Fake It Till You Fail: Elizabeth Holmes and the Theranos Story

When Darden School of Business professor Les Alexander teaches his newly published business case on Theranos — the infamous medical device company led by charismatic founder Elizabeth Holmes — he begins with a simple but revealing question: “How many people are older than Holmes was when she started out?” In his MBA classes, every hand shoots up.

Holmes was just 19 when she founded Theranos, driven by an ambitious idea to revolutionize blood testing using a device that could run 200 tests from a single finger prick sample. “Here is an entrepreneur who was very young at the time, who had a very large idea to change the world,” Alexander notes. “She went into this with strong conviction, but I don’t think she got the best advice and mentorship from her partner, her board members, or others who had the experience she lacked.”

The case about the rise and fall of Holmes’ company, “Theranos: Fake It till You Make It?”, is about more than just an entrepreneur in over her head, an overly trusting board, or venture capital and wealthy angel investors who got caught up in Silicon Valley hype, says Alexander, the John Glynn Endowed Professor and Professor of Practice in Business Administration.  “It’s full of teachable moments about ethics and governance, management and leadership.”

A transformative idea — if it had worked

Holmes founded Theranos in 2003 while still a student at Stanford University, captivating mentors and investors with a transformative vision — quick, painless and affordable blood testing that would enable detection of a range of physical ailments, potentially upending the entire healthcare industry. Early backers such as Tim Draper at Draper, Fisher, Jurvetson (DFJ) saw enough promise to have DFJ  invest $500,000 in 2004; over the next decade, venture capital firms and wealthy angel investors including Sam Walton, Betsy DeVos, Rupert Murdoch and Robert Kraft contributed up to $900 million in funding.

Along the way, Holmes cultivated celebrity status, donning black turtlenecks in homage to her hero, Apple’s Steve Jobs, and speaking in a husky, authoritative voice, as she graced the covers of Fortune, Vanity Fair, Glamour, and Inc. She was also able to attract high-profile names to her board, including former Secretaries of State George Shultz and Henry Kissinger, former Secretary of Defense William Perry, and future Secretary of Defense Jim Mattis — in anticipation of breaking into the lucrative military market.

Eventually, the company created a device called Edison, after inventor Thomas Edison’s famous quote, “I have not failed 10,000 times. I’ve successfully found 10,000 ways that will not work.” The name was all too prescient as the machine failed to function, even as it was rolled out to clinics in Walgreens and Safeway stores. The Edison gave inaccurate and inconsistent results, and Theranos began to rely on third-party equipment to process blood, sending samples back to the clinics while giving the impression the results came from the Theranos machine.  The façade unraveled after investigative reporting by The Wall Street Journal and other publications, leading Holmes and her partner Ramesh “Sunny” Balwani to be convicted of criminal fraud in 2018, sentenced to more than 11 years in prison. (Holmes lost an appeal of the case this February.)

“The vision of disrupting blood testing would have been a great thing if it were successful — but she mismanaged it, and it turned out to be a tragedy,” Alexander says. “One of the big takeaways for me is that it’s okay to fail, but it’s not okay to commit fraud. It’s important to have passion for what you’re developing and believe you’ll get there on the 10,001st try, but you have to be realistic in understanding there’s a possibility that despite your best efforts you may never succeed — and that has to be okay. For her, it never was.”

Painful lessons learned

The case highlights the difficult balance entrepreneurs must strike between cheerleading for their vision and being transparent about their progress.

“There are things you cannot fake,” Alexander explains. “It was not okay for her to let the device out of the lab and have people make life-and-death decisions based on inaccurate results or use somebody else’s technology and pass it off as her own.”

As for Holmes' celebrity status, it may have helped her raise millions but it also obscured the company’s flaws. “She was so visible because she sought out celebrity status, and to a degree, it helped her — but she hadn’t proven anything yet,” Alexander says. “If you build a great business, celebrity will find you. It shouldn’t be your focus from the start.”

The board's oversight — or lack thereof — was another big failure. Composed of influential figures with little scientific or startup expertise, Theranos’ board lacked the ability to effectively challenge Holmes. “They weren’t able to add value or even ask the right questions,” Alexander points out. “The job of a board is to be a resource and hold the CEO accountable, especially in early-stage companies, and if that doesn’t happen, you are going to have issues.” A key question for every founder to ask, he adds, is who they need on the board to make up for their own gaps in knowledge.

As for investors, Alexander doesn’t blame the early-stage venture capitalists who took a chance on the young entrepreneur — by their very nature, those investments are made on the potential of an individual’s idea and market opportunity, before they have much to show for it. Later-stage investors, on the other hand, overlooked glaring issues, including a failure to provide financial information or scientific results, and imposed high-pressure deadlines in which to make decisions, that should have given them pause.

At the same time, they faced the obvious fears of missing out on the next big thing in Silicon Valley and possibly passing on the next Airbnb or Uber.  “FOMO, fear of missing out, can be a big driver for investors,” Alexander says. “But when you’re being asked to invest millions with limited information under tight deadlines, that should be a red flag.”

Since Theranos, Alexander believes investors have become more disciplined, especially in late-stage funding. However, scandals like FTX prove that vulnerabilities persist. “This industry moves very quickly,” he warns. “I can’t say it won’t happen again.”

Ultimately, Alexander hopes his case study prompts readers to reflect deeply on the responsibilities of entrepreneurs, board members and investors. “What would you have done differently?” he asks. “Would you have put money into this company? What information would you have needed before making that decision?”

In the end, the Theranos case is a cautionary tale of the inherently risky innovation economy, with entrepreneurs, board members and investors forced to make high-stakes decisions in an uncertain environment. If it shows anything, however, it’s that even in the midst of the hype, they ignore integrity at their peril.