A conflict exists between big tech and health care as highlighted by Theranos a lab testing clinic that Elizabeth Holmes founded at the age of 19.
Enthusiastic investors move at a rapid speed when they spot a promising new venture and as a result dollars roll in and the hype beings to build. Theranos was said to develop a revolutionary lab test that could screen a variety of conditions using a single drop of blood.
Indeed, this was a cost-efficient solution – the characteristic of big tech- so investors loved what the charismatic Holmes presented. Actually, this young founder fashioned herself after Steve Jobs, who is an Apple visionary.
Based on those claims, Theranos hit a valuation of $9 billion but failed to transform the health care years later. As a result, a potential 20-year prison term awaits its founder which is a severe type of punishment to have been given to a healthcare company in recent years.
The article will review the history and lessons learnt from the rise and fall of Theranos.
The History of $9 Billion Blood-Testing Startup
Elizabeth Holmes started Real-Time Cures which was later renamed Theranos in 2003 at the age of 19 and after dropping out of Stanford University. Actually, this young entrepreneur was inspired by her grandfather’s medical career as well as her summer internship at Singapore’s Genome Institute in 2003.
Indeed after this internship, Holmes came up with an arm patch that was able to diagnose and treat medical conditions and wrote a patent application for it.
In 2004 Shaunak Roy joined Theranos as its first employee and Channing Robertson joined the board as an adviser. Further, Holmes leveraged family connections to raise initial funding of nearly $6 million by the end of 2004. The first investors were Time Draper and Victor Palmieri.
In 2005, a cartridge-and-reader system was the initial design of a Theranos device that relied on microfluidics and biochemistry. The Theranos 1.0 and the technology was set to be licensed to pharmaceutical firms to aid them in catching drug reactions during clinical trials.
In 2006, the management fired Henry Mosley who served as the chief financial officer for questioning the reliability of Theranos technology and its honesty.
In 2007, the premature Theranos 1.0 was used in a patient study in Tennessee and the company also announced its plan to sue 3 of its former employees for using its intellectual property. Later in September of the same year, a new prototype named the Edison was developed. The modification of Fisnar’s glue-dispensing robot was done by Apples’ designers that Holmes had poached and placed them in charge of architecting Edison’s overall feel and look.
In 2009, Sunny Balwani joined Theranos with a background in business and software engineering. In 2010 both Holmes and Balwani presented a business proposition to Walgreens to run health clinics as well as pursued a partnership with Safeway.
Part of the partnership was to create a new device with the capability of performing several classes of blood tests and therefore, in 2011 the Minilab was created.
In 2012 Theranos signed a deal with Walgreens to launch devices in-store but missed agreed-upon milestones. At the same time, Theranos managed Safeway employee health clinic’s blood testing as a beta run. However, there are continuous differences and discrepancies between the values that Theranos gave. However, the CEO brushed off the chief medical officer’s concerns and later retired the following year.
In the same year, Lieutenant Colonel David Shoemaker questioned Theranos regulatory strategy when Holmes approached him seeking an opportunity to deploy the device in the military. Later, a surprise inspection was carried out by the Center for Medicaid and Medicare Services (CMS) but Balwani confirmed to the officials that the device was still in the development stage.
James Mattis who was a board member of Theranos managed to convince Colonel Shoemaker and a more limited experiment was allowed.
In May 2013, Ian Gibbons, a former Theranos’ scientist introduced to Holmes by Channing Robertson committed suicide. He had joined the company in 2005 and was named the chief scientist. Also, a 4s model with a new website was launched in September 2013 although many Theranos’ scientists opposed this move because the technology was still being developed.
In February 2014, Partner Fund bought 5.6 million Theranos’ shares at $17 a share as the company was valued at $9 billion while Elizabeth Holmes net worth stood at $5 billion. As a result, both Holmes and Theranos graced the cover of Fortune magazine and gained media attention.
During her media briefings, Holmes reported that Theranos offered over 200 tests and was working towards pushing it to 1,000.
However, in 2015 John Carreyrou, a Wall Street investigative reporter got a tip about this company’s unethical and harmful practices and contacted its former lab director on February 26. During this period, Theranos was operating at a limited capacity and generating unreliable patients’ results
FDA gave Theranos its first approval in July 2015 yet scientists were concerned about its technology. However, Carreyrou was continuing with his investigation and published his first story about Theranos shortly before Holmes attending a conference. The story revealed how Theranos was struggling with its blood-testing technology but Holmes used the coming weeks to defend her company.
With time facts about Theranos lab began coming out such as the FDA’s visit and report that indicated the company was shipping what it termed as an “uncleared medical device.” By November, both partnerships with Safeway and their relationship with Walgreens had fallen through.
In January 2016, CMs cited concerns about Holmes’ labs and SEC began conducting its investigations. Sunny Balwani who served as the company president resigned leaving Holmes as the single top executive.
