8 Tips Entrepreneurs Can Take Away From the Theranos Scam and Its Aftermath
January saw the release of not one but two documentaries about the infamous Fyre Festival. Netflix and Hulu’s dueling pieces shared the lurid tale of would-be music festival promoter Billy McFarland, who promised an over-the-top Caribbean luxury experience, revealed to be a complete fantasy once attendees actually showed up. McFarland is now serving a six-year prison sentence.
If the Fyre story feels familiar, there's good reason: More than a few observers have pointed out the parallels it has to the scandal involving Theranos, the health-tech company whose "break-through" blood-testing device proved to be a dud. No surprise, then, that yet another documentary about business fraud is coming out, this time from HBO. The premium cable network has announced the March 18 release of The Inventor: Out for Blood in Silicon Valley.
In all three documentaries, the founders are portrayed as young, pathological liars who took full advantage of the media.
Theranos was a medical tech startup founded in 2003 by Elizabeth Holmes, the charismatic young Stanford dropout and Steve Jobs devotee. Holmes’s pitch for Theranos was simple: Her machines would provide fast, affordable, and accurate blood testing using only one drop from a finger prick.
Theranos, Holmes claimed, could dramatically improve the healthcare system by reaching people who normally avoid medically necessary blood tests due to cost, inconvenience, wait time or blood and needle phobias. With new laws (like the one Holmes backed in Arizona), Theranos could even empower consumers to test themselves without needing a doctor’s go-ahead.
Holmes’s compelling narrative was eventually revealed to be false, involving a coverup and messy story of regulatory scrutiny, non-functioning equipment, manipulated test results and paranoid management.
In the wake of a 2015 series of scathing articles by Wall Street Journal writer John Carreyrou, broken partnerships with Walgreens and Safeway, regulatory crackdowns and a slew of lawsuits, Theranos has closed down, and Holmes (and her partner, Theranos president Ramesh Balwani) face criminal charges.
McFarland's and Holmes’s stories both point to the dark side of entrepreneurship that typically shows up right behind someone's belief that he or she can build something remarkable amid a context of self-delusion and fraud.
Even ethical and rational entrepreneurs may find it hard to not see a funhouse mirror version of themselves in Holmes and McFarland. Their failures have big, big lessons to teach entrepreneurs. Here are some of the biggest, from the Theranos scandal.
Stories are powerful.
Holmes might not have been great at medical engineering or even business management. But her talent as a storyteller was indisputable. Theranos got as far as it did -- accumulating a $9 billion valuation, fawning press coverage and powerful partnerships -- because Holmes controlled her story masterfully. The entrepreneurial power of narrative is a double-edged sword reflecting both good and evil.
Holmes used narrative to cover up a fraud; but legitimate entrepreneurs can use it to communicate their accomplishments and vision.
Funding creates pressure.
At the peak of its hype, Theranos brought in a stunning $633 million in a single round of funding, bringing her company to its eye-popping value. Theranos was an entrepreneur’s dream, but it also put Holmes into a tight spot due to her misleading pitches: In fact, she collected investors and partners, not mere onlookers, and the former asked for promised results.
Valuation and funding don’t always reflect a company’s actual accomplishments, and entrepreneurs need to describe and adhere to a realistic time line when they're courting funding.
Youth isn’t everything.
Theranos hyped Holmes’s youth, implying that it let her “think outside the box” more effectively, but the founder's age didn’t make up for her lack of practical medical-engineering experience or her possible lack of ethical boundaries.
Groundbreaking ideas can come from any age group, but successful entrepreneurs value the experience and hard-won wisdom of their older employees and colleagues.
Celebrity isn’t expertise.
Impressive figures populated the Theranos board, including Henry Kissinger and former Secretary of Defense James Mattis (now accused of trying to help Theranos work around regulators). Healthcare experts, however, were noticeably lacking.
Theranos didn’t have many supporters in the broader scientific community; she even went against the standard practice by forbidding peer-reviewed, independent studies of her technical staff's work. It’s unlikely Theranos would have fared better by befriending experts had she and her colleagues been more forthcoming (since their tech didn’t work in the first place). But legitimate entrepreneurs can and should acquire expert connections (not just celebrity endorsements).
Welcome employee feedback.
In his book Bad Blood, Carreyrou described a corporate culture that required “complete devotion and unmitigated loyalty.” Employees who objected to Theranos's practices were scolded or ignored, and many resigned after having their concerns written off by Holmes and Balwani.
Not every employee-employer relationship is destined to work out, but legitimate entrepreneurs still know that employee feedback and even employee pushback are necessary for business success. Open dialogue encourages everyone in a company to think critically and creatively; it recognizes new opportunities and anticipates obstacles.
“Move fast and break things” isn’t the only way to disrupt.
In retrospect, we can view Theranos as an indictment of startup culture, and one where misleading marketing and bungled tech didn’t just delay food deliveries but actually endangered lives. “Move fast and break things” isn’t great advice when the “things” broken are people.
Still, Forbes contributor David Shaywitz worried that people might take the wrong lesson from Theranos; he fretted that people might view any kind of healthcare “disruption” as inherently irresponsible. And that's worth thinking about, because the truth is, there are many ways to go about changing an industry. Disruption can be radical without being reckless.
Plan for reality, not fantasy.
Perhaps we’re so fascinated by McFarland and Holmes because they seemed to have no exit plan. Harold Hill, the fictional con-artist protagonist of The Music Man, grew accustomed to fleeing towns whose citizens had wised up, but McFarland and Holmes both clung to their narratives even after their impending doom became obvious.
Even in well-run entrepreneurial ventures, setbacks and outright failures are inescapable roadblocks along the way. Successful entrepreneurs plan for these realities rather than sticking their heads in the sand.
Consumers want products that matter.
Why did we all drink the Theranos Kool-Aid for so long? Fawning tech and business journalists share a hearty portion of the blame, but there’s also an irresistible social good to draw from the Theranos narrative. While Silicon Valley is awash in ventures that promise to improve laundry, restaurant reservations and plenty of life's other little annoyances, Holmes offered a product that could genuinely alter lives and advance medicine. That product was a lie, of course, but it still showed how much consumer interest exists in serious, ambitious ventures that tackle big problems.
The Theranos story was, and is, extreme and dramatic. It’s no wonder that a film adaptation of Carreyrou’s book is in the works, with Jennifer Lawrence attached to star as Holmes. But though Theranos presents a particularly striking case study of entrepreneurial failure, its story still has relevant lessons for entrepreneurs carrying out ethical, clear-headed ventures.