This is the unique story of how a startup turned out to be a complete scam.
This week began the trial of Elizabeth Holmes, who at age 19 had already founded her own company, promising to revolutionize medicine. For ten years she managed to deceive everyone – business partners, world-renowned investors, government officials, and doctors – until one article in The Wall Street Journal revealed that behind her high-profile claims there was nothing but a box of pipettes and pretty stories.
On August 31, 2021, the U.S. District Court for the Northern District of California began hearing perhaps the most lid-breaking case in the IT sector in a decade. Elizabeth Holmes, the founder of the startup Theranos, was on the bench. She is charged with fraud and conspiracy to defraud, defrauding investors, doctors, and customers.
In total, she faces more than 10 charges, which could result in up to 20 years in prison for the former IT star.
The rise of Elizabeth Holmes
Elizabeth Holmes was a living illustration of the American dream. She was from a successful family, born in Washington, D.C., graduated with honors from high school, and went to Stanford University. Already at 19, she is filing a patent for her first invention, a medical patch that would deliver drugs to the human body instead of injections.
According to her statement, she was always afraid of injections. That’s why she wanted to make sure that people didn’t have to have them anymore. I don’t know how true the story was, but the patch was her first patent.
Stanford’s professors considered the venture to be either not very successful or downright anti-scientific. So Holmes, after only a year and a half at Stanford, decided not to waste any more time on those incapable of being part of a breakthrough future. In 2003, she takes money from her parents’ trust fund, which was intended for her education, and goes to California, the home of America’s technological giants.
There she launches her own startup, the company Theranos. It was, according to Holmes’ idea, to give the world a miracle device that would practically rid mankind of the terrible ordeal of injections.
One I can say for sure –
she was not mistaken about the field of activity. In 2015, the U.S. market for laboratory blood tests was estimated at $75 billion. The startup, which promised to squeeze 240 indicators out of a single drop of blood, was noticed immediately.
Theranos’s business quickly took off. Many venture funds and private investors became interested in the promising development, the details of which were kept in the strictest secrecy. Among the latter were Rupert Murdoch, Bill Clinton, and the founders of Walmart, the Walton family.
However, this was only a small part of the success. Holmes was able to assemble a stellar board of directors, which included two former U.S. Secretaries of State, Henry Kissinger, and George Schultz. And she was able to negotiate a partnership agreement with Walgreens, a U.S. chain of cosmetic and drug stores, which has agreed to offer Theranos service in 40 of its outlets in Arizona and California. The Safeway supermarket chain also signed a contract with Theranos.
As a result, by 2014 the company had raised more than $700 million in investments. Its estimated value reached an incredible $9 billion. Elizabeth Holmes became not only a star of the U.S. IT sector but also the youngest female billionaire in history to make her own fortune. At the time it was estimated by Forbes at $4.5 billion.
However, one article in The Wall Street Journal has changed everything.
How John Carreyrou article for WSJ revealed the Theranos fraud
Unlike investors, businessmen, government officials, and customers who believed in Theranos, The Wall Street Journal journalist John Carreyrou was always more skeptical about the Holmes project. The result of years of journalistic investigation was an article published on October 15, 2015. It instantly put an end to the company and reclassified Holmes from an American business star to a suspected fraudster. He found out that the Theranos miracle device is nothing more than a beautiful box stuffed with a lot of pipettes.
However, they still should not have been enough to fulfill the promised number of tests. And, as Carreyrou was told by the startup’s employees, there weren’t enough. Edison was performing only 15 types of tests instead of the promised 240.
In addition, the journalist found that the management of Theranos forced employees to sign non-disclosure agreements about the product.
Then it turned out that the company, in addition to the false data on the capabilities of its device greatly overstated the financial performance.
What was next in Theranos case?
The Wall Street Journal’s publication led to lawsuits by Walgreens and the U.S. Securities and Exchange Commission (SEC). Holmes settled both cases out of court: the retailer Theranos paid about $30 million and the regulator $500,000 for defrauding investors.
But she did not escape criminal prosecution. In the summer of 2018, the U.S. Attorney’s Office for the Northern District of California filed fraud charges against Holmes, as well as Ramesh Balwani, her ex-husband-in-law and the CEO of Theranos, after their own investigation. They face similar charges, and each faces up to two decades in prison. And both deny guilt.
The trial of Balwani, nicknamed Sunny, isn’t scheduled until January 2022. In this sense, Holmes has a certain advantage, because she will be the first to tell her side of the story.
Featured image credit: Vanity Fair