The Theranos Startup Story: From $9 Billion to $0 With Criminal Charges #scottsthoughts

Welcome to Success Story, the most useful podcast in the world. I'm your host, Scott D. Clary. The Success Story podcast is part of the HubSpot podcast network. The HubSpot podcast network is the audio destination for business professionals who seek the best education and inspiration on how to grow a business. HubSpot podcast network hosts act as on-demand mentors to entrepreneurs, startups and scale-ups through practical tips and inspirational stories. Listen, learn and grow with the HubSpot podcast network at HubSpot.com slash podcast network. Today, I am going to break down the story of Theranos. You've heard it in the news. You've heard about Elizabeth Holmes. You've heard about the incredible growth and all the scandal. Now you're going to hear it from me. We're going to start off with the origin story. We're going to speak about how they grew so quickly and then the rise and then the fall the deceit and everything that's still ongoing and all the things that are still unfolding even as this podcast episode airs. This is normally a business case study that leads into a growth story, but realistically this is a story of Theranos that went from $9 billion to a $0 valuation in criminal charges. From $9 billion to $0 with criminal charges. And if you don't know the story, I'm happy that I'm the first one bringing it to you, but there's a good chance that if you are involved in tech or you have been paying ten to the news and you've heard the name Elizabeth Holmes, you would have heard the Theranos story before because it's still ongoing. So it's not even done yet, but let's bring you up to speed. So where does Theranos start? Where does this story start? This idea, this concept, well, the dramatic improvements in medicine over the past hundred years or so have been some of the most defining factors in modern civilization. We used to be life threatening diseases are now mild annoyances that we only wait out because of modern medicine undiagnosable diseases back hundred of years ago are now identifiable because of modern techniques and testing. This is a story of Theranos, a company that claimed to be on the forefront on the bleeding edge of modern medicine. They claimed to be able to revolutionize how blood testing is done, but we will see how the company grew, how it ultimately crumbled, and how now it is in a massive amount of legal trouble. Well, most notably the founders and a massive amount of legal trouble because of some of the claims that they made. So how did Theranos begin? Well, imagine if you are taking a blood test, general diagnostic. The standard practice is to take multiple draws of blood to accomplish several tests. Theranos, however, offered an alternative to this. As a health tech company, Theranos claimed to be able to conduct a multitude of tests with only a few drops of blood. Only using a few drops of blood means a more efficient health care system, one that is cheaper and faster. This was all said to be possible through Theranos' proprietary technology. Through Theranos' invention, quote-unquote, air quotes invention, the Edison up to 200 tests can be performed using only a few drops of blood. A breakthrough like this had incredible implications for how health care is accomplished globally. So with such an impressive piece of technology under the hood, of course, they grew quickly. So within a relatively short period of time, Theranos blew up, expanded. With the company's claims, a lot of people had their eyes on the potential of Theranos. There were practical applications and financial opportunities that people wanted to achieve with Theranos. But how did this all start? Well, let's talk about the founder, Elizabeth Holmes. So back in 2003, Elizabeth Holmes was taking up a degree in chemical engineering at Stanford University. Eventually, in that same year, she dropped out of Stanford to pursue her idea of new ways of doing blood tests. Holmes was the founder of the Startup Real Time Cures. This startup eventually became Theranos as we know it today. While serving as CEO for Theranos, Holmes was well known for her charisma, image, and aura. She was an incredibly personable, likable person. Holmes proved to be crucial for how Theranos grew. She was the one that championed and evangelized the vision. She had the Steve Jobs-esque startup founder, Alure. It was through her commanding presence she took Theranos forward. It's how she evangelized a product, how she raised money, how she made people believe the claims. She was serving as both the face and the leader for Theranos. And because she was so confident in her vision and she had such an aura around her, she raised a lot of money from a lot of significant people. She knew that approaching the right people would lead to the right investors, the right money, and of course, ultimately the growth of her vision and her company. So Elizabeth Holmes approached different venture capitalists to fund her vision for Theranos. A key point here is that Holmes approached venture capitalists that were not well-versed in medical technology or health technology. Theranos got around $6 million in funding by late 2004. The promise of a revolutionary way of doing blood work enticed different entities to partner up with Theranos and Holmes. Besides the original venture capital funds which funded Theranos, others helped Theranos grew to a top valuation of $9 billion. Partners included Safeway and Walgreens, plus, of course, other funding firms, venture firms, angels, stakeholders. This was enormous. And she did this by bringing in dumb money and building in, quote unquote, stealth mode. Theranos was secretive, Holmes was secretive. Not only with the technology, but also how the company worked. Because it was known in the industry, they worked in what's called a stealth mode. This means that they did