Theranos closed all its Wellness Centres in Arizona and California when its partnership with Walgreens officially came to an end in June 2016. Also, in July Holmes was banned from the lab-testing industry for 2 years by CMS. As part of the settlement, she paid $30,000 to the regulatory body later in 2017 and Theranos accepted not to own or operate any clinical lab for the next two years.
Theranos began pivoting on its new sample processor dubbed the minilab, shut down all its clinical labs and sent home around 340 employees.
However, Theranos began facing lawsuits from its partners, investors and patients. As a result, the company began refunding all patients that took tests in its clinic in Arizona, continued to lay off the remaining even as the board members began departing.
By the close of 2017, Theranos made a deal with Fortress Investment Group where it obtained a secured debt financing of $100 million to help it get through 2018. This transaction was pegged on certain development milestones that Theranos had hit such as working to get FDA to approve the Zika Virus.
In March 2018, the Securities and Exchange Commission (SEC) charged Theranos, Holmes and Balwani with massive fraud. However, this was settled and Holmes was fined and barred from serving as an officer or director in any publicly-traded company for the next 10 years.
Still, Theranos and Holmes are being investigated and Zika test development experienced some setbacks which might cause them to default the agreement it has with Fortress.
By June 2018, the Department of Justice had charged Holmes with 9 nine counts of wire fraud and she stepped down as Theranos CEO. In September 2018, the company wrote to its shareholders telling them of its intention to formally dissolve and give Fortress its company patents and pay its creditors with the remaining funds.
Lessons Learnt from Theranos’ Rise and Fall
Avoid too much Funding at the Early Startup Stage
Generally, venture capitalists and angel investors target both young and serial entrepreneurs with promising business ideas. As a result, a founder with an innovative idea may get tempted by the hype, constant inflow of investments as well as spiking valuation.
While startups need cash to grow excess cash and attention from investors can undermine its founders’ focus. Still, investors hope to monetize as quickly as possible and this can put a lot of pressure on the founders and the team.
It’s the pressure from impatient investors that forced Theranos and its team to run as fast as it could thus pushing it on a slippery slope and on to its ruin. They were probably not given enough time to mature the business model and perfect its technology.
Otherwise had Theranos delivered a diagnostic test as promised, this would have achieved significant economies of scale. The goal was to use a single pinprick of blood to get a wide range of results.
This provides a big lesson to investors, entrepreneurs and managers that they should avoid exposing startups to excessive funding and huge expectations on early-stage startups.
Make Data-Driven Decisions
Initially, the management presented itself as the transformative agent of healthcare but it didn’t have any clinical data to back its technology. As a result, Holmes and her team made erratic decisions that were not backed by any data hence the premature release of its testing devices. This strategic error has led to a lot of sanctions and hefty fines.
On the other hand, maybe Theranos failed to make its data available to the public or use it because that could have undermined its astronomical valuation. Still, its investors would not have allowed it but the right course was to use and share its not-up-to standard data.
Such transparency would have encouraged trust among its investors, partners, creditors, regulators and patients.
Avoid Scaling Unproven Business Models
Theranos had an aggressive go-to-market strategy. First, it shouldn’t have partnered with Safeway and Walgreens because this increased the potential value of premature technology.
Further, this exposed the startup to a new set of performance targets that the young team was not ready to handle.
A lesson to startups is that they should first demonstrate their business models viability before making so many promises too early.
Therefore, entrepreneurs need to prove that their business models prior to making major decisions towards growth such as expansion, and acquisition.
Innovation Always Improve so Manage Investors’ Expectations
It’s not possible to nail everything in the first trial and therefore innovators should manage public expectations appropriately regarding what the new technology can and cannot do.
Theranos and Holmes failed to manage investors, media and partners’ unrealistic expectations. Actually, the public would not have judged it harshly had it been less bold in its claims. The company would be given a chance to improve its technology and rectify any know errors.
Further, Holmes’ invention was regarded by Ian Gibbons, the chief scientist as more of an idea than reality but he tried everything possible and exhausted every option because he was bound by the scientific method.
Holmes on the other hand used her funds to hire communications specialists, salespersons and marketers.
Sadly, the downfall of Theranos might make it hard for female founders. Some of Theranos high-profile investors comprise Oracle founder Larry Ellison, Rupert Murdoch, members of the Walton family and Betsy DeVos, the former US Secretary of Education.
Theranos is not the first startup to make mistakes in its early growth phase. However companies that successfully developed sustainable business models sourced funding after hitting specific milestones, made data-driven decisions, didn’t scale an unproven business model too soon and founders managed their stakeholders’ expectations.
A startup’s cumulative outcomes of decisions made determine whether it will succeed or fail. Lessons picked from Elizabeth Holmes as well as the rise and fall of Theranos can help future innovative companies escape similar outcomes and live up to their potential.