This week, Elizabeth Holmes, the founder of Theranos was found guilty of 4 counts of fraud in a US court. And in today’s Finshots, we explain how a Silicon Valley-based startup that promised to revolutionise blood testing crashed and burned.

The Story

A needle, a tiny prick, and real-time bloodwork analysis. That’s what Theranos promised. The idea was to check for cancer, cholesterol, diabetes, and a host of other diseases in a matter of minutes using affordable methods. And on the back of this promise, Stanford University dropout Elizabeth Holmes built a company worth $9 billion over the last decade. She also became the youngest female self-made billionaire on paper while still in her 20s.

More importantly, her vision resonated with all the right people. Holmes claimed that this revolution could save lives! It “sounded” disruptive. And it sounded like money. The top two diagnostic labs in the US raked in upwards of $75 billion in revenues each year. So the market was huge. The only thing missing was execution. And to this end, Theranos partnered with pharmacy chain Walgreens to create “wellness” centres across thousands of stores in the US and change the industry forever. People could stroll in with their doctor’s note and insurance ID and get a cholesterol test done for less than $3. That’s compared to $50 for a typical lab test.

Amazing!

Investors like Tim Draper and Rupert Murdoch lapped the story up and soon, the company raised over $900 million. Theranos even got the big wigs on its board. We’re talking about people like Henry Kissinger — a former National Security Advisor and William Perry, a Stanford professor.

Everything was perfect. Except for one niggling detail. Theranos devices didn’t quite work and the house of cards began to collapse soon after.

In 2015, former employers blew the whistle on the company’s shady practice. Turns out that Theranos’ much-touted device called Edison wasn’t really that accurate. Whistleblowers even claimed that Theranos used devices from Siemens to conduct most of its tests and rarely used its own proprietary technology.

Sure, you could argue that founders often sell lofty promises they can’t keep in a bid to impress customers. You could contest that the fake it till you make it mantra runs deep in Silicon Valley. But if you make dubious claims about your product, show fake demos, mislead customers, all the while raising millions from unsuspecting investors, that’s tantamount to fraud.

Optimism be damned.

But the question is — Why didn’t smart investors, directors and other employees call this bluff earlier? What took them so long? Well, you could pin the blame on many things. Maybe it was Holmes’ ability to spin beautiful narratives. Maybe it was all the media glitz and glamour. Or maybe it was her deep voice. But perhaps the biggest reason is simply FOMO (fear of missing out).

In 2014, Dan Mosley, a lawyer and power broker among wealthy families, asked the entrepreneur Elizabeth Holmes for audited financial statements of Theranos, her blood-testing start-up. Theranos never produced any, but Mr Mosley invested $6 million in the company anyway — and wrote Ms Holmes a gushing thank-you email for the opportunity.

[…]

Ms Peterson [Lisa Peterson who handled investments for the DeVos family] testified that she was scared Ms Holmes would cut her firm out of the deal if they dug deeper into the details of Theranos’ business. “We were very careful not to circumvent things and upset Elizabeth,” she said. “If we did too much, we wouldn’t be invited back to invest.”

Investors were simply running after the next big thing and perhaps got too carried away with all the stuff they were hearing about Theranos and Miss Holmes. Unfortunately, as fate would have it they burnt their hands pretty bad and Theranos is now one of the most infamous poster child for startup greed and hubris.

Until then…

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PS: Holmes hasn’t been found guilty of defrauding the thousands of patients who took faulty Theranos’ results.

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