not generally publicize their findings of research or have many press releases associated. It was just this growing entity that couldn't stop, couldn't be slowed down. This enabled Theranos to acquire more and more partners to expand itself without explaining what they were actually working on. And because they were validated by some of these really impressive investors early on, even though they weren't health tech investors or medical tech investors, they were still impressive investors. This sort of got the ball rolling and it started to snowball to a to an extent by claiming Theranos could not say exactly how their blood testing works because it was a quote unquote trade secret. Partners got into agreements where they basically just took Theranos' and Elizabeth Holmes word at face value by claiming to have revolutionized how blood testing was done. Theranos brought something new to the table. Starting at a sin, Theranos would have made traditional blood testing completely obsolete. This was a big deal. This would have carved a new practice in the healthcare industry. Tests would not only be cheaper, but they would also be automatically processed and more accurate and portable. This attracted a lot of attention from media hype investors, business partners. But as Theranos grew rapidly, multiple people became skeptical about the company. For example, a Stanford professor publicly raised suspicions about Theranos' claim because there were no peer-reviewed articles about Theranos' technology. In health sciences, this was a highly unusual practice. However, a turning point for Theranos was when journalist John Carrue published his article about Theranos and Elizabeth Holmes. In this article, he published that Theranos was not using his technology for their demonstrations. Instead, normal blood testing technologies and techniques were used just under the guise of being something new. There was never any innovative technology that actually worked, and the supposed Edison was never even real. Though Theranos tried to defend itself, the damage was already done. Other people within the company spoke out on Theranos' false claims. The exposure of Theranos' lies about the technology severed ties with Walgreens in Safeway. Plus, Theranos received repercussions from the FDA, the SEC and multiple investor lawsuits. Eventually in 2018, they dissolved after years of legal trouble. From valuation reaching up to $9 billion, Theranos dropped to being worth basically nothing. In that same year, Elizabeth Holmes and her COO, Ramesh, Sunny, Balwani were charged by the US Attorney's Office for the Northern District of California. Several accusations and charges were made throughout the years. And most recently in February of 2021, Holmes was accused by federal investigators of destroying evidence during the last days of Theranos. So what can we learn from this story? The lies, the deceit, the rise, the fall, some of their progress, some of their momentum, but also the fact that it was built on a fake product. So Theranos did some things that we can learn from, also did a lot of things that we should avoid. So what should we pick up from this story? The first is that bringing something to the table is crucial. So Theranos provided something revolutionary in their industry. If they didn't try and push the bar, there would be no attracting any customers, partners, investors. You do have to show up and push the bar slightly, however, you kind of have to back it up with the real product. Secondly, how you present yourself is important. Elizabeth Holmes led Theranos as its face and CEO with a certain presence. Charisma, Image and Ora will help with how people approach and think of you, to the point where apparently she did it so well that she didn't even need to have a working product. So imagine how powerful her personality could be with a company that actually delivered. The third thing we should learn from the Theranos story is you should always choose carefully who you approach for your business. Elizabeth Holmes got millions in funding early on by choosing people who did not understand the health technology industry well. Now this is an interesting lesson because she chose people that allowed her to raise money easier. Can you raise money easier from people that don't understand your industry if you sell it potentially? But I'm going to argue that it's better to raise money from people that understand your industry intimately so that they can actually help you when shit hits the fan versus trying to raise dumb money. So learn that you can choose different kinds of people to raise money for your company if you're an entrepreneur, but I would strongly suggest you default the people that could be a little bit harder to raise money from, but they can provide more value. But the most important lesson out of all these lessons is to back up your claims that you make. You can make all the claims in the world and Theranos and Elizabeth Holmes continuously made false claims about a technology and what it could offer the world. Don't make claims that you can't follow up on. It's going to backfire in your face later on. The bottom line is that Theranos was a company that grew quickly because of the value its claims created. A new way of doing blood tests meant drastic change for the health care industry. However, false promises lies deceit like Theranos losing everything it had built up. While claiming something to differentiate your business from competitors is crucial, making claims you cannot follow up on will only harm your business in the long term. Theranos relied on false claims to create value once its lies were exposed. Everything was destroyed. How Theranos grew its business, how it lost everything is something that all businesses and companies should learn from as they try and build something that can grow incredibly quickly, but do it from a place of ethics.