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CEO blog: Theranos – Falling for the “snake oil salesman”

The ongoing fallout of Theranos is a timely reminder that in an age of fake news, clickbait and startup hype, responsibility for these incidents does not lie with the ambitious entrepreneur alone. alva’s CEO reviews this incident and argues that it is also the responsibility of the media and investors to ask the difficult questions and conduct adequate due diligence. Fear of missing out on the next big thing, exasperated further by media hype, is a significant motivator, but robust, reliable and transparent data, should be the cornerstone of such significant decisions.

 

Last week Theranos, the blood analysis start-up, and Elizabeth Holmes, its chief executive and founder were charged with “massive fraud” by the US Securities and Exchange Commission.

As widely reported in last week’s media, the SEC said that Holmes and the former company’s president Ramesh Balwani had raised more than $700 million through “an elaborate, years-long fraud in which they exaggerated or made false statements about the company’s technology, business and financial performance”.

Holmes, who did not admit or deny wrongdoing, will pay a $500,000 fine and will be barred from serving as an officer or director at any public company for 10 years. She is also returning 18.9 million shares.

This will most certainly be the epilogue of the Holmes and Theranos saga, which saw the fall from grace for the much-hyped blood-testing company once valued at $9bn.

The question for many is how did Holmes manage to pull it off for so long – she started Theranos in 2003 – and why was she so successful at creating the hype around Theranos?

In the rush to be part of the next big thing, culpability for shortcuts, mistruths and fraud does not lie solely with the ambitious entrepreneur. In this CEO blog, I also review the responsibilities the enthralled media and gullible investors have in challenging enticing but unfounded claims.

Snake oil and the fear of missing out on the next big Unicorn

A resemblance to the “snake oil salesman” is alarmingly accurate. Somebody that sells a product that claims to have some miraculous powers, which is usually accompanied by a tremendous amount of hype. Furthermore, in an attempt to help push their product, they will usually utilise planted accomplices who will claim that the product actually works.

When analysing the fate of Theranos, we should take a close look at Holmes’ self-created cult and image, the amplification from Silicon Valley’s media and the poor level of diligence carried out by Theranos’s gullible investors.

It was the image that Elizabeth Holmes projected of herself, not her company, that made Theranos so successful. The cult that she created around her personality – and the comparisons she evoked to the late Steve Jobs- are what gave Theranos its power in the public eye.

When Elizabeth Holmes emerged on the tech scene in 2003, she had already created a story that was too good to resist – a brainy 19-year old who drops out of Stanford and used her parents’ college fund to create a company destined to disrupt the healthcare sector.

She was plastered on the covers of magazines hailed as “The Next Steve Jobs”, featured on TV shows, and offered keynote speaker slots at TED Talks. The unquestionable adoration for Holmes reflected her unique demeanour, but it also reflected the Valley’s obsession for the next Unicorn and in a way its own narcissism. Here was a female innovator who was able to personify the Valley’s vision of itself – someone with a zealous drive to change the world.

There is no question that the hype created by the business press helped the company raise $700 million in funding. Many didn’t want to miss out. Investors included VC powerhouse Draper Fisher Jurvetson, healthcare players Walgreens and BlueCross Shield Venture Partners, Rupert Murdoch and Tako Ventures, founded by Oracle’s Larry Ellison, all of which threw money at the venture.

When Holmes raised the funding, she did it on the condition that she would not divulge to investors how her technology actually worked and that she would have final say and control over every aspect of the company. She used secrecy as an asset, implying largely the belief that the fact that Theranos was hiding something meant that it had something good to hide and that breakthroughs will be worth the wait.

The Wall Street Journal expose leads to the downfall of Theranos and Holmes

However from October 2015, John Carreyrou initiated the unravelling of Theranos with the publication of a series of articles in the Wall Street Journal. Carreyrou’s work alleged that the company had failed to produce a working product, and had been secretly running its tests using competitor’s equipment.

