactics with both the journalist and former employees, whom they thought were leaking out information. Elizabeth went to the extent of asking Rupert Mudroch, the owner of WSJ to block the report from coming out. She mentioned that the report was false and would damage the reputation, but Murdoch never interfered and believed in the editors’ ability to take the call.
John Carreyrou
Withstanding all the pressures, Carreyrou and the WSJ released the story on October 15, 2015, which stunned the Valley. This was followed by more and more disturbing reports coming out, but Holmes stood strong as though nothing was happening. She even gave a speech a high-powered tech conference where she again lied about the technology and her work and blamed the WSJ report on an anti-woman bias.
It was only after FDA’s investigation and their damaging report, which confirmed the wrong doings of the company that she would step down. According to the FDA report, only 12 out of 250 tests were done on Theranos machines, which themselves were not perfect. Soon after the report, SEC filed charges along with investors and retail partners suing Theranos for damages.
In the final session tomorrow, we will see where the case stands today and examine why and how did so many different entities get fooled at the same time.
Aftermath of the scandal
In August of 2018, Theranos ceased to exist as a company and was forced to shut down. The company and its promoters Elizabeth Holmes and Sunny Balwani face multiple charges of fraud, which are still on-going. Along with federal charges, they were sued by Walgreens and Partners Fund too, whom they settled for $25 million and $43 million respectively. Under another settlement, Theranos agreed to pay $4.65 million in a state fund that reimbursed 76,000+ Americans from Arizona who had used their services.
But the main question which arises is that how was a firm allowed to reach such a scale? Let us decode it down here.
To begin with investors were pouring money in startups after recession had forced the Federal Reserve to bring interest rates down to zero. This boom ensured that money was coming in initially but it was the FOMO effect (fear of missing out) that really had investors eating out of her hands. With Channing Robertson singing praises about here, it opened doors to people who would otherwise have never entertained her.
The same happened with Board of Directors too. Channing Robertson opened doors to many famous senators and businessmen who once on board got other senior personalities. The presence of such leading businessmen and luminaries as investors and board of directors ensured that no wrong fingers were raised at the firm.
Elizabeth Holmes with Bill Clinton
Also, it was Elizabeth’s personality and manner of cultivating contacts which ensured that people always believed her irrespective of evidence proving to be on the contrary at the ground level. She had that gravitational pull and would ensure that people listened to her with rapt attention. A famous Professor at Stanford supporting her claim added to the aura around her.
This same aura would ensure that she got deals signed with Walgreens, Safeway and the Army despite many red flags being raised during all three discussions.
Therefore, it was her aura, the presence of such big personalities on her investor and board list, the fear of missing out among the investors and the business community and finally the recession which forced money to be employed elsewhere, which allowed Theranos and Elizabeth Holmes to continue with their lies and fraudulent activities for a number of years.
