Why and how did Theranos get in trouble? What lessons can be learned from the Theranos case?

 

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CHAPTERCASE 12 Part I Theranos: Bad Blood Elizabeth Holmes was 19 years old when she founded Ther anos, a medical diagnostic company, in 2003. Ambitious and entrepreneurial, she dropped out of college with the in- tent to disrupt the health care industry. Holmes' big inven- tion was a miniaturized lab that could run 200 diagnostic tests from a single drop of blood drawn from a painless fin- ger prick quite a departure from the traditional method of using needles to draw vials of blood from veins. The technol ogy and process of diagnosing blood hadn't changed much since the 1950s, and Holmes was convinced that the diagnos. tic blood testing market was ripe for disruption. She proclaimed she could develop a new tech- nology that could spot every thing from cholesterol to cancer within minutes and more accu rately than traditional blood- drawing methods. She would accomplish this feat by merging scientific advances in medical devices with bioengineering. 16 Holmes' strategic intent did not just focus on developing more consumer-friendly blood tests; it also focused on provid ing faster, less expensive, more reliable, and more convenient tests. She wanted consumers to be able to take blood tests at challenge incumbent diagnostic companies Quest Diagnos- tics and LabCorp, which were both using decades old tech nology and charging hundreds of dollars for standard blood tests. Government agencies such as Medicare have sued these firms for overcharging by billions of dollars. Together, Quest Diagnostics and LabCorp had long dominated the U.S. market in a cozy duopoly and owned more than 80% of the market. their local pharmacy or even in the comfort of their own homes. This convenience would be an important step to ward achieving individualized health care, which would al- low consumers to obtain important information as they needed it to make their own medical decisions. Because con sumers could have an entire suite of blood tests conducted every two works or so, and have the resulting data shared with their physicians, people would find themselves with a much more dynamic view of their overall health profiles. Holmes theorized that repeated testing over short intervals would allow for early detection and prevention of diseases. With its revolutionary technology, Theranos set out to At the time Theranos got off the ground, Steve Jobs was dominating Silicon Valley with his larger than life presence. He so inspired Holmes that she duplicated things he did-wearing black turtle- necks every day, hiring for- mer Apple employees who had worked with Jobs, hiring the same advertising firm, and scheduling meetings on the same day as Jobs did (Wednesdays). Jobs was known for his uncanny abil- ity to convince pretty much anyone who encountered him that his reality was the true reality, regardless of facts and other constraints. This version of reality has come to be known as Jobs "reality distortion field." To effect her own reality distor- tion field, Holmes held con- stant eye contact with individuals and never blinked, an effect that was reinforced by her large blue eyes. In addition, to sound more assertive and confident, she trained herself to use a deep baritone voice rather than her natural voice. Elizabeth Holmes, founder and CEO of Theranos, is pictured here with a nanotaine" a small container holding a drop of blood to be red for testing into the Edison machine, a Theranos invention. Although the Edison machine was a prom ising and appealing idea, Theranos never got it to work in 2022, Holmes was convicted of defrauding investors. Now a convicted felon, she faces up to 20 years in prison plus millions in restitution and lines. Ethan Pes/The Forbes Collection Contour Reyes So promising was the new Theranos technology that Holmes managed to persuade her adviser, Channing Robert son, then senior associate dean in the School of Engineering at Stanford University, to leave his tenured professorship and join her startup. Robertson's endorsement was enough to convince Tim Draper, of the famous venture capital firm DFJ, to provide initial funding. Draper was also the first to invest in the now-famous startups Tesla, Skype, and Baidu (China's version of Google). He was convinced that Holmes CHAPTERCASE 12 Part I Theranos: Bad Blood Elizabeth Holmes was 19 years old when she founded Ther anos, a medical diagnostic company, in 2003. Ambitious and entrepreneurial, she dropped out of college with the in- tent to disrupt the health care industry. Holmes' big inven- tion was a miniaturized lab that could run 200 diagnostic tests from a single drop of blood drawn from a painless fin- ger prick quite a departure from the traditional method of using needles to draw vials of blood from veins. The technol ogy and process of diagnosing blood hadn't changed much since the 1950s, and Holmes was convinced that the diagnos. tic blood testing market was ripe for disruption. She proclaimed she could develop a new tech- nology that could spot every thing from cholesterol to cancer within minutes and more accu rately than traditional blood- drawing methods. She would accomplish this feat by merging scientific advances in medical devices with bioengineering. 16 Holmes' strategic intent did not just focus on developing more consumer-friendly blood tests; it also focused on provid ing faster, less expensive, more reliable, and more convenient tests. She wanted consumers to be able to take blood tests at challenge incumbent diagnostic companies Quest Diagnos- tics and LabCorp, which were both using decades old tech nology and charging hundreds of dollars for standard blood tests. Government agencies such as Medicare have sued these firms for overcharging by billions of dollars. Together, Quest Diagnostics and LabCorp had long dominated the U.S. market in a cozy duopoly and owned more than 80% of the market. their local pharmacy or even in the comfort of their own homes. This convenience would be an important step to ward achieving individualized health care, which would al- low consumers to obtain important information as they needed it to make their own medical decisions. Because con sumers could have an entire suite of blood tests conducted every two works or so, and have the resulting data shared with their physicians, people would find themselves with a much more dynamic view of their overall health profiles. Holmes theorized that repeated testing over short intervals would allow for early detection and prevention of diseases. With its revolutionary technology, Theranos set out to At the time Theranos got off the ground, Steve Jobs was dominating Silicon Valley with his larger than life presence. He so inspired Holmes that she duplicated things he did-wearing black turtle- necks every day, hiring for- mer Apple employees who had worked with Jobs, hiring the same advertising firm, and scheduling meetings on the same day as Jobs did (Wednesdays). Jobs was known for his uncanny abil- ity to convince pretty much anyone who encountered him that his reality was the true reality, regardless of facts and other constraints. This version of reality has come to be known as Jobs "reality distortion field." To effect her own reality distor- tion field, Holmes held con- stant eye contact with individuals and never blinked, an effect that was reinforced by her large blue eyes. In addition, to sound more assertive and confident, she trained herself to use a deep baritone voice rather than her natural voice. Elizabeth Holmes, founder and CEO of Theranos, is pictured here with a nanotaine" a small container holding a drop of blood to be red for testing into the Edison machine, a Theranos invention. Although the Edison machine was a prom ising and appealing idea, Theranos never got it to work in 2022, Holmes was convicted of defrauding investors. Now a convicted felon, she faces up to 20 years in prison plus millions in restitution and lines. Ethan Pes/The Forbes Collection Contour Reyes So promising was the new Theranos technology that Holmes managed to persuade her adviser, Channing Robert son, then senior associate dean in the School of Engineering at Stanford University, to leave his tenured professorship and join her startup. Robertson's endorsement was enough to convince Tim Draper, of the famous venture capital firm DFJ, to provide initial funding. Draper was also the first to invest in the now-famous startups Tesla, Skype, and Baidu (China's version of Google). He was convinced that Holmes