6 Lessons Entrepreneurs Can Learn From the Fall of Theranos
Now we know Theranos didn't have brilliant leadership or breakthrough technology, just an abundance of credulous investors.
Once the darling of the tech community, Elizabeth Holmes is now an example of what can go wrong when entrepreneurs get in over their head. Holmes co-founded Theranos with Ramesh Balwani. The company hoped to develop technology that could quickly and inexpensively analyze blood samples.
The goal was to create a type of computer that was essentially a miniature blood lab, capable of determining if patients had diseases like diabetes or cancer. Theranos partnered with Walgreens and the Department of Defense to bring the technology to the masses.
As it turns out, however, the company was operating on a foundation of lies and half-truths that have caused the one-time Silicon Valley darling to become a cautionary tale. On March 14, the Security and Exchange Commission brought charges against Holmes and Balwani, alleging that they intentionally misled investors and business partners.
Now, rather than serve as a source of undying inspiration, Holmes provides entrepreneurs with 6 cautionary lessons to learn from when building a business.
1. Talented advisors are useless if you aren’t honest.
Theranos assembled an all-star board of directors, featuring some of the most respected leaders from all walks of life. Directors included George Shultz (former Secretary of State), James Mattis (the current Secretary of Defense) and Dick Kovacevich (former CEO of Wells Fargo).
However, despite surrounding herself with outstanding mentors, Holmes was not able to benefit from their advice. As has been alleged in a number of reports, Holmes kept employees and advisors in the dark about the challenges her organization was facing.
Since she wasn’t honest with her board, she wasn’t able to benefit from their experience. Though discussing mistakes and failures may be uncomfortable for entrepreneurs driven to succeed, business leaders are obligated to seek advice when things go wrong. Doing so is in the best interest of the organization, its employees and its investors.
Had Holmes chosen to tap into the advice of her all-star board, she might have been able to avert disaster.
2. Transparency is key to strong business partnerships.
The Security and Exchange Commission alleges that Holmes misled business partners like the drugstore giant Walgreens. Holmes claimed that the Theranos minilab was capable of testing for roughly 200 diseases. The SEC’s report shows that, in reality, the device could test for roughly 20 diseases.
Perhaps this is why Walgreens chose to sue Theranos for $140 million in 2016, claiming breach of contract. Though the parties settled out of court, it seems clear that Holmes misled her business partners into believing that her company was capable of providing services it was years away from being able to provide. Legally, this sort of misrepresentation is known as fraud.
The only way to enter a business partnership is with full transparency. Anything short of this and the relationship is doomed to failure the moment the truth comes out. After all, business relationships are like any other: they thrive on a foundation of truth.
3. Raising capital isn’t a cure-all.
In 2010, Theranos raised $45 million in investment capital. Over the next 8 years, the company would raise a total of $400 million. Many entrepreneurs make the mistake of assuming that raising capital will solve an organization’s most meaningful challenges.
The thinking goes like this: If you aren’t finding product–market fit, surely more money will help you hire the engineers and product managers to fix it. If you aren’t hitting your sales targets, more money will allow you to hire an experienced VP of Sales while retaining existing salespeople. If you aren’t generating press attention, raising a large round of funding will show the media that your organization is worth covering.
In truth, however, raising capital from investors can exacerbate existing problems, especially if they are related to company culture or flaws in leadership. Theranos should serve as an example for other entrepreneurs that capital is not a cure-all. Before establishing a relationship with investors, business leaders should first ensure that the fundamentals of the business are strong.
4. The public values leaders who proactively take responsibility.
Elizabeth Holmes shirked her responsibilities as the leader of an organization that was supposedly focused on helping people to inexpensively live healthier lives. She appears to have intentionally created a highly secretive organization that operated in the shadows of the tech world for roughly 10 years. Along the way, she manipulated investors, business partners and journalists while knowingly offering a product that was unreliable.
This is no recipe to earning the trust of the general public. As a rule, people prefer leaders who admit to making mistakes and who take responsibility for their actions when mistakes occur.
In contrast to Elizabeth Holmes is Mark Zuckerberg, who helms Facebook. After realizing that his organization made a serious mistake in failing to properly react to a user data breach, he took full responsibility for his organization’s actions, taking out full-page newspaper ads apologizing to Facebook users.
5. Fail fast or you’ll fail big.
As mentioned earlier, Holmes chose to operate in “stealth mode” for nearly 10 years of the company’s history. Stealth mode is startup speak for operating under the radar. As a result of opting to operate secretly and withhold important information from employees and advisors, Holmes may have missed her opportunity to fail fast. As a result, she and her company failed big.
Had Theranos operated with more transparency, it’s conceivable that the organization would have been able to solve some of the problems that caused the company to under-deliver later on.
Rather than operating in secrecy until the organization is 100 percent successful, entrepreneurs should adopt the lean-startup methodology known as “build, measure, learn.” This framework encourages founders to create an organization that builds products quickly, measures the outcome of the product in question and learns from the results.
Applying this framework requires operating out in the open, where employees can gather customer feedback and where business leaders can inform employees and advisors about company performance in an honest manner.
6. What you say to the media can have legal consequences.
The first point of the complaint filed against Elizabeth Holmes by the SEC mentions that Holmes intentionally misled members of the media in order to disingenuously represent Theranos technology.
While hyping your business is certainly a generally accepted part of media relations, doing so in order to intentionally misrepresent your organization can be ethically dubious. In the case of Theranos, it appears to have been illegal.
Holmes is accused of using the media to mislead Theranos investors, partners and customers. Entrepreneurs must be mindful of how they use the media. Promoting your business is one thing; telling outright lies in order to garner press attention or to save face is another.
Entrepreneurs struggling to build a successful business could easily find themselves in situations similar to those Elizabeth Holmes faced when building Theranos. Readers must remember that one’s integrity is most tested during times of struggle.
When times get tough, rather than opt for deception, manipulation and puffery, entrepreneurs should opt for transparency. Reaching out to advisors, partners and employees and asking for advice and help is often the best way to overcome professional hardship.
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