Theranos Case

THERANOS

Figure 1: https://raisonbrands.com/healthcare-startups-win-more-investors-with-branding/

Elizabeth Holmes and the beginnings of Theranos

Elizabeth Holmes always wanted to be rich. At age nine, one of her relatives asked, "What do
you want to do when you grow up?"
"I want to be a billionaire" she replied.
"Wouldn't you rather be president?" she was asked.
"No, the president will marry me" she countered, "because I'll have a billion dollars."

Holmes always had a sense of determination and ambition, qualities that were nurtured by her
parents. Their family history was distinguished: her father was descended from Charles Louis
Fleischmann, a Hungarian immigrant who started a massively successful yeast company in
1868. This business was so prosperous that by the turn of the twentieth century the family
became one of America’s wealthiest. Elizabeth’s great-great grandfather, Dr. Christian Holmes,
established Cincinnati General Hospital and the University of Cincinnati Medical School. Holmes
often referred to her family history when answering questions about Theranos, citing this
legacy shaping her learning and outlook.

Subsequent generations, however, had squandered much of the family fortune, living as
Holmes’s father Chris stated, ‘large but flawed lives’. Chris Holmes ensured his children
understood that undertaking a successful, yet purposeful life was important. Holmes’s parents
pushed Elizabeth to achieve in all areas. Despite being a ‘fair student with average grades’ her
parents encouraged her to study Mandarin though the Stanford University languages program,
as this was known as a ‘backdoor entry’ into the prestigious university.

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After high school, Holmes was offered a place at Stanford. For a student with interests in
science and technology, it was an obvious choice, given its proximity to Silicon Valley and close
connections with many technology organisations. As she was finishing high school, two
Stanford PhD students were beginning to gain significant attention for their start-up with a
funny name - Google.

At Stanford, Holmes met professor Channing Robertson, a prominent leader in the chemical
engineering department who had been teaching since the 1970s. He became her mentor and
one of her earliest supporters describing her as a ‘natural storyteller': "She has somehow been
able to take and synthesize these pieces of science and engineering and technology in ways I
had never thought of."

In 2003, at age 19, Holmes dropped out of Stanford,to start Theranos. By 2005 Theranos had its
first prototype, Theranos 1.0, and over two dozen employees. Holmes was driven by two ideas.
The first was people’s fear (including her own) of needles. She told a TEDMED audience that
that between forty and sixty per cent of people who are ordered by their doctor to get a blood
test do not because of fear. The second was the relatively high cost of blood testing. Holmes
believed diabetes, sexually transmitted diseases, and other common medical conditions could
be diagnosed and treated earlier if the tests were less onerous and more accessible. “We see a
world in which no one ever has to say, ‘If only I’d known sooner.’ A world in which no one ever
has to say goodbye too soon.”

From the very beginning Holmes presented herself, and her company, as trying to change the
world for the better. Holmes wanted to transform the medical industry, and as a result, save
lives. Former U.S. Secretary of state George Schulz was one of the most outspoken supporters
of Elizabeth Holmes and Theranos. "Everywhere you look with this young lady, there's a purity
of motivation," Shultz said. "I mean she really is trying to make the world better, and this is her
way of doing it."

Theranos’s strategy

Theranos aimed to disrupt, healthcare and medical diagnostics in similar ways to how
companies like Apple, AirBnb or Uber have shaken up music, technology, hospitality or
transport. Holmes recognised a potential gap in the market and set out to capitalise on it.

Theranos (a mashup of "therapy" and "diagnosis") aimed to revolutionise blood testing

technology. While the original idea patented by Holmes was to create a wrist-based antibiotic
delivery system, early research showed that this was akin to ‘science fiction’ given the delivery
of minute amounts of antibiotics in this way was medically ineffective. Instead Theranos started
to explore the creation of a handheld diagnostic system that combined microfluidics and
biochemistry. Theranos focused on developing a cartridge reader system, where patients could
prick their finger and a drop of blood would be ‘read' using sophisticated digital technology.
This blood-testing technique was not new, it had been used since the 1980s, but the idea that it
could be housed in a toaster-sized machine placed in stores, homes, medical transport or on
the battlefield would completely transform medical testing.

