Oct 01, 2021

The Amazing Tale of Theranos: What it Means for Founders, CEOs, and Investors

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The Amazing Tale of Theranos: What it Means for Founders, CEOs, and Investors

Theranos, a spectacular American business crash-and-burn, is the start-up that keeps on giving – in the form of lessons for founders, CEOs, and investors. Once a technology and media darling embraced by investors, Theranos’ inevitable demise came when it failed for 15 years to produce promised results. What’s more, its downfall came with a huge price tag, costing investors more than $900 million.

If you’ve read Bad Blood, the 2018 book by Wall Street Journal reporter John Carreyrou, you’re likely astonished by two facets when it comes to Theranos. On the one hand, there’s the audacity and powers of persuasion (or lies) by Theranos, rewarded by the blind faith (greed) of investors, on the other.

To catch you up, Theranos was founded in 2003 by then 19-year-old charismatic and persuasive Stanford dropout, Elizabeth Holmes. Holmes had an enthralling vision – to blanket the world with a supposedly astounding technology invented by Theranos which she called “the Edison.”

The Edison was a small portable machine touted by Holmes as a breakthrough health technology she claimed could perform more than 200 blood tests very rapidly using only a few drops of blood. According to Holmes, cost and misery for patients would be alleviated, and the productivity of healthcare workers everywhere would skyrocket.

Based on her claims about Edison, Holmes was able to raise more than $900 million from investors in her quest to transform the blood-testing industry. At its 2013/2014 peak, Theranos was valued – on paper anyway – at $10 billion. As reported by Forbes magazine in 2015, Holmes herself was supposedly worth a cool $4.5 billion.

However, despite its idealistic vision, Theranos had a fatal flaw – its lauded technology was never fully developed, and it never actually worked. Many product demonstrations were allegedly faked.

Theranos ceased operations in 2018. Holmes and her COO – who was also secretly her boyfriend – were charged with criminal fraud. Holmes is currently on trial. She now has a net worth of nothing, although she resides on the grounds of a $135 million Silicon Valley estate with her new hotel-heir husband. The trial start date was also extended to August 31, 2021, as the original start date coincided with the birth of Holmes’ first child.

The Theranos story provides dramatic illustrations of 4 critical lessons for entrepreneurs, CEOs, and investors.

The Right People are Essential to a Business 

Holmes herself possessed no business or manufacturing experience, and she had no formal medical or scientific education or experience. She should’ve surrounded Theranos with a management team and board members with strengths and expertise in these areas.

Instead, she filled her board with more famous names than a White House cocktail party – high-profile politicians, media moguls and other personalities with no actual backgrounds in healthcare or technology.

As a founder and CEO, seek people who know more than you do, challenge you, disagree with you occasionally, and are experts in various disciplines. When filling out your management team and board, add professionals with experience relevant to your line of business and those with unrelated but essential skill sets.

Expect your team to challenge your thinking, ask hard questions of you, and constantly set a higher standard. While high-profile names can attract attention, your company will benefit from an inner circle of experts possessing proven industry backgrounds and sophisticated financial experience. Always rely on these types of first-class professionals once you’ve found them.

Investors need to thoroughly evaluate the people side of any target company, searching for the right personalities and skill sets. Are the backgrounds of the senior management team and the board members relevant to their roles? Do they have successful track records? Who is there, and who is missing?

Culture Counts 

Theranos was a toxic mix of fear, mistrust, and locked rooms. Holmes’ COO and romantic partner was described as a domineering tyrant and even a “psychopath.” Holmes and her COO ruled with an iron fist, and there was a shocking lack of corporate governance.

Departments were siloed and communication between them emphatically discouraged. Whistleblowers were fired and later threatened by the company’s lawyers. The culture of secrecy enabled Holmes to perpetuate ‘her’ narrative since few people at Theranos were ever shown the whole picture.

As a founder or CEO, stay in tune with your company’s culture. Openly share information about products, services, business lines and strategies across the company. This will ensure that all teams are helping move the business in the same direction and prevent the type of secrecy that was a hallmark of Theranos’ culture.

Dissent needs to be allowed, even encouraged. Transparency is always paramount. And, while proper legal advice is critical in today’s business world, don’t over-lawyer. Theranos spent ridiculously excessive amounts of time and money trying to intimidate instead of focusing on what mattered – developing a reliable product and building a sustainable company.

Investors should interview partners, advisors, and employees to explore the culture. Is there a legitimate corporate governance structure to help prevent fraud or unauthorized decisions? Employees will rarely be universally happy with their employer, but their feedback should generally be positive. This type of employee review, an example Carreyou found on Glassdoor during his research of Theranos, is a major red flag:

“How to make money at Theranos:

  1. Lie to venture capitalists
  2. Lie to doctors, patients, FDA, CDC, government. While also committing highly unethical and immoral (and possibly illegal) acts.”
Don’t Disregard Due Diligence 

Too many Theranos investors failed to conduct meaningful due diligence, instead preferring to piggyback on the abysmal diligence efforts of others with the mentality of: “Investor A is a successful person/entity/investor and if they’re in, I’m in.” Theranos didn’t disclose its financials and allegedly lied to regulators. Product demonstrations in some cases were supposedly faked using their competitors’ equipment!

Touted “partners” of Theranos, when later interviewed by journalists, asserted they never had any involvement with the company. Numerous outside medical experts claimed there were many fundamental flaws with the Edison that even the most basic industry review would have uncovered from the beginning.

As founder or CEO, expect potential investors to conduct in-depth due diligence of your company when evaluating a possible investment. They’ll require you to populate a data room and to disclose all your contracts, financial statements, business plans, regulatory filings, and on and on. It took an incredible amount of time and investment before the true story of Theranos was uncovered … but it was.

Investors need to understand the importance of due diligence and spend the necessary resources to delve into the inner workings of a target company. Do you fully understand the company’s business model and products? If not, your ability to recognize mistakes and lies is compromised.

More established companies should provide audited – or at a minimum for smaller companies, externally reviewed – financial statements from a reputable accounting firm. In many cases, it’s prudent for an unbiased third party to conduct a quality of earnings analysis. Investors should insist on complete and open product demos, access to reliable financial information, and proof of regulatory filings.

Besides reviewing the materials in the data room provided by the target company, investors should interview customers, employees, other investors, vendors, business partners, industry experts and competitors. They need to look for third-party validations of products, performance, and achievements. Are there red flags?

With few exceptions, piggyback due diligence is not a winning strategy.

Don’t Lie to Others … or Yourself 

Holmes’ legal defense team is claiming Theranos merely failed, like countless other companies, and failure is not a crime. Her defense team has also implied that while Holmes possessed typical Silicon Valley startup moxy and hubris – she didn’t commit fraud.

But did Holmes and Theranos cross that eventual line in the sand where hubris in fact becomes fraud? Overall public sentiment on Theranos currently sways much more toward “yes.” In a few months, we’ll learn whether the Holmes jury shares the same sentiment.

As a founder or CEO, you must be ruthlessly honest with your management team, employees, investors and, most importantly, yourself. Be optimistic, but don’t over-promise. Have confidence your idea will be developed and evolve over time, but don’t oversell it as perfected before it really is. Know that investors will examine what you claim to have achieved, even while they evaluate what you say you’ll do next.

Investors need to reassure themselves through rigid financial analysis, industry validation and proven regulatory approvals that a target company’s claims are supported. Even if desired results aren’t yet 100%, investors should expect progress towards stated goals.

Investing based on fear of missing out is never a winning strategy.


It’s easy for founders, CEOs, and investors to become carried away by the momentum of an exciting vision. But narrative is never a guarantee of success, and substance is always far more important than style. There are reasons for the typical investment process, with steps including pre-investment planning, term sheets, and deep-dive due diligence.

And the reason Theranos happened on such a high profile and massive scale is because these fundamental pre-investment steps were skipped! While Holmes’ actions were by any stretch over the top, the abject failure of supposedly sophisticated investors to insist on basic, check-the-box diligence validation, contributed equally to their own financial misfortunes.

Founders, CEOs and investors must always be willing to put in the hard work necessary for any proposed investment without taking shortcuts.

About Linden Law Partners 

Linden Law Partners is a boutique transactional law firm founded by professionals with decades of experience. We’ve advised companies, entrepreneurs, and investors in hundreds of early-stage and venture capital financings, and have been lead counsel for M&A transactions ranging from hundreds of thousands of dollars to $700 million. Contact us to discuss how we can help.

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