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Harvard Business School Professor, former Medtronic CEO

The Real Tragedy of Elizabeth Holmes

On Monday, January 3, a jury found Theranos founder Elizabeth Holmes guilty of four counts of criminal fraud. She faces a maximum of 20 years in prison for each count. But the real tragedy goes much deeper. Had the company not failed in 2016, it could have caused enormous harm to unsuspecting patients who believed its test results were valid. While the jurors found her not guilty on charges of fraud against patients, apparently that was due to her lack of contact with patients and the fact that Theranos destroyed its patient records in 2018.

Holmes, who started her company at age 19, experienced a meteoric rise to fame, thanks in part to fawning media stories that helped her attract new investors. She fashioned herself as a Silicon Valley founder, wearing turtlenecks in a style similar to Steve Jobs. Yet she took the Valley’s approach to software of testing ideas out on real users too far, testing her medical diagnostic product on real humans where lives are at risk. It seems she adopted the then-popular adage of “Fake it until you make it.” Now, her “faking it” has turned into a series of fraud convictions.

Theranos, as conceived by Holmes, was essentially a sham company created on the false premise that a single drop of blood from the fingertip could give equivalent data about complexities of the blood and prospective diseases as the traditional blood draw from the veins in the arm. This premise was never tested in a controlled trial, nor verified with statistical data.

In addition, Holmes claimed that Theranos had a proprietary machine named Edison that could test blood samples from the fingertip, but in fact Theranos used traditional testing machines instead. When asked to provide data by prospective customers, Holmes refused, saying this information was proprietary, and she wouldn’t provide it for competitive reasons. When I raised questions in the media about this obviously suspicious approach as early as 2015, Theranos’s PR vice president emailed magazine editors with purