First blood: What ambitious businesses can learn from Theranos

July 8th, 2019 Posted by alastair, blog 0 comments on “First blood: What ambitious businesses can learn from Theranos”

written by alastair barlow [blog]

The much-hyped startup Theranos raised hundreds of millions in investment all based on a lie. Ultimately, the story is about how growth targets canmetastasise if not properly set and controlled. In this month’s AccountingWeb column, I dissect the case to extract a few key lessons for ambitious businesses.

Read: 3 minutes

Theranos and its founder Elizabeth Holmes had a bold and admirable vision: to automate and significantly reduce the cost of blood testing, making it available to the masses and provide more real-time monitoring of personal health for faster therapy.

There was one problem: it didn’t work as advertised.

Theranos’s ‘revolutionary’ technology was centred on a portable mini-lab named Edison (after America’s greatest inventor, Thomas Edison) with which they claimed they could perform over 200 tests with a tiny nanotainer of blood taken from just a finger-prick rather than through venepuncture (the traditional way of sticking a needle in and taking much larger blood samples).

The real test figure was around a dozen and Theranos relief heavily on other companies to supplement this figure.

At the heart of this fiction was Elizabeth Holmes, who founded the company at 19 after dropping out of Stanford in 2003. She had no medical training, no business experience and no engineering background. And yet, she managed to convince investors to part with over $900m to try to transform the $70bn blood testing industry.

But Holmes and Theranos’s story is more than just the fraud. In John Carreyrou’s excellent expose of Theranos, Bad Blood, the writer detailed a business rendered completely dysfunctional by a reckless, almost delusional pursuit of growth.

Holmes and her right-hand man (and lover!) Sunny Balwani presided over a ruthless culture of growth at all costs. Creating an actual functioning product and Theranos employees were secondary considerations.

Before diving into the story further, let’s consider some key facts to set the scene:

Theranos raised $900m investment.

  • At its peak in 2015, there were 800 staff in the business.
  • It had a valuation high of $10bn in 2015. Only three years later it was worthless!
  • An all-star advisory team included U.S. Secretary of State George P. Shultz, William Perry (former U.S. Secretary of Defense) and many other diplomatic and military persons.
  • Experienced investors such as the Walton family and Rupert Murdoch invested over $100m.
  • They claimed the company generated over $100m in 2014, when in reality it was just over $100k.
  • On 15 June 2018, Holmes and former COO Sunny Balwani, were indicted on multiple counts of wire fraud.

Ultimately, Holmes was fined $500,000 and barred from serving as an officer or director from a publicly traded company for 10 years. She was also required to return 18.9m shares and relinquish voting control. The company ceased trading and was unable to find a buyer and so was dissolved in September 2018.

There are so many lessons to learn and early signs of fraud to look out for from this incredible but disappointing story.

Read my key takeaways and lessons in the full article on AccountingWEB here.