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Theranos’s path to success was far from open and transparent. As a privately-owned company,
Theranos was under no obligation to share financial records or company information with the
public. Theranos kept information about its technology and blood tests secret from both
investors and many staff. Channing Roberston told The New Yorker, “For a long time, I couldn’t
even tell my wife what I was working on.” Some noted Holmes operated in “the Steve Jobs way
of keeping everything secret until the iPhone was released.” Lakshman Ramamurthy, a
molecular biologist and a former associate director at the Food and Drug Administration (FDA)
recognised, however, “a health test is more consequential than a consumer product. It needs to
be clinically valid and provide useful information.” Theranos largely failed to engage with the
scientific community in any real way. Over the life of the company Theranos did not publish
information on its work in peer-reviewed biomedical literature, with Holmes listed as a co-
author on only one article in an online-only fee-paying journal (Toy v Theranos, 2016).

In April 2005, Holmes said on the public-radio program “BioTech Nation” that she had created a
hand-held device that would help drug companies tell in real time how well their drugs worked
on patients using “a little tiny needle that pulls a little tiny drop of blood” from an arm or the
hand. No evidence of this initial device was shown to investors or the public.

In 2007 Theranos struck a deal with pharmaceutical company Pfizer to test Theranos 1.0 in a
cancer-patient trial. Under this agreement devices were to be placed in patient’s homes and
they would use them to test their blood daily. Results were to be wirelessly sent to Theranos’s
California headquarters for analysis then forwarded to Pfizer. This study was ended in 2009 as
Pfizer claimed they were “underwhelmed” with the clinical outcomes. Final reports showed
glaring inconsistencies in results, high mechanical failures and significant issues with wireless
transmission of data.

Another prototype was created by 2007. Slightly larger than a toaster, the Edison was a sleek
box with an iPod-like screen that aimed to read and diagnose blood samples almost instantly. It
was named for the famous inventor Thomas Edison who claimed "I have not failed. I've just
found 10,000 ways that won't work."

Theranos asserted that the Edison could diagnose up to 200 conditions in only a few minutes
from a single drop of blood. Patients would no longer need to be stuck with needles drawing
multiple test tubes of blood, addressing a significant fear that many people have, including
Holmes. The Edison would also provide almost instantaneous medical data allowing for
increased responsiveness to healthcare needs.

Silicon Valley and the rise of the ‘unicorns’

By 2010 Silicon Valley was booming. While it had always been synonymous with innovation,
the beginnings of companies such as Tesla, Uber, Lyft saw the rise of the ‘unicorn’ or the
privately held company worth more than $1 billon. In this world ingenuity was rewarded and
growth the ultimate goal.

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To be competitive pushing into new markets and developing new products is essential, yet
questions can be raised about the behaviors that are allowed and accepted in the name of
‘innovation’. Questions about privacy and use of data, the role of social media and tech
companies in functioning democracies, the treatment of workers and contractors and
managerial misconduct have all cast a shadow over the progress of these economic giants.
Outsiders, and some within the industry, have begun to suggest that Silicon Valley has an
‘ethics problem’, walking a fine line between what is actually illegal and what constitutes bad
behavior and there have been calls for big companies to instill an ‘Chief Ethics Officer’.

In the broader community, however, companies are now being pressured to take a stand on
global issues. There’s increased demand for ethical leadership and employees are willing to
take a stand when they disagree with the internal culture of their workplaces. In 2019 Google
employees staged mass walkouts to protest the companies lack of action in terms of diversity.
Employees want to work for organisations that contribute to the global good, but also want a
positive, supportive and fair work culture. Companies that last a long time align their business
practices with their values and their values align with what works for customers, employees
and partners. What makes Silicon Valley so interesting, for many outsiders, is the coexistence of
a sincere belief in wanting to make the world better and ethically dubious decision making for
the sake of achieving organizational aims.

Theranos's clients

While there was significant early interest in Theranos's offering. The blood testing market had
been dominated by a small number of large companies, and there was potential for rapid
growth in not only the hospital and medical environment but into areas such as retail. Early on
Theranos met with a number of pharmaceutical companies, however many did not want to pay
for the high costs of validation testing. Another challenge was that in client demonstrations the
Edison performed inconsistently. In a 2006 test with Novartis in Switzerland, the device reader
had multiple issues and failures in preliminary testing, and Holmes had fake results
electronically sent to the system from the US without the client being aware. Upon return to
headquarters in Palo Alto a number of employees who’d been on the trip seemed to lack
enthusiasm and appeared downcast despite Holmes’s claim that the trip had been a success.
Chief Financial Officer, Henry Mosley, questioned Holmes on what had occurred and raised
concern over some of the financial forecasting that had been used. He was told by Holmes that
he wasn’t “a team player” and fired. None of the other employees knew what occurred,
Mosley simply ‘disappeared' and wasn't replaced. Employee rumour was he had been caught
embezzling funds.

