The $10B scam that was Theranos

Elizabeth Holmes faked it… until she DIDN’T make it. But was this deliberate deception, delusion, bad luck or "unconscious incompetence"?

Source: ChatGPT4o

In 1878 Thomas Edison claimed to have solved the incandescent light bulb problem. Although he had created a light bulb, it couldn’t stay lit for more than a few minutes due to overheating. Investors and Journalists would marvel at his light bulb before he quickly ushered them out, before the bulb burned out. 

He sold the dream, not the reality. He raised the money, stayed ahead of his competition, and kept the dream alive until it became reality. 

Perhaps one of the worlds first "fake it till you make it” inventors, it took the “Wizard of Menlo Park" four years to produce a working bulb, but in the end he did it. He won. 

Today, his innovation is used by people all around the world. History absolved him. 

But what if it didn’t? 

That same “fake it till you make it” culture was perhaps at its zenith in 2003 when 19 year old Elizabeth Holmes founded Theranos claiming that a single drop of blood could provide rapid and accurate test results using compact automated devices that the company had developed.

All of these claims were false. 

I’m all for entrepreneurial vision and innovation and I accept that there is fundamental risk with the research and development required to build next generation technology. My question however, having experienced some this play out very badly first hand, is how much the concept of “unconscious incompetence” plays a role. Presumably Elizabeth Holmes at 19 years old had a significantly high level of “unconscious incompetence”. That certainly didn’t stop her…

She raised over $700 million from a lineup of high-profile investors, hitting a jaw-dropping valuation of $10 billion. 

We’re talking big names like Rupert Murdoch, U.S. Secretary of Education Betsy DeVos, the Walmart Walton family, Oracle’s Larry Ellison, and venture capital big shots. 

These folks bought into the hype of a healthcare revolution - powered by a single drop of blood - with their eyes (and wallets) wide open.

It’s hard to fault them given that Elizabeth Holmes was invited to The White House and endorsed as one of America’s leading innovators. 

source: Silicon Valley Business Journal

Like all companies, Theranos was only ever Three Strikes away from disaster, and here they are:

Strike 1: Technological Smoke and Mirrors

They claimed their magical blood-testing gadget could run a zillion tests from just a drop of blood. Investors and the healthcare industry were drooling. But the tech (named The Edison) couldn’t deliver. Ever. 

To “keep the dream alive” they lied… to everyone. They partnered with a pharmacy chain who took blood samples (there normal amount, not just a single drop) and sent them away for the regular kind of analysis. (Just haphazardly conducted, which is a bad idea healthcare). 

Strike 2: Regulatory Showdown

Theranos was playing fast and loose in a world where rules are tight. 

When the truth started leaking out, the regulatory hounds were unleashed. The Centers for Medicare and Medicaid Services (CMS) and the U.S. Securities and Exchange Commission (SEC) discovered Theranos was about as compliant as a toddler on a sugar high resulting in sanctions and Elizabeth Holmes being banned from running a clinical lab. 

Strike 3: Media Storm

The Wall Street Journal’s John Carreyrou led the charge, ripping off the veneer and exposing the grimy truth underneath. His articles laid bare the chasm between Theranos' grand claims and their shoddy tech. 

The ensuing media storm didn’t just wreck Theranos' reputation—it sparked a broader conversation about the ethical duties of healthcare startups. 

The once-darling of Silicon Valley was now the poster child for startup hubris.

But was Elizabeth Holmes and Theranos ever Three Strokes away from success? Ever? 

Its certain that IF they managed to deliver complete results from only a single drop of blood in close to real time, this would have revolutionised healthcare to the same extent that Edison’s incandescent light bulb revolutionised how we use energy in our homes and offices, changed the way we design buildings, increased the length of the average workday and jumpstarted new businesses. Except they didn’t. 

History did NOT absolve her. 

What Happened to Elizabeth Holmes?

She saw her empire crumble, lost billions of (paper value) dollars fro her net worth and faced the full force of the law. 

Following a lengthy legal saga, Holmes was found guilty of fraud. In November 2022, 19 years after founding Theranos when she herself was only 19 years old, she was sentenced to 11 years and 3 months in prison. 

Her conviction and sentence marked a dramatic fall from grace for a woman once literally heralded as the next Steve Jobs. 

Have a suggestion for a case study? 

This story makes me think back to the article I wrote about a startup that was ahead of it’s time back in 2005 but then got uninvented. BUT… their technology was real, it did work, they were just never able to get the cost to customer ratio right because of the costs of the underlying hardware and servicing.

In the case of Theranos, I feel that there simply was too much “unconscious incompetence” of existing science for their technology to ever reach their vision.