Theranos was an American health technology company founded in 2003. The Theranos business model and company culture were based on unproven technology, fraud, secrecy, and authoritarian leadership. The CEO and co-founder Elizabeth Holmes portrayed herself as the next Steve Jobs, while in reality there was no product underneath, and it was one of the greatest frauds in American history.
Background
Theranos was a former American health technology company founded in 2003 by Elizabeth Holmes.
The company reached a peak valuation of $9 billion in 2015 after claiming it had developed automated and rapid blood testing technology requiring a very small amount of blood. Holmes, who styled herself like revolutionary Steve Jobs, became the world’s youngest female self-made billionaire at age 20.
And she really managed to fool a lot of people!
However, Theranos subsequently caught the attention of medical research professors and investigative journalists who questioned the validity of its technology.
And yet, also in front of the evidence, she kept acting:
Just three years later, Theranos announced to investors that it would be ceasing all operations and relinquishing its cash and assets to creditors. Below is a look at the sordid story of what happened to Theranos, with particular emphasis on the role that Holmes and former president Ramesh Balwani played.
Theranos business model
Theranos was built on the premise that it performed blood tests using proprietary technology in a less invasive way. In fact, the company claimed a small pinprick on the finger could diagnose anything from high cholesterol to cancer.
Holmes secured hundreds of millions in venture capital funding based on this premise. But she only accepted funding with the proviso that she wouldn’t have to reveal how the technology worked.
Company culture
This culture of secrecy pervaded every aspect of the company culture. Holmes maintained total and absolute control over operations for years, even taking three former employees to court and claiming they had stolen intellectual property.
In 2006, then-CFO Henry Mosley was fired for questioning the reliability of the blood-testing technology and also the integrity of Theranos itself.
Safeway and Walgreens contracts
Five years later, Theranos released a new device capable of performing multiple classes of blood tests. The device was called the miniLab and nicknamed the 4s after the iPhone model.
Theranos then secured a deal with Safeway to run its employee health clinic. Safeway’s chief medical offer expressed concerns around discrepancies in the test results but was brushed off by the CEO who soon retired.
In 2012, Theranos signed a deal to sell its devices in Walgreens stores but routinely missed deadlines. Holmes also approached a high-ranking military official regarding potential who then raised regulatory concerns with the U.S. Food and Drug Administration (FDA).
After a surprise inspection, Holmes and Balwani had to concede the technology was not ready for release.
Unethical practices and criticism
A Wall Street Journal received a tip about Theranos in early 2015 and was subsequently told about the working conditions with the company.
Theranos had been operating at a limited capacity and had been generating false patient results. Holmes and Balwani had also wanted to conduct HIV tests before being talked out of it by a former lab director.
Theranos received FDA approval in July 2015, with the scientific community asking serious questions about the company’s technology. Despite this, Holmes embarked on a media campaign to publicly dispel any criticism.
Lawsuits and departures
In a visit to Theranos labs, the FDA told the company it was shipping an “uncleared medical device”. One month later, its collaboration with Safeway was over with the Walgreens deal following suit in June 2016.
The company continued to face intense scrutiny from regulatory bodies, with Theranos labs found to pose a safety risk to patients. Branded wellness centers were closed in California and Arizona.
The Centers for Medicare & Medicaid Services (CMS) then banned Holmes from the lab-testing industry for two years. As clinical labs shut down and hundreds of employees terminated, a series of lawsuits from patients, investors, and Walgreens began materializing.
Fraud charges and closure
After a separate investigation by the Securities and Exchange Commission (SEC), Theranos together with Holmes and Balwani were charged with fraud.
On June 15, 2018, both individuals were found guilty on nine separate counts of wire fraud and two counts of conspiracy to commit wire fraud. Holmes was later accused of destroying evidence shortly before the company ceased operations in September 2018.
In the multi-million dollar scheme, investors, doctors, and patients were all defrauded as baseless claims were made around the company’s proprietary technology. Venture capitalists and investors alone committed some $724 million based on these claims.
Key takeaways:
Theranos was an American health technology company founded in 2003. The Theranos business model and company culture were based on unproven technology, fraud, secrecy, and authoritarian leadership.
Theranos entered into a partnership with Walgreens and Safeway before its product was ready for release. It subsequently attracted the attention of various regulatory bodies, including the CMS, SEC, and FDA.
Theranos CEO Holmes and COO Balwani were found guilty of multiple counts of wire fraud and conspiracy, with the former also being accused of destroying evidence. The company was shut down soon after the court ruling in late 2018.
WeWork is a commercial real estate company providing shared workspaces for tech start-ups and other enterprise services. It was founded by Adam Neumann and Miguel McKelvey in 2010. WeWork’s business model was built on complex arrangements between the company and its landlords. There were also several conflicts of interest between Neumann and WeWork, which provided the impetus for the failed IPO and significant devaluation that would follow.
Netscape – or Netscape Communications Corporation – was a computer services company best known for its web browser. The company was founded in 1994 by Marc Andreessen and James H. Clark as one of the internet’s first and most important start-ups. The Netscape Navigator web browser was released in 1995 and became the browser of choice for the users of the time. By November 1998, it had been acquired by AOL, which tried unsuccessfully to revive the popularity of the web browser. Ten years later, Netscape was shut down entirely.
Musically, or Musical.ly as it is officially known, was a Chinese social media platform headquartered in Shanghai. After passing 200 million users in May 2017, the platform was shut down by tech company ByteDance in November. After its acquisition, ByteDance suggested Musical.ly would continue to operate as a standalone platform. Company representatives noted that it would be able to leverage ByteDance’s AI technology and enormous reach in the Chinese market. Musically was ultimately absorbed into TikTok in June 2018, with the app no longer available in August of the same year. Existing users were offered technical support and several new features as a sweetener.
Vine was an American video social networking platform with a focus on looping video clips of six seconds in length, founded by Dom Hofmann, Rus Yusupov, and Colin Kroll in 2012 to help people capture casual moments in their lives and share them with their friends. Vine went on to become a massively popular platform. Yet by 2016, Twitter discontinued the mobile app, allowing users to view or download content on the Vine website. It then announced a reconfigured app allowing creators to share content to a connected Twitter account only. This marked the end of Vine.
CNN Plus was a video streaming service and offshoot of CNN’s cable TV news network that was launched on March 29, 2022. The service was ultimately shut down just one month after it was launched. Trouble began for the platform when parent company WarnerMedia merged with Discovery. The latter was unimpressed with paltry viewer data and, with $55 billion in debt to clear, was not interested in funding CNN+ moving forward. Other contributing factors to CNN Plus’s demise include a lack of compelling content and streaming service market saturation.
Clubhouse is a social app that allows thousands of people to communicate with each other in audio chat rooms. At one point, the company was worth $4 billion and boasted users such as Mark Zuckerberg and Elon Musk. Clubhouse declined because it rode the wave of pandemic lockdowns and suffered when people resumed their normal routines. The decision to remove the invite-only feature also caused a rapid influx of new members and removed any exclusivity. Clubhouse management also failed to define a business model and was unaware of the components of a successful social media site.
Gennaro is the creator of FourWeekMBA, which reached about four million business people, comprising C-level executives, investors, analysts, product managers, and aspiring digital entrepreneurs in 2022 alone | He is also Director of Sales for a high-tech scaleup in the AI Industry | In 2012, Gennaro earned an International MBA with emphasis on Corporate Finance and Business Strategy.