The lack of a consistently working product did not stop Holmes and the Theranos team from
targeting clients. In 2010 Theranos approached Walgreens (the second-largest pharmacy group
in the US) to consider installing the Edison in pharmacies across America. Holmes and her team
met with executives and presented a compelling PowerPoint presentation claiming that the
Edison was "viable and consumer-ready" and validated under the FDA system. During the initial
partnership discussions, a Walgreens lab consultant, Kevin Hunter, expressed trepidation about

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Theranos technology and was told by one his executive team “we can’t risk a scenario where
(competitor) CVS had a deal with them in six months and it ends up being real.”

Figure 2: Walgreen Wellness Centre offering

The Walgreens deal went ahead in exchange for a

$100 million "innovation fee" and an additional
$40 million loan. By 2012 Walgreens was told
that the project was on track for a 2013 launch
and that Theranos had all the regulatory approval
necessary. The Edison would, according to
Holmes, require 99.9% less blood than traditional
testing and help make Walgreens the nation's
lowest cost, highest quality laboratory provider.
In 2013, they started rolling out "wellness
centers" that offered over the counter lab testing
in pharmacies, and within two years there were
41 across California and Arizona.

Despite Theranos's claims of being able to test a

single drop of blood and provide almost instant
results, the process within Walgreens' wellness
centers involved traditional blood removal, via a
needle, and the transport of the blood via FedEx
back to Theranos's headquarters for testing on
commercially bought machines. Even if the
Figure 3: Walgreens Wellness Centre:
https://finance.yahoo.com/news/drugstore-test-startup-shaking-
medical-220206225.html

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Edison or other Theranos designed devices could run diagnostic testing onsite, they did not
actually have FDA approval to use them.

One way Theranos built credibility with clients was by stressing their links to the US military.
Holmes had met James Mattis, head of U.S. Central Command at the Marines’ Memorial Club in
San Francisco. He went out of his way to stress Holmes's integrity. "She has probably one of
the most mature and well-honed senses of ethics—personal ethics, managerial ethics, business
ethics, medical ethics that I've ever heard articulated.” In 2011, a military delegation visited
Theranos Headquarters to discuss plans to deploy their devices to Afghanistan. This delegation
was headed by Lieutenant Colonel David Shoemaker of the army’s medical department.
Shoemaker had experience with many who thought the military was exempt from civilian
regulation, and pushed back when Holmes told the delegation that they wanted to deploy the
devices without going through the FDA approval process. He noted that Holmes didn’t seem to
listen to any ideas that contradicted her point of view. Shoemaker advised Theranos that the
military would only consider deploying their technology if that has advice from the FDA that
they had appropriate regulatory approval. After nearly a year of back and forth, Shoemaker
contacted the FDA himself to enquire about Theranos’s compliance with federal regulations.
This led to not only an FDA compliance review at Theranos, but a rather stern email sent by
Holmes to General Mattis suggesting Shoemaker gave “blatantly false information” to the FDA.
After much debate and compromise, Theranos gained approval for limited, de-identified testing
of their product in Afghanistan. However, they never actually commenced the project.

What became apparent was that Theranos leaders seemed to be unable to distinguish between
a prototype and a consumer-ready product. A pattern of criticism was emerging, as mid-level
workers, compliance officers, and outsiders began to question the efficacy and ethics of
Theranos’s practices—only to be overruled and second guessed by those at the top. One
employee said "It was as if Boeing built one plane and, without doing a single flight test, told
airline passengers, "Hop aboard." To still be working on minor issues in the product was one
thing when you were in R&D mode, but going live in Walgreens stores meant exposing the
general population to what was essentially a huge, unauthorized research experiment.

Theranos's supporters and investors

Between 2003 and 2013 Elizabeth Holmes raised nearly $900 million from investors. At its
peak, Theranos was valued at almost $10 billion, and Holmes became the youngest-ever self-
made billionaire in her 20s, owning more than half of the company.