In the current age of media anarchy, where good quality investigative journalism has become a thing of the past, those devastating articles told the truth about what was happening. In these times of fake news and click-bait, it’s comforting to see that truth does exists, that it exists outside our opinions, and that no amount of spin, hype, and sheer bull keeps it from being the truth.

Carreyrou’s articles triggered the inevitable implosion of Theranos. Walgreens severed its relationship with Holmes, shuttering all of its Wellness Centers. The FDA banned the company from using its Edison device. The Centers for Medicare and Medicaid Services banned Holmes from owning or running a medical laboratory for two years. Then came the civil and criminal investigations by the U.S. Attorney’s Office for the Northern District of California and two class-action fraud lawsuits. The final straw came last week with the SEC charges.

Biotech start-ups are still a vital source of innovation

So what does it mean for the Biotech startup community? There is likely to be more investor scrutiny and less hype and that’s a good thing. The healthcare industry needs the breakthrough innovations that come out from the research and development by the dozens of biotechnology startups. These startups are usually formed by seasoned scientists whose life-long careers, energy and resources are dedicated to solve extremely serious diseases.

These companies include Catabasis Pharmaceuticals, which is focused on amyotrophic lateral sclerosis and other terrible neurological conditions, while Quanterix and others are developing blood-based diagnostic tests to help doctors offer more targeted cancer treatments. The pipelines and progress of these companies are visible, and their clinical trial results knowable, since they conform to FDA protocols as well as Securities and Exchange Commission investor regulations, in the case of publicly held companies.

However, from the long list of these potentially ground-breaking biotech startups, none of their founders are featured on the covers of Forbes magazine, receiving the celebrity status that Holmes gained.

Furthermore, innovators that want to change the world must remember that trust and longevity comes from being trustworthy, and trustworthiness comes from doing what you say you are doing.  That is adhering to a solid code of ethics, honesty and transparency based on giving accurate information of what the technology is actually able to do today. In particular, when the results of the medical tests could potentially put the public at risk.

The role of the media and investors in the rise and fall of Theranos

The business media has a lot to answer for in the Theranos saga – specifically to provide accurate information about the companies it covers. In reality the majority of journalists didn’t ask the questions that should have been asked, or when they did ask the questions, they accepted the “secrecy” narrative created by Theranos to hide its actual status. The media is itself partly responsible for once again joining and feeding the hype.

Finally, while sophisticated venture-capital firms that invest in life sciences passed on Theranos’s pitches, is it really fair to say that they have no responsibility in the fate of Theranos?

Something is fundamentally wrong with an investment model in which tech companies can raise hundreds of millions of dollars out of thin air, and lose it just as quickly. Investors in Silicon Valley are hedging their bets and hoping to win big. But it takes time to build a sustainably profitable business, and Valley investors want rapid, stunning growth.

In the search for the next “unicorn”—a privately-held $1 billion startup—investors prioritize exponential returns over lasting results. As the Theranos story shows, the pressure to grow quickly leads companies to take shortcuts and engage in sloppy practices—and sometimes outright fraud.

The investment community can help avoiding these implosions from happening again by adopting a different perspective and support capitalism for the long term. As Capitalism’s founding philosopher, Adam Smith, wrote in 1759 in The Theory of Moral Sentiments “All the members of human society stand in need of each other’s assistance, and are likewise exposed to mutual injuries” … “The wise man and virtuous man is at all times willing that his own private interest should be sacrificed to the public interest”.

Holmes’s fierce vision hoped to change healthcare and improve the lives of millions of people (for the public interest). In the end her overly-aggressive ambition and poor judgement destroyed the company and her reputation.

Alberto Lopez is the Founder and CEO of alva, as well as a Visiting Professor at Cass Business School.

Read Alberto’s previous blog on why companies should not waste a tax reform here.

You can follow Alberto on Twitter or connect on LinkedIn.

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