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The rise and fall of Elizabeth Holmes and Theranos

Assif Shameen
Assif Shameen6/18/2018 11:33 AM GMT+08  • 11 min read
The rise and fall of Elizabeth Holmes and Theranos
SINGAPORE (June 18): “Fake it until you make it” is a mantra in the tech start-up world almost as old as California’s Silicon Valley itself. This region outside San Francisco is home to the world’s largest tech industry, whose iconic companies suc
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SINGAPORE (June 18): “Fake it until you make it” is a mantra in the tech start-up world almost as old as California’s Silicon Valley itself. This region outside San Francisco is home to the world’s largest tech industry, whose iconic companies such as Apple, Facebook and Google’s owner Alphabet are now in a race to cross the trillion-US dollar valuation. In their formative years, many of today’s tech behemoths had no real business model, but with lots of venture capital money and hard work, they eventually morphed into some of the most profitable enterprises on earth.

Over the past decade, one ambitious young woman, Elizabeth Holmes, who faked blood tests at her start-up to produce supposedly revolutionary technology, just took it too far. This week, Theranos, as her fledgling medical device company that pretended to be a tech start-up in the Silicon Valley is known, starts its final round of layoffs, which is expected to lead to a formal liquidation of the firm by August.

In mid-March, the US Securities and Exchange Commission (SEC) charged Theranos and its high-profile CEO, Holmes, with defrauding investors. The SEC says Holmes raised more than US$700 million from investors through “fraudulent claims”. As part of a settlement with the SEC, Holmes has agreed to pay a US$500,000 ($667,552) penalty, give up majority voting control of the company and will be barred from serving as an officer at a public company for a decade. The US Attorney’s Office in San Francisco is looking to file criminal charges against her later this year.

Poster child

For years, Holmes was a poster child for successful entrepreneurial young women in technology. Inc. magazine called her “the next Steve Jobs”. Fortune’s cover story blurb gushed: “This CEO is out for blood. Elizabeth Holmes and her secretive company Theranos aim to revolutionize health care.” Forbes had her on the cover of its iconic 400 Richest Americans issue even though she barely made it as a “freshman” in her first-ever appearance on the coveted list. Time named her as one of the world’s 100 most influential people.

It was not just the magazines that were captivated by the charismatic young blonde. Her deep baritone voice was also omnipresent on TV news channels. And when she was not blowing her own trumpet, there was always some tech commentator or venture capitalist raving about Theranos’ “groundbreaking” blood tests.

Former US President Bill Clinton himself interviewed her at the eponymous Clinton Global Initiative annual meeting. She convinced celebrity veterans such as former secretaries of state Henry Kissinger and George Shultz, current defence secretary Jim “Mad Dog” Mattis, former defence secretary William Perry, former US Senator Sam Nunn, former US Senate majority leader Dr Bill Frist, former US naval operations chief Admiral Gary Roughead, former Wells Fargo CEO Richard Kovacevich and Riley Bechtel, chairman of global infrastructure behemoth Bechtel Group. Another board member and investor was David Boies, the star attorney who is reportedly acting as a defence lawyer for disgraced former Malaysian prime minister Najib Razak. Her board was so star-studded that potential investors doing due diligence would just look at the list and wonder how ­anything could possibly go wrong. A board packed with some of America’s best-known policymakers, generals and CEOs was more likely seen as a paragon of good governance rather than one of the biggest start-up frauds in history, as it turned out.

Theranos raised over US$900 million and at its height in 2014 was valued at over US$9.6 billion. Holmes, who had a stake of more than 50%, was at the time worth nearly US$5 billion on paper. She was hailed as a pioneering young female founder who broke the glass ceiling and showed the way to millions of young women in engineering and technology, a field seen as the sole domain of men.

Holmes and her India-born boyfriend Ramesh “Sunny” Balwani, 52, scion of a Sindhi merchant family, who is 19 years older than her, perpetuated the fraud for years, though it was the younger woman, not the older man, who called most of the shots. Balwani, who made US$40 million from selling his own start-up at the height of the tech bubble in early 2000, was 36 when he met Holmes at a summer Mandarin language programme in Beijing when she was 17 — a year before her high school graduation. Two years later, when she began working on her start-up, she connected with Balwani again and the duo soon became a couple. Balwani loaned her some money to get Theranos going and later invested in the firm. In 2009, he was named president and chief operating officer of Theranos.

Holmes had a vision for a medical device, essentially an armband with microneedles, that would draw just a few drops of blood to diagnose whatever ails a person and then inject the medicine that was needed. It was a revolutionary vision peddled by a 19-year-old. Blood testing has long been the holy grail of modern medical science. Seventy per cent of all decisions made by doctors are based on blood test results. What Holmes was proposing was that all tests, however sophisticated, could be done with just a few drops of blood, replacing the age-old practice of drawing several vials of blood with hypodermic needles.

The blood testing story for Holmes actually began in Singapore. At the end of her freshman year in 2002, she interned at the Genome Institute Lab in Singapore and worked on tests for severe acute respiratory syndrome through the collection of blood samples.

In late 2003, Holmes, then just 19 and in her second year of a chemical engineering undergraduate course in Stanford University, filed her first patent for a wearable drug-delivery patch. By early 2004, she had dropped out of college, and used the remainder of her scholarship money to fund a healthcare start-up.