From early in the company's history a number of well-connected people publicly praised
Holmes' vision and lent their support to Theranos. One of the first investors was a family friend
of Elizabeth's, Tim Draper who invested $1million. The Draper name carried a lot of weight and
helped give Elizabeth credibility: Tim's grandfather had founded Silicon Valley's first venture
capital firm in the late 1950s, and Tim's firm, DFJ, was known for lucrative early investments in
companies like the web-based email service Hotmail.

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Don Lucas, Chairman of Oracle from 1980 to 1990 was another early champion, who had
brunch with Holmes every Sunday. Don was introduced to Elizabeth by her father, through
contacts at the IMF. In an oral history of Bay Area venture capitalists, he describes Holmes:

She had no background in business, and so it's quite presumptuous for

somebody to say, "I'm going to be president of the company." ....After
spending a lot more time with her. I learned her great-grandfather was an
entrepreneur and started Fleischmann's – packaged yeast. It was very
successful. So that was one side, that's the entrepreneur side. But she was on
the medical side. Ah! It turns out later, the hospital very near where they lived
is named after her great uncle who was involved with medicine. She came by
both of the two talents necessary here, one medicine and the other
entrepreneurship, quite naturally.

Lucas introduced Holmes to Larry Ellison, the founder of tech company Oracle. Ellison, like
Lucas, invested in Theranos's second funding round. One of the wealthiest people in the world,
Ellison was not necessarily an ideal role model. Oracle, in its early years, famously exaggerated
the capability of its software. It shipped versions before they were completely consumer-ready,
leaving customers to deal with a multitude of bugs. Avie Tevanian, known as "Steve Jobs right-
hand guy" invested $1.5 million and joined the board of Theranos in 2006. Tevanian, a well-
known technologist, worked closely with Jobs at both NeXT and Apple.

The circle of investors grew to include a who’s who of American plutocrats: Rupert Murdoch,
the Walton Family, and the DeVos family. As Theranos grew a veritable “who's who” of
politically connected people invested and joined the board, many of whom met Holmes
through former secretary of state George Schultz. Schultz met Elizabeth through his
granddaughter (who moved in similar social circles) in 2011 and he became the conduit,
introducing Holmes to many other politically connected people. Notably, not many had any
medical expertise. By 2015 the Board included:

 George Shultz, former US secretary of state

 James Mattis, a retired US Marine Corps general who went on to serve as President
Donald Trump's secretary of defence
 Richard Kovacevich, the former CEO of Wells Fargo
 Henry Kissinger, former US secretary of state
 William Frist, a heart and lung transplant surgeon and former US senator
 William H. Foege, former director of the Centres for Disease Control and Prevention.

The presence of these former cabinet members, members of Congress, and military officials on
the board also gave Theranos legitimacy and supported assertions that the Edison devices were
being used in the field by the U.S. military.

Investors too were excited about Theranos. Christopher James and Brian Grossman, who ran a
hedge fund Partner Fund Management reached out to Holmes regarding a potential investment
in 2013. They were impressed with the level of information security at Theranos, and the

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remarkable board of directors. At a meeting with Theranos, they were shown a PowerPoint
presentation containing scatter plots purporting to compare test data from Theranos's readers
to data from conventional lab machines. The material indicated that Theranos's test results
were almost entirely correlated with those of the conventional devices. In reality, much of the
data in the charts wasn't from the Edison. It was from commercial blood analyzers Theranos
had purchased.

The investors were also sent financial forecasts. The documents forecast gross profits of $165
million on revenues of $261 million in 2014 and gross profits of $1.08 billion on revenues of
$1.68 billion in 2015. What they were unaware of was that Theranos fabricated these numbers.
Theranos hadn't had a real chief financial officer since Henry Mosley was fired in 2006.

Theranos begins to brand itself to the wider public

Between 2003 and 2013 Theranos operated largely under the radar in broader consumer terms.
As a private company, while it was attracting enormous attention in the investing and venture
capital community, it had a culture of intense secrecy with regard to its intellectual property
and operations. It’s website and communications were limited.

However, by 2013 the origin of Theranos, and its young, photogenic leader with world-changing
ambition began to gain attention. The media loved Elizabeth Holmes. The story of a 20-
something self-made billionaire who was trying to revolutionise health care, making medical
testing more affordable and responsive was the perfect story to sell magazines. In June 2014
Holmes was featured in Fortune under the headline "This CEO is out for blood." She then graced
the cover of Forbes 400 as one of the richest people in America. Stories followed in USA Today,
Inc., Fast Company, and Glamour, along with segments on NPR, Fox Business, CNBC, CNN, and
CBS News.

