The Fall of Theranos and Lessons for Startups

The Downfall of Theranos and Lessons for Startups

Bullied employees, false advertising and ignoring warnings from experts are just some of the things that led to the company’s failure.

Lawyers defending the founder and former CEO of blood-testing company Theranos, Elizabeth Holmes, want you to know that she was just a bright-eyed, bushy-tailed young girl who tried and failed. She was trying to change the world—one drop of blood at a time. 

Being afraid of needles, Holmes devised a plan that would eliminate their need altogether: a device that would detect cancer, high cholesterol and much more with just one drop of blood acquired through a finger pinprick. Investors thought this was exciting, and so, they poured in millions of dollars to help Holmes see her idea through. However, things unraveled quickly and unfavorably for the CEO once worth US$9 billion. A Wall Street Journal article exposed that Theranos’ technology did not work. Soon, the company was taken to trial, where Holmes was found guilty on four counts of criminal fraud against investors. 

Failing is not a crime; however, bullying employees, lying to the world and defrauding investors for your personal gain is. 

Here are five lessons that startups can learn from Theranos’ mistakes:

1. Don’t hide the flaws in your product; work to improve them

For long, Holmes refused to disclose how the technology behind Theranos works. Though she marketed it as the future of science, no one knew (or questioned) how legitimate it was. Inspired by her role model Steve Jobs, she dubbed the technology a “trade secret”, something that she couldn’t share with anyone. After a point, in the name of “trade secrets”, she hid the company’s use of third-party, traditional devices, thus further duping patients and investors. That caught up to her.

No, you don’t have to share every detail about your startup with the world. But if you use such jargon to keep dubious products safe, know that it won’t work for long. 

2. Know your product inside-out

What piqued the interest of the Wall Street Journal journalist was a quote from Holmes’ 2014 New Yorker profile. She said, “A chemistry is performed so that a chemical reaction occurs and generates a signal from the chemical interaction with the sample, which is translated into a result, which is then reviewed by certified laboratory personnel.” This vague and confusing statement set off a series of articles that went on to expose Theranos. 

Your lack of knowledge about your own product will not only reflect badly on you as a founder, but it will also sow the seeds of doubt among your audience. 

3. Don’t rush with your product

Holmes could have waited, tried different techniques or modified her offering to ensure that it could work. Instead, she chose to run with what she had—which, according to various reports, was nothing. In fact, she started pitching her idea to top-notch investors without any real idea as to how the product would work. Her aim was just to get funding and spread awareness. 

Launching a startup in itself is no easy feat and requires a generous investment of time, money and energy. All things considered, there’s no point in compromising all that for two minutes of fame. 

4. Listen to feedback

If experts are warning you that your product doesn’t work, listen. The then-Chief Scientist, Ian Gibbons, told Holmes that the tests weren’t ready for the public. He pointed out inaccuracies, as did other scientists. His caveats were ignored. An engineer who worked on the Theranos devices, David Philippides, told the Wall Street Journal that the company didn’t care for the science or research behind such a product. He noted, “The time was not taken to develop anything properly. 

This is science. You need time.” So, when you decide to create a product and test the prototypes, give due attention to the feedback you receive—from experts and from your very own employees.

5.Don’t resort to false advertising

Elizabeth Holmes knew that her product didn’t work. She tried it herself, after all. However, that didn’t stop her from selling it to the world. In fact, she also used logos of pharmaceutical companies, such as Pfizer, claiming that they supported Theranos. However, it was later revealed that these companies had nothing to do with Holmes, and that their logos were being used without authorization. To try and gain investors’ trust, she used them without permission. 

You can lie and say that your product works and top companies support you. You might even get away with it initially. However, remember that 29 witnesses took the stand to testify against this faulty product, including people who tried it. And the companies whose logos were unfairly used spoke up, too. So, sooner or later, acts like these will hurt your reputation. 

In the end, the reason behind Theranos’ downfall was not simply that the product didn’t work. It was the route Elizabeth Holmes and her team took to make people falsely believe that it did. The problem lies in the marketing, the making and the manipulation that followed. Today, Theranos has become a cautionary tale in Silicon Valley, teaching startups what not to do when trying to break into the business world. 

Header Image by Flickr

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