Like every billion-dollar startup, Theranos began with an idea: that blood could be effectively tested for all kinds of diseases using just a pinprick. It was that idea that, when it struck then-19-year-old founder Elizabeth Holmes, seemed so powerful that she dropped out of Stanford to pursue it. And it was the promise of that idea that propelled the startup’s valuation to $9 billion and attracted heavyweights like Henry Kissinger and former secretary of state George Shultz to its board.
But sooner or later, even the billion-dollar ideas have to become reality. And that was where Theranos stumbled.
Early days, easy money
When Holmes dropped out of Stanford in 2003, it was with Stanford chemical engineering professor Channing Robertson’s blessing. In fact, he was so impressed with her idea that he joined the nascent startup’s board of directors. From there, it was on to fundraising: by the end of 2006, Theranos had blown through a $500,000 seed round and raised series A ($5.8 million), B ($9.1 million), and C rounds ($28.5 million). In 2010, it raised another $45 million. The money came easily because Theranos’s promise that it could revolutionize the way we collect, analyze, and communicate health information had an easy appeal. The company’s pinprick blood testing and subsequent data analysis was going to be able to prevent the 100,000 deaths each year caused by patients’ adverse drug reactions. What investor wouldn’t want in on that?
Behind the scenes, there were already concerns. When Theranos pursued a partnership with the Department of Defense, the DoD became concerned about the company’s FDA compliance, and launched a formal inquiry. But Holmes had a friend in Marine Corps General James Mattis (who later joined the Theranos board), and the incident was resolved quietly. As far as the public or the press knew, Theranos was still a rising star in the medtech industry.
Hitting the big time
With the big money came commericial and press attention and subsequently even more money. By 2013, Theranos was closing a $50 million investment deal and partnership with Walgreens, and the next year, the company exploded. In early 2014, Theranos raised almost $200 million at a $9 billion valuation, and the fawning articles started pouring in. Theranos became one of the most desirable workplaces in the country, and Holmes became America’s youngest female billionaire.
But for all the mainstream press attention, Theranos wasn’t making a dent in scientific journals. Its revolutionary device, meant to be able to test for all sorts of things with just a few drops of blood, was shrouded in secrecy, and hadn’t been peer-reviewed (it still hasn’t). And at the same time, another problem was forming: in 2013, Holmes negotiated a two-tiered shares system with her investors that gave her, a young, inexperienced founder, near-total control of the company.
In 2015, Theranos raised another massive investment round ($348 million). The startup got FDA clearance for a fingerprint herpes test. Holmes was quickly becoming an icon. Then, in October, the wheels fell off.
Hitting the wall
That October, The Wall Street Journal ran an article alleging that the company’s blood test machine was sometimes inaccurate, and that its labs often used competitors machines instead. Just weeks later, the FDA joined the fray, ordering Theranos to stop using its Edison device for most tests. This gave key Theranos partner Walgreens pause, and the drugstore giant canceled its plans to expand its collaboration with Theranos. A budding deal with Safeway worth $350 million fell through, too. Board members, including Kissinger, began to abandon ship. In the space of a month, the foundation on which Theranos’s $9 billion valuation was based had evaporated.
In the subsequent months, more problems arose. News about the Defense Department’s concerns back in 2012 finally broke in December of 2015, strengthening the growing feeling in the industry that Theranos was built on hype and Holmes’s powerful personal connections rather than functional technology. In January, the Centers for Medicare and Medicaid Services (CMS) dealt Theranos yet another blow, reporting that in tests the company’s Edison device was unacceptably inaccurate nearly a quarter of the time, and proposing sanctions including pulling its certification for Theranos’s California lab. That case remains unresolved, but a loss of certification would probably be the death blow for Theranos’s brand.
What went wrong?
Obviously, Theranos’s biggest problem is with the technology itself. Were it as accurate as it’s meant to be, the company might still be worth $9 billion, or even more. But in outside analysis, Holmes often shoulders the blame for the company’s missteps. As founder and CEO, she appears to have over-promised and under-delivered mightily. It probably wasn’t intentional she says she’s devastated by what has happened, but, with Holmes having kept a tight grip on the reins via the tiered stock system she negotiated, there’s no denying she was the executive in the drivers seat. COO Sunny Balwani recently left the company, but few observers think that’s likely to make a difference with Holmes still at the helm and with the Edison’s problems still apparently unresolved.
More broadly, though, some blame might be assigned to Silicon Valley’s founder-worshipping startup culture. Generally speaking, investors don’t love arrangements like the one Holmes was able to make in 2013, because giving the CEO enough shares to also have voting control on the board removes the checks-and-balances value that a corporate board is meant to provide. Holmes was able to get away with this in part because of the Valley belief that the founder is king, especially when it’s a young, intelligent, ambitious founder like Holmes (or like Mark Zuckerberg before her). The FDA and the DoD may also share some blame, having apparently found issues with Theranos and the Edison back in 2012. It’s not entirely clear how their 2012 concerns were swept under the rug and kept there for so long, but it is ultimately the FDA’s job to protect consumers from these sorts of abuses.
So how much of this is Holmes’s fault? It’s a matter of perspective. Over-promising and under-delivering is an affliction that affects many visionary tech CEOsÔÇöhow often has Tesla Motors missed the launch dates promised by founder Elon Musk? But Holmes works in an especially sensitive field, one where you really can’t begin business operations until the technology is completely ready. Holmes’s tech clearly wasn’t ready, but she started commercial operations anyway. The result of that decision, ultimately, was a letter from CMS saying that Theranos’s lab practices pose immediate jeopardy to patient health and safety. In the healthcare industry, no amount of VC funding is going to help your brand come back from that kind of blow.