As Holmes gained more press, she was invited to more and more conferences and began
winning business awards. Time magazine named her
one of the one hundred most influential people in the
world. President Obama appointed her a U.S.
ambassador for global entrepreneurship, and Harvard
Medical School invited her to join its prestigious board
of fellows.

Holmes wanted a marketing campaign for Theranos

that was fit for a company like Apple. She approached
Chiat/Day, the same creative firm that produced
Apple's famous "1984" commercials. Theranos signed
a $6 million retainer with the firm and Chiat/Day staff
scrambled to be part of what seems to be a career-
making opportunity.

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The creative team began to run into trouble with some of the claims Holmes was making. She
wanted bold, optimistic website text that said Theranos could run "over 800 tests" on a drop of
blood and that its technology was more accurate than traditional lab testing. She also wanted
text stating Theranos's test results were ready in less than thirty minutes and were "approved
by FDA" and "endorsed by key medical centers". Chiat/Day, however, had to ensure that each
claim was proven.

One Chiat/Day member of the team remembered:

If you want to say "hundreds of tests on one single drop" then it has to be
hundreds of tests on one single drop, no ambiguity. You have to be able to
prove that's how you do the test. You have to be able to do it then, not in 10
years, not in 5 years. You have to be able to do it then.

Figure 4: https://twitter.com/theranos Chiat/Day pushed Theranos to provide

supporting information to prove what they
said was accurate. In response, Holmes showed a summary report from Johns Hopkins Hospital
that they said supported an independent evaluation of their technology. A closer look,
however, showed that no such evaluation had occurred. One of the Johns Hopkins team had
requested a device to test, but Holmes never followed through and sent it. Chiat/Day thought
the founder had lofty ambitions that often ran headfirst into reality. While copywriters never
had to seek the sort of FDA approval that Theranos never received, its teams still tried to write
legally viable copy for products that would be used in a medical context. One agency member:
“If she couldn’t say it, she would still push for it, she had a certain way of saying, ‘No, this is
what we’re doing.’” The brand eventually revised some of its more dubious claims, like the idea
that one drop of blood could be used through entire testing process, but its overall message
stayed the same.

With a shift toward more outward communication, and all the media attention Holmes was
receiving, Theranos faced more scrutiny. People wanted to know how and why Theranos was
so successful, and the medical community began to question whether Theranos could do all it
claimed.

Organisational culture at Theranos

Ramesh "Sunny" Balwani joined Theranos around August/September 2009 as President and
COO. He brought with him $13 million made from previous software investments, but he had
never worked in the area of medical technology. Balwani was the operational manager and
helped establish the culture at Theranos, becoming the most important person at the company
after Holmes. Where Holmes would focus on the board and big-picture ideas, Balwani, despite
his lack of scientific experience, would manage the day-to-day with employees and business

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partners. He had no problem with working in the lab; he would come in roll up his white
button-down shirt sleeves and start working on weekends.

Balwani, however, had a reputation as a bully. One employee stating:

Initially he would be fairly nice but then through email he frequently would get
really upset about different things and it was like "this is unacceptable" or
"you guys don't know what you're doing". He was always sort of firing back at
people and blaming people for different things that were going on and was
always unsatisfied with what people were doing and how they were doing it.
It got to a point where it was almost hard to work for him because he would
just get so angry.

What the staff, board, investors and clients didn't know what that Sunny Balwani and Elizabeth
Holmes had been in a romantic relationship at least 2006. This was something they went to
great lengths to hide.

At Theranos, work was hard, and commitment was expected. Long hours and weekend work
were standard. One of the lead engineers at Theranos, Ed Ku, noticed that employee turnover
was extremely high. Entry-level and executive employees seemed to turn over at an alarming
rate. The work environment was chaotic; people were there one day and not the next, yet it
was also a work hard/play hard environment. Management threw regular parties to celebrate
holidays and project kick offs and conclusions. In 2015, when Theranos received its only FDA
approval, Holmes threw a massive party that included a bouncy castle and beer pong. Holmes
gave rousing speeches, at one Christmas party telling employees that one of their devices was
“the most important thing humanity has ever built. If you don’t believe this is the case, you
should leave now”.

