Elizabeth Holmes dropped out of Stanford at age 19 to start a new career. She founded Theranos, which was a privately held health technology corporation initially touted as a breakthrough technology company in the blood-testing market.
The money and glory were huge. In a few short years, Ms. Holmes grew the company to a valuation of $9 billion. Ms. Holmes was touted as the next Steve Jobs or Bill Gates.
Theranos claimed its technology was revolutionary and that its tests required only about 1/100 to 1/1,000 of the amount of blood ordinarily needed for tests and cost far less than existing tests on the market. There were plans for Theranos wellness centers in Walgreens.
However, eventually, numerous shortcomings and inaccuracies in its technology led to charges by the U.S. Attorney for the Northern District of California on wire fraud and conspiracy charges against Ms. Holmes and former company president Ramesh “Sunny” Balwani. The trial is presently scheduled to begin in August 2020. Ms. Holmes may be faced with up to twenty years imprisonment.
So how did an American dream fall apart? It had major talent on its team; managers formerly with IBM and Panasonic; and stellar board members, including former secretary of state, George Shultz, Donald L. Lucas, who had helped take Oracle to the top, and Channing Robertson, the associate dean of Stanford’s School of Engineering.
By its third year in business, it had a valuation of $165,000,000. Pharmaceutical companies were eager to use the company’s blood-testing systems to monitor patients’ responses to new drugs. There was a definite need and the market for the product was huge.
The stakes were high and unfortunately, the company faked results in order to bring investors on board and get contracts. Theranos 1.0, the blood testing system, didn’t always work, so some of the technicians involved, with Ms. Holmes blessing, faked results to wow potential investors and get the big contracts.
Theranos was a house of cards that eventually fell. In 2015, medical research professors John Ioannidis and Eleftherios Diamandis, and investigative reporter John Carreyrou of The Wall Street Journal, started questioning the validity of Theranos’ technology.
Theranos was bombarded on all sides with legal and commercial challenges from medical authorities, investors, the U.S. Securities and Exchange Commission (SEC), Centers for Medicare and Medicaid Services (CMS), state attorneys general, former business partners, patients, and others. In September 2018, the company ceased operations.
Theranos and Elizabeth Holmes, once the darlings of Silicon Valley, had a reported a $9 billion valuation and employed hundreds of workers who bought into its mission to create a cheaper and more efficient alternative to traditional blood testing methods.
However, in the company itself, an atmosphere of fear, lies and retribution prevailed. There were constant firings, threats toward employees who said anything about the company, and verbal harassment. People were afraid and guilt-ridden as many knew the claims Theranos made were invalid.
And eventually, two former employees blew the whistle. Erika Cheung tipped off the Centers for Medicare and Medicaid Services and Tyler Shultz, an ex-research engineer and the grandson of Theranos board member George Shultz, were instrumental in helping Wall Street Journal investigative reporter John Carreyrou expose the company.
Good news from a nightmare
What became a nightmare for many at the core of the company finally imploded. However, as a result of the implosion, there is also good news. Ms. Cheung and Tyler Schulz have started an organization called Ethics in Entrepreneurship. Its purpose, to help other entrepreneurs from falling to the same fate that befell Theranos employees.
Ethics in Entrepreneurship is presently seeking non-profit status in the U.S. and Hong Kong. The founders want to facilitate conversation about ethical practices as a norm in the startup world. Its plans involve connecting early-stage entrepreneurs to ethicists, seasoned entrepreneurs, and other relevant industry experts to guide on how to make ethical decisions when building a company. It also plans to make available tools and frameworks for ethical decisions that benefit businesses, employees and consumers.
As Ms. Cheung told CNN Business, “There were so many instances, even for someone like Elizabeth Holmes, to turn back and say, ‘I’m taking things a little too far here,’ … She had many opportunities to do so… I do think entrepreneurship can empower people and empower society, but we also have to not let things escalate to this degree.”
Ms. Cheung and Mr. Shultz shared some of the lessons they learned from working in a culture of fear and secrecy at the Manova Global Summit on the Future of Health in Minneapolis. Tyler Shultz recalled, “you weren’t supposed to talk to other people at Theranos about what you were doing.”
They both agree that there should be a way within the investment landscape to prevent an unethical situation from following the Theranos path and going too far.
For example, if someone was personally profiteering or committing egregious actions, there could be a system in place for investors to pull back money. “There needs to be ways to keep people accountable, to nudge them to good behavior,” Ms. Cheung said.
You need the right people asking the right questions…
~Erika Cheung
Mr. Shultz advocates creating a culture of healthy disagreement. One of his primary missions is to establish a culture in which people can disagree — even with the boss.
Ms. Cheung advocates having an ethics hotline. “But the biggest one is, do you have a way for employees to report problems? Are the right mechanisms in place to compile evidence, and is there investigation and follow up?”
While vanity boards are popular in Silicon Valley, but especially in a highly regulated space like health care, Ms. Cheung says, “You need the right people asking the right questions… Be proactive: Think about the impacts a startup will have on customers, investors, employees and society. It’s better to think about these ethical issues early in the process, rather than reactively.”
The two are impassioned about the impact the new organization can have. “We’re all here because we want to make an impact and we want to do good and we have good intentions but making sure you have that strong vision and figuring out how to maintain that…” is challenging, Ms. Cheung said. “You have to figure out how to stick to those morals and standards and values despite the chaos.”
The Theranos story reads like a lurid paperback trash novel. Unfortunately, it’s a true story, complete with suicide, breakdowns, tough attorney threats toward employees and a disintegration in ethics and morals.
We need more young people standing up to these abuses of power and greed. I applaud Ms. Cheung and Mr. Shultz for taking strong steps to help young entrepreneurs step out on the right foot.
The startup world will be watching them.
Richard Bowen is widely known as the Citigroup whistleblower. As Business Chief Underwriter for Citigroup during the housing bubble financial crisis meltdown, he repeatedly warned Citi executive management and the board about fraudulent behavior within the organization. The company certified poor mortgages as quality mortgages and sold them to Fannie Mae, Freddie Mac and other investors.
