What Can be Learned From One of the Most Infamous Startup Failures: Theranos

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In 2015, after enjoying a few years as Silicon Valley’s most in-demand startup, Theranos, the blood-testing company named for the portmanteau of “therapeutic” and “diagnostic,” was the subject of a groundbreaking article in the Wall Street Journal. Whereas previous profiles had focused on Theranos’ promise to revolutionize healthcare, as well as the company’s eccentric founder, Elizabeth Holmes, the Journal uncovered an unsightly truth in their reporting – Theranos had never developed technology close to the level of sophistication as they claimed. Within the next two years, the company completely imploded.

Theranos’ mission originated in Holmes’ famed phobia of needles. In her early years as a Stanford undergraduate, Holmes dreamed of a device that could rapidly process any medical test from only a drop of blood. Through a committed act of sleight-of-hand, Holmes was able to obscure from both investors and the public the challenges that the development team faced. By the time Theranos had rolled out its services in 2013, it was using skeletal prototypes and hacked machines from other companies.

The Theranos story is ultimately one of fraud, deception, and overshot ambition, However, it contains many lessons applicable to any biotech startup. Thus, we consider here a couple of takeaways.

1) Know Your Product
Holmes dreamed of delivering a consumer product ready for use in a patient’s home, but run-ins with the FDA quickly dashed her hopes. Eventually, it was decided that blood samples would be delivered to the Theranos lab for testing, but Holmes remained adamant that the machine still be designed like a consumer product. This created frustrations for the development team, as they were given strict size and aesthetic guidelines, impeding their technical work. This highlights the importance of zeroing in on a precise idea of what your startup will market and for whom. Contradictory or overlapping ideas complicate the development process and frustrate employees who lose sight of how their task fits into a broader effort. Furthermore, conflicting ideas of a product can lead to employees stepping on each other’s toes and undoing each other’s work.

2) Pick the Right Leaders
In 2008, only a few years into Theranos’ lifespan, mounting concerns from employees forced board members to consider removing Holmes as CEO to find a more experienced replacement. This was quickly rebutted by Holmes, who was able to convince the board to let her stay in her role. If Theranos found a new CEO at this point, they might have eventually unveiled a less ambitious, but more stable product. However, Holmes continued to lead the company in her own vision, holding impossible expectations and stamping out dissent along the way. Vision is a crucial attribute of any company leader. But, it must be balanced by practicality and flexibility – two traits Holmes lacked. Choosing the right leadership for your startup dictates entirely how the product you build will eventually be carried to market.

3) Timing is Everything
While it is possible for startups to form belatedly, more often, companies establish themselves without fully understanding their path ahead. This is particularly true in the field of medical technology, where incorporation is often necessary to raise funds for patents and approvals. Forming a company before successfully developing your product can lead to disaster. If you hope to market a new drug, you could spend years searching for a lead compound, and that compound might still fail. If Holmes had tried prototyping her vision even loosely before founding Theranos, she would have quickly realized the depth and complexity of the problem she hoped to tackle. Finding a humbler replacement could have also taken years, but once discovered, the incorporation process would have been much smoother. Take the time to develop a product you feel confident about so that once you pitch to investors, you know exactly what you have to offer. You’ll save everyone time, money, and pride.

4) Exaggeration is Dangerous
While embellishing investor pitches is standard in the world of startups, medical technologies complicate the ethics of exaggeration. A software company can overstate its capabilities because failure to deliver only limits the functionality of an app, at most frustrating some user. Exaggerating the functions of a medical product, however, can let down actual patients or worse, deceive them into non-necessary procedures. Organizations like the FDA provide a check on what a startup can claim to do, but Theranos proves that products sometimes slip through the cracks. Overstating your company’s success is tempting in investor meetings, but be sure not to violate the trust of your customers.

5) Communication is Key
One way that Holmes kept Theranos’ struggles under wraps was by personally mediating all company information. This meant that development teams had no point of access to each other, obviously prolonging most of their work. The team concocting blood tests had no clue what the physical constraints of the machine would be, the team responsible for sales often had an outdated idea of what the machine they were marketing could do, and so on. While Theranos provides an extreme example, it serves as a reminder that open communication is central to productive collaboration and ultimately leads to a better product. 

6) Patent with Care
At one point, an ex-friend of the Holmes family retaliated against Elizabeth by patenting a particular component of the Theranos device that she hadn’t thought needed protection. Whereas patenting a new drug largely involves patenting a novel compound, biotechnology startups looking to build medical devices have more ground to cover. A novel, sophisticated medical device will often feature proprietary components that need patent protection, components that don’t require patent coverage, and components that combine or improve upon previously existing technologies. If you’re opposed to licensing another inventor’s patents for any part of your device, make sure to search through the prior art before committing to designs.

7) Trust Criticism
If there was one take away from the Theranos story, it would be this. Holmes’ insistence on building out her personal vision jeopardized the well-being of the company consistently, and her inability to reckon with the truth – that the Theranos device was an impossibility – ultimately led to her downfall. It wasn’t as though her employees were simply left in the dark, tackling small tasks without knowledge of Theranos’ greater problems. Consistently, when faced with criticisms or even simple concerns from researchers, engineers, lab technicians, lawyers, investors, and others, Holmes deflected and doubled down on her own commitments. When honest, reasoned criticism comes your way, it is always in your best interest to listen.

Reference: Carreyrou, John. Bad Blood: Secrets and Lies in a Silicon Valley Startup. Knopf, 2018.