Departments were set up as ‘silos', disconnected from each other. Holmes suggested this was
to ensure the secrecy of data. Ku, who was working on an early version of the diagnostic testing
system, noted that new engineers were being hired but reporting directly to Holmes. They were
being set up as a rival team and not sharing any information. The information technology (IT)
function also contributed to the disconnection between sections. The computer networks were
set up in a way that split everyone into groups, stopping communication across departments.
Workers couldn't even exchange instant messages with each other. It was all done in the name
of protecting proprietary information and trade secrets, but the result was loss of collaboration
and a significant reduction in productivity.

Ian Gibbons, Chief Scientist at Theranos, raised concerns with the way Holmes and Balwani cut
the groups off from one another and discouraged them from communicating. At the other
diagnostics companies where Gibbons had worked, there had always been cross-functional
teams with representatives from the chemistry, engineering, manufacturing, quality control,
and regulatory departments working toward a common objective. That was how you got
everyone on the same page, solved problems, and met deadlines.

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It is not unusual for tech companies to ask employees to sign nondisclosure agreements, but at
Theranos the obsession with secrecy reached a whole different level. The company had sued a
number of employees over theft of intellectual property. Employees were prohibited from
putting "Theranos" on their social media profiles. Instead, they were told to write that they
worked for a "private biotechnology company." Balwani routinely monitored employees' emails
and internet browser history.

‘Snooping' emerged in both IT and human resources (HR). IT security was so tight that
employees were fired for just plugging USB drives into their computers. Admin assistants would
regularly friend employees on social media and report back to Holmes what was posted. HR
staff regularly checked employment website Glassdoor, and noting negative reviews about
Theranos and, on orders from Balwani, posting fictitious positive ones (See Appendix A for
reviews from Glass Door).

There was also a pattern of dishonesty. Ian Gibbons stated he heard Holmes tell outright lies on
more than one occasion, and after five years, he "no longer trusted anything she said". Another
employee remembered receiving an email from Holmes stating she would get back to him
when she returned to the office when he could see her sitting at her desk.

The biggest problem, according to many staff, was that Holmes and Balwani did not like to hear
negative feedback, calling those who raised concerns "naysayers". Employees who tried to raise
issues of concern were either marginalised or fired, while ‘yes men' or sycophants were
promoted. Holmes and Balwani had created a highly secretive culture that did not let outsiders
in. Employees rarely questioned company actions because they had little power to do so. By
surrounding themselves with those who agreed with them, Holmes and Balwani cut themselves
off hearing diverse voices and receiving different ethical perspectives. Erika Cheung, lab
technician, said people were scared of upsetting Holmes and Balwani. They were scared of
losing their jobs, they were working "insane hours", and when things went wrong, they looked
for someone to blame, rather than a way to solve problems.

Theranos's downfall

People had doubts about Theranos from the very beginning. Those within Theranos included;
Henry Mosely, the CFO who was fired in 2006 after questioning Holmes' use of fake scientific
and financial data in client meetings. Ian Gibbons, Chief Scientist, was drawn into a legal battle
over company proprietary information and, right before he was due to testify, took his own life.
Avie Trevanian, the former Apple employee and friend of Steve Jobs, raised concerned about
Theranos's operations and Holmes's leadership in 2007. He was asked to resign from the board.
Along with internal staff there were many external people who came into contact with
Theranos who doubted their claims, such as Kevin Hunter, Walgreens consultant and
Lieutenant Colonel Shoemaker of the US Army.

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It was more junior and mid-level employees, however, who most consistently asked questions
about Theranos's deception. 22-year old Erika Cheung not only raised questions (ultimately
ignored) inside Theranos but lodged a complaint with the Centre for Medicare and Medicaid
Services, the government agency responsible for regulating blood-testing labs. When The Wall
Street Journal reporter John Carreyrou began a two-year investigation into the company, one of
his primary sources was Tyler Schultz, grandson of board member George Schultz. Tyler had
joined Theranos after leaving college and, like Erika Cheung, had concerns about the practices
at Theranos. Tyler had tried on numerous occasions to discuss his worries with his grandfather,
who steadfastly supported Holmes.

In October 2015, the Journal published an article questioning the veracity of Theranos's lab
results and the legitimacy of its core product, the Edison. Carreyrou even revealed that
Theranos relied on third-party devices to administer its own tests. Theranos's pitch was a fraud.
Their machines either didn't work or produced incorrect results. It had never undergone any
independent, peer-reviewed testing. Some of the demonstrations were faked by having the
blood samples covertly tested on conventional machines.