Groundbreaking idea

Holmes’ idea of an armband with microneedles was groundbreaking and futuristic; it is just that in reality, it would take years to get it to work. Yet, she needed to keep raising money and her investors’ expectations to boost Theranos’ valuation. So, she quickly pivoted to a new device inspired by diabetes monitors that test blood sugar levels, and came up with something that monitored just about anything that you could test blood for. Essentially, she was proposing a full range of blood tests from a mere drop or two of blood from a single finger prick.

But, even that idea did not work, so Holmes pivoted to a device she dubbed “Edison” — named after America’s best-known inventor. Basically, she bought a glue-dispensing robot off-the-shelf that was reprogrammed so that the robotic arm mimicked a lab scientist testing blood. The problem was that device could perform only 12 tests from a menu of 250 tests. The remaining 238 tests were run on commercial blood analysers made by competitor companies. What made things worse was Theranos modified the tests by diluting the blood sample to create more volume. That caused even more problems since it clearly put patients’ lives in harm’s way. Moreover, Theranos regularly rigged the tests to produce better results for its Edison devices.

There is a backstory to Holmes’ obsession to create something that would replace hypodermic needles. Her mother was terrified of needles, as was Holmes herself when she was a child. As a nine-year-old, when girls in her school were asked what they might do when they grew up, Holmes reportedly told her classmates that she wanted to become a billionaire busineseswoman.

Over the years, Theranos conducted eight million blood tests, of which one million have already been voided. The US Centers for Medicare and Medicaid Services found that Theranos was running tests so haphazardly that some patients could be at risk of internal bleeding or stroke. The last iteration of Holmes’ device was dubbed Mini Lab — a hacked Siemens machine that was supposed to test blood but that she could never get working.

Her powerful board of directors never realised anything was amiss. The veterans, who were all given millions of dollars of stock options for sitting on the board, just wanted relevance in retirement. In 2014, Holmes blatantly asserted that Theranos was developing a US$100 million project with the Pentagon, the headquarters of the US Defense Department. Theranos never had a contract with Pentagon.

Holmes was obsessed with Apple co-founder Steve Jobs, adopting his signature style of wearing a black turtleneck, and often used Jobs’ quotes that she had read somewhere. She liked referring to Theranos’ blood-testing systems as “the iPod of healthcare” when it was anything but. Indeed, Theranos’ obsession with fast-paced success and being “the next Apple” meant billions of dollars the firm raised were spent not on R&D but on image-building and public relations as well as legal fees and internal security.

Early investors

Many billionaires and mega-millionaires, mostly old white men, were charmed by Holmes. Among the early investors were Oracle’s founder Larry Ellison and prominent venture capitalist Tim Draper. Another early investor was billionaire media tycoon Rupert Murdoch, who invested US$5.8 million in February 2005 and more later. At its height, Murdoch’s total investment in Theranos was worth over US$125 million. He was not alone staring at big losses. Mexican billionaire Carlos Slim, the world’s fourth-richest person, lost US$30 million; the Walton family, heirs of Walmart founder Sam Walton, lost US$150 million; the family of billionaire education secretary Betsy DeVos lost US$100 million.

Theranos was covered by a fawning tech media that specialises in the IT, software and internet sectors. Most reporters who cover tech do not understand the intricacies of medicine. One journalist who was not taken in by Holmes’ little white lies was John Carreyrou, an investigative reporter at The Wall Street Journal, which is owned by Murdoch’s News Corp. Carreyrou, who covered healthcare for years, was sceptical that a 19-year-old could be behind one of the biggest breakthroughs in medicine. He kept digging and uncovering her lies and eventually helped bring down the house of cards that Holmes had meticulously built.

At the height of WSJ’s reporting on the scam, Holmes visited Murdoch in his office and urged him to shut down the newspaper’s investigations. To his credit, Murdoch refused, telling her that he normally left editorial matters to the paper’s editors, who were best positioned to decide what was fit to print. The media baron put the newspaper’s credibility above his own financial interest. Within months, Murdoch’s entire US$125 million investment was wiped out.

So, what went wrong at Theranos? Frankly, it did not have the technology or expertise that it claimed. ­Holmes hoodwinked savvy investors, some of the US’ best-known public figures and the media into believing something that nobody should have believed in the first place. Think about it: What kind of world do we live in where a 19-year-old girl with less than 16 months of college education, with little or no knowledge of medicine or the sciences, can come up with a groundbreaking idea on blood testing and be believed by the world’s most admired public servants and handed over a billion dollars by sophisticated billionaire investors?

It is unclear whether Holmes will eventually face criminal charges, but she is set to be a household name. Jennifer Lawrence will play the Theranos boss in an upcoming Hollywood ­biopic directed by Adam McKay, who was also the director of The Big Short, based on the US subprime housing meltdown that triggered the 2008 global financial crisis.

At 34, charismatic and obviously talented, Holmes is still young, and Americans believe in second chances and giving everyone a shot at redemption. Indeed, in recent weeks, as Theranos lays off the last of its remaining 20 or so workers and lights are switched off for the last time at its headquarters in Palo Alto, ­Holmes, still seen in her signature black turtleneck dress, has been visiting wealthy investors. Whether she gets funding for her next start-up or ultimately serves time in prison before getting a chance to pitch ideas again at investors looking for the next big hit, the Theranos drama and JLaw’s movie potrayal might someday be remembered as just an opening act for Holmes.

Assif Shameen is a technology writer based in North America

This article appeared in Issue 835 (June 18) of The Edge Singapore, which is available at newsstands now.

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