Being the true story of how wannabe tech-guru Elizabeth Holmes and her company Theranos took investors for a ten billion dollar ride. First published in Esquire Middle East, November, 2018
In the early years of the millennium, in an anonymous building on the unfashionable side of Palo Alto, California, a strange, secret ritual regularly took place. Small groups of businessmen, investors, and venture capitalists – the sacred money-bearers of the roaring tech industry – would be ushered past security guards and multiple locked doors into a small laboratory. Here Shaunak Roy, co-founder of the security-obsessed company – which was named Theranos after ‘therapy’ and ‘diagnosis’ – would prick his finger and squeeze out a tiny amount of blood. The droplet would be deposited into a specially designed holder which was inserted into a mysterious square box that sat on one of the small lab’s benches. After a satisfying series of electronic beeps and chimes, the soundtrack to the digital revolution that was in the process of upending industries from media to retail, a lengthy readout would be delivered showing the results of a comprehensive series of blood tests.
The investors would invariably depart impressed, many with looser chequebooks than when they went in. They had just witnessed one of Silicon Valley’s most secretive companies’ technology in action. Theranos, the brainchild of a 19-year-old college dropout Elizabeth Holmes, promised to revolutionise a key area of healthcare. And to make everybody very rich in the process.
The first modern blood test was devised in 1901 when Austrian scientist Karl Landsteiner identified the major blood groups and thus paved the way for safe blood transfusion. After Landsteiner, the study of blood, haematology, and the devising of new tests to be performed on it, flourished. Today blood screening is used to detect everything from heart disease to cancer. It identifies incipient diabetes and predicts strokes. Mass blood screenings provide invaluable data about whole populations’ well-being, and in turn form the basis of entire governments’ health policies. Seventy per cent of medical decisions involve a blood test. They are at the centre of modern diagnostic practice.
But the process of testing someone’s blood has remained virtually unchanged since the beginning of the last century. As anyone who has visited a doctor will know, the experience is uncomfortable, inconvenient and for some terrifying. Each test or set of tests needs its own, relatively large, sample. The needles can be intimidating and invasive while for the elderly or seriously ill the simple act of finding a viable vein becomes increasingly difficult and stressful. Veins collapse, infections can set in. And those with critical illnesses often need blood tests daily, or even more often, leading to otherwise unnecessary hospitalisations.
Theranos promised an end to all this. Blood tests would be as simple as pricking a finger and inserting a cartridge into a machine the size of a desktop computer. Dozens, even hundreds, of separate tests could be run on this single, tiny, sample, and results available in minutes rather than days. Patients could use machines installed at home, with the results beamed to their doctor for a diagnosis. Large-scale drug tests could be conducted and monitored from test subjects’ bedrooms. On battlefields and in disaster zones injuries could be diagnosed and treatment started in minutes instead of hours or days. And for the hordes of worried well regular blood tests could be conducted, for a small fee, in supermarkets, drugstores and shopping malls.
‘One tiny drop changes everything’ ran Theranos’s marketing line, accompanied by a picture of one of the company’s ‘nanocontainers’. It had been provided by leading advertising firm TBWA/Chiat/Day – entirely uncoincidentally the same company that had delivered the slogan ‘Think different’ for Steve Jobs nearly 20 years before. Theranos, after all, was going to be the Apple of health tech. It would disrupt the industry, change the world, save lives. It would make its inventors and investors unimaginably rich.
And it was all a lie.
In 2003 Elizabeth Holmes, the charming, persuasive, mercurial founder of Theranos announced to her parents that she was dropping out of Stanford University, the prestigious feeder school for Silicon Valley, in order to found a tech startup. She had completed only two semesters, but it was perhaps to be expected from the driven, single-minded 19-year-old who had announced that she wanted to be a billionaire when she was just nine.
Her first idea had been a patch that would both diagnose and then treat medical conditions, but when that proved to be a non-starter instead of scaling back to a more technologically unambitious concept she doubled down, proposing a device that would use the technology of microfluidics to generate dozens of individual blood tests from a single droplet of blood. Holmes had little actual experience in microfluidics, and her sole medical experience had been in Singapore during her brief time as a student processing nasal swabs for suspected SARS patients. She was phobic of needles though, a cute factlet she would weave into Theranos’s origins story as often as possible. And with the lab-diagnostics industry worth $73 billion in the U.S. alone, with nearly 10 billion tests performed annually, the industry was one ripe for lucrative disruption.
Despite her inexperience Holmes’s real weapon was her determination and her almost supernaturally persuasive personality. She idolised Steve Jobs, even dressing like him in a black polo-neck sweater. She swigged vegan protein drinks, slept four hours a night and internalised the lessons she thought his career taught: failure was not an option, any technological barrier could be overcome, secrecy was vital, loyalty the greatest of all virtues.