Theranos went on the attack. They hired private investigators and influential lawyers to
discredit and investigate those who spoke out against them. The day the Journal article was
published Theranos held a company-wide meeting and Balwani lead a chorus of several
hundred Theranos employees chanting “F*** You Carreryou!” By 2017, Theranos had spent
nearly a billion dollars, a third on lawyers, settling lawsuits with investors and refunding every
patient who took one of its blood tests. The number of test results Theranos voided or
corrected in California and Arizona eventually reached nearly 1 million. Ten patients have filed
lawsuits alleging consumer fraud and medical battery. One patient who undertook Theranos
medical testing alleges that Theranos's blood tests failed to detect his heart disease, leading
him to suffer a preventable heart attack.

In March 2018, the Securities and Exchange Commission charged Theranos, Holmes, and
Balwani with conducting "an elaborate, years-long fraud." They have pleaded not guilty. They
were each released on $500,000 bail and ordered to surrender their passports.

Silicon Valley culture

Elizabeth Holmes always displayed the self-belief that is common within Silicon Valley culture
that prioritises growth. She epitomised the idea of "fake it until you make it" and went to
extreme lengths to hide the fakery. This bravado is not new. Thomas Edison, her device’s
namesake, was famous for faking demonstrations and giving journalists shares in his company
to get them onside. Today in the tech community ventures are regularly funded that make bold
claims about capacity or potential. Innovators who hope to disrupt industries regularly lay claim
to what they expect their technology will do in the future, not what it can do today. But
disappointing consumers as to the attributes of new software is not the same as rolling out non-
functional medical technology.

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Stanford researcher John Ioannidis highlighted that it was difficult to understand Theranos’s
culture from outside, also pointing out that the secretive approach it adopted was odd and
made it difficult to trust:

Stealth research creates total ambiguity about what evidence can be trusted
in a mix of possibly brilliant ideas, aggressive corporate announcements, and
mass media hype. The unquestionable success of computer science,
engineering, and social media technologies has created reasonable hope that
these technologies can also improve health in ways that the biomedical and
life sciences have failed to do until now. But then how can the validity of the
claims made be assessed, if the evidence is not within reach of other scientists
to evaluate and scrutinize?

In the end, Holmes saw herself as the victim. She blamed the journalist John Carreyrou and her
lawyers for giving her bad advice and not being able to contain the bad press. Holmes believed
she should have been able to convince The Wall Street Journal that Theranos was going to save
the world even though the technology didn't quite yet work. She just needed more time. As
Holmes told the Forbes 30 Under 30:

You'll get knocked down over and over and over again, and you get back up…
I've been knocked down a lot, and it became really clear that this was what I
wanted to do, and I would start this company over 10,000 times if I had to.

This case has been prepared by Dr. Kim Goodwin (Department of Management & Marketing,
University of Melbourne) based on published sources. This case study is for teaching purposes in
Organisational Behaviour (MGMT200001) only and must not be distributed without permission
of the author.

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Appendix One: Employee Reviews from Glassdoor.com

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Theranos Case

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Appendix Two: Theranos Timeline

2003 Elizabeth Holmes drops out of Stanford to found Theranos.

2004 Theranos raises $6.9 million (US).

2005 First prototype, Theranos 1.0, created. Company has over 24 employees.

2007 Company valuation hits $200 million. Company has over 70 employees

2013 Theranos announces itself to the public with website and advertising. Theranos
announces deal with Walgreens Pharmacies.

2014 Company valued in excess of $9 billion. “This CEO is out for blood” published in
Fortune Magazine and Elizabeth Holmes delivers her TED talk.

2015 Company has over 800 employees. Theranos is criticized by some on the medical
community.

2015 John Carreyrou publishes Wall Street Journal article on Theranos.

2015 U.S Food and Drug Administration publishes a report on Theranos claiming they
used “untested medical devices”.

2016 Theranos’s Newark lab found to be a threat to patient health by Centers for
Medicare and Medicaid Services (CMS).

2017 Theranos settles with one of its largest investors after being accused of securities
fraud.

2018 U.S. Securities and Exchange Commission (SEC) charges Holmes and former
Theranos president Ramesh “Sunny” Balwani with fraud.

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 Theranos Case
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