By 2004 Holmes, using her family’s extensive business connections, had raised seed funding of $6 million. The first machine, designed by Shaunak Roy, was the Theranos 1.0. It was intended to realise Homes’s wholly unrealistic vision of a cartridge-based system that would force highly diluted samples of blood through a series of microchambers and deliver a multitude of accurate test results. But it turned out to be hopelessly unreliable. When the machine was demonstrated to potential investors, though the sample was indeed forced through the cartridge, the results presented to the impressed onlooker were previous data that had nothing to do with the blood they’d just seen being loaded into the device.
Not to be deterred, and with the company already making waves in the burgeoning startup culture of Silicon Valley, Holmes ordered a second machine to be designed: the Edison. On the outside this new device was a looker: it was housed in a sleek black case with a smart diagonal silver decal, the result of her hiring Ana Arriola as Theranos’ Chief Design Architect, who she had recruited from her beloved Apple, and it boasted a touchscreen with a modishly minimalist interface.
Inside things were a great deal messier. At Edison’s heart was a modified off-the-shelf industrial glue gun: a robot arm that essentially imitated the actions of a lab technician, diluting samples and moving pipettes around to drop them in their respective testing bays. It was a big leap downwards from the elegant cartridges and reader that she had envisaged. But even this ugly compromise was riven with flaws. The central problem that neither machine could solve was that the samples, the pinpricks of blood which were the company’s raison d’etre, were just too small to provide consistent results. The machine was highly sensitive to heat fluctuations, the internal pipettes often became misaligned or broke, centrifuges occasionally exploded, and even getting the micro samples to the machine was problematic, with the blood often clotting inside the specially designed nanocontainers and thus being rendered useless.
To make matters worse no one had considered the legal ramifications of placing these machines in patients’ homes, or in public clinics. In order to be used outside a lab they would need to be certified. Given they were unreliable enough to make that an impossibility Holmes altered her business model. Now the machines would not sit in patients’ homes but would be housed at Theranos, with the pinprick blood samples couriered to the lab there for testing.
None of this stymied Holmes’s unstoppable capital-raising programme. During its short life Theranos would raise upwards of $700 million from individuals, venture capitalists and companies, all of whom were completely unaware that the technology that they were pouring their money into was, in the best interpretation of the evidence, highly unreliable, and in the worst virtually non-existent. In 2007 Theranos raised a further $43 million, its valuation soaring to $197 million. In 2010 it inked a $140 million deal with American drugstore chain Walgreens, and shortly afterwards another with supermarket behemoth Safeway, looking for a way to defend against internet shopping, who planned to place ‘Wellness Clinics’ in thousands of its stores, and spent upwards of $350 million on installing the luxury, Theranos-branded, health spas in thousands of its stores.
In 2014 Theranos finally exited stealth mode and went public, unveiling a new Chiat/Day-designed website. “Goodbye big bad needle” read one of the headlines, a nod to Holmes's fear of the devices. By now tests were arriving daily from the wellness centres that Walgreens had installed in over 40 stores. The lab where the testing took place, nicknamed ‘Normandy’ was behind a locked door. There, unbeknownst to any of the investors, tests on nanocontainers of blood FedExed in from stores were conducted on a mixture of unreliable Edison machines and conventional blood testing equipment bought from companies like Siemens, which themselves struggled to generate accurate results from the highly diluted blood samples.
Many of the technicians and scientists were dubious or outright alarmed about the reliability of the test results. But Holmes’s technique for dealing with internal criticism was simple and brutal. She fired anyone who raised questions either about the technology, or about the honesty of the company’s claims for it, binding them with draconian non-disclosure agreements. When questions were raised outside the company she deployed her undeniable charm, bluster together with blanket legal threats, to silence critics. What had originally been legitimate attention to security devised to protect Theranos’s novel and valuable intellectual property was now a ruthless system for suppressing the ugly truth that it didn’t actually work.
But none of this was visible to the outside world, where Theranos was burnishing its reputation as one of Silicon Valley’s most exciting startups and Elizabeth Holmes as a visionary who was going to do to healthcare what her hero Steve Jobs had done for the personal computer. “This CEO is Out For Blood” blared Fortune Magazine in a gushing profile in 2014. The next year Vanity Fair named her as one of their ‘five visionary tech entrepreneurs who are changing the world’. “Holmes may be doing more than running one of the world’s most successful startups – she may be starting a movement to change the health care paradigm as we know it,” the magazine enthused.
Holmes strategically deployed her charm to recruit a board of luminaries from business, politics and the military to give the company the sheen of probity and respectability. Former Secretary of State George Shultz, former Iraq Marine Corps General and current Secretary of State James Mattis (who Holmes had persuaded to test Theranos’s use in military deployments) and Henry Kissinger were, by now, supportive board members. All the while investment poured in. By July of 2015, after major health insurance company Capital BlueCross declared Theranos would be its preferred lab partner, Holmes’s startup was valued at $10 billion. Even in Silicon Valley, it was an astonishing rise for a company that only a decade ago hadn’t existed.
In the midst of the furore, no-one seemed to do much in the way of due diligence on the company that they were pouring money into. Alarms were raised but dismissed. Walgreens had hired a consultant called Kevin Hunter to vet Theranos’s technology. He had been unimpressed by what he saw at the company’s HQ. They had refused to show him the lab itself, or one of the fabled machines in action. Elizabeth Holmes seemed to lack much specific knowledge of the actual detail of blood testing and when he had asked for the results of blood draws taken from Walgreens’ executives he was stonewalled. His concerns were ignored by a company determined to push on, afraid that one of America’s largest health retailers could find itself fatally behind the curve if it failed to invest.
When James Mattis’s own nephew, who had begun work at Theranos, resigned, appalled by the company’s attitude to licensing and safety, Mattis believed Holmes over his own family. All seemed bewitched by the Silicon Valley myth of the lone, visionary founder fighting against naysayers and sceptics, changing the world. Making money.
But, as in many tales of blood, retribution was around the corner. And it came in the unassuming form of a determined investigative journalist from The Wall Street Journal called John Carreyrou.
Cracks had begun to appear in Theranos’s facade in 2014 when a generally admiring article in the New Yorker appeared which contained some bizarrely unhelpful quotes from Holmes about how her machine actually worked. “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,” she had said. This is, even on the kindest interpretation, and to the most scientifically ignorant reader, utter gibberish. And it caught the eye of Carreyrou, a two-time Pulitzer-winning journalist. After months of careful research, and in the face of an increasingly hostile Holmes, Carreyrou's story appeared in the October 15th edition of the paper, 2015, under the headline ‘Hot Startup Theranos Has Struggled With Its Blood-Test Technology’. It was a bombshell piece, charting the company’s lies and exaggerations about its technology. (Carreyrou’s subsequent book, Bad Blood, has been optioned for a movie set to star Jennifer Lawrence as Holmes and to be directed by The Big Short’s Adam McKay.)
Lawsuits flooded in, and the deals with Walgreens and Safeway collapsed. In 2018 Holmes and others were indicted on nine counts of wire fraud. They had been involved, said the government, in a “multi-million dollar scheme to defraud investors [and] to defraud doctors and patients.”
But while the question of Holmes's guilt will be decided by a court in the coming months, what the courts won’t be able to answer is how we got here? How were so many people, savvy investors, experienced venture capitalists, taken in by what was essentially a box with wires sticking out and a fancy touch-screen.?
In 1841 a Scottish journalist called Charles Mackay published a volume of essays entitled Extraordinary Popular Delusions And The Madness Of Crowds. A catalogue of crazes, obsessions and human folly it charted delusions such as The South Sea Bubble, Dutch Tulipomania and witch hunts. “The follies of mankind are not unique to the modern world,” he wrote, nearly two centuries ago. “Men go mad in herds, while they recover their senses slowly, and one by one.”
Mackay would have instantly recognised the unicorn frenzy in the early aughts as a promising chapter for his book. The key to the Theranos story is the culture in which it flourished. For an industry nominally based on science, tech entrepreneurs, and the venture capitalists who back them, are bewitched by myths, and charged with Fomo, fear of missing out, of being that putz who didn’t take fifty per cent of Apple or Facebook or Uber when it was offered at a dollar a share. Coupled with the cheap money that sloshed through Silicon Valley after the financial crisis, it was a recipe for frenzy and irrationality. It birthed a culture in which optimism slipped into fraud, and the mythologising of unique cases – Apple and Amazon – took on a life of its own. The very characteristics that in a saner time would act as red flags – it’s a crazy idea, the technology isn’t proven, the CEO isn’t old enough to buy beer – instead were born as medals of startup honour. “That’s what they said about Amazon” is the unspoken retort.
Whether the Theranos scandal will change any of this is debatable, perhaps doubtful. Myths are powerful things, they appeal to our imaginations and our passions rather than our reason and intellect. They stoke our desires rather than inviting our scepticism.
And, after all, Silicon Valley is a place where unicorns really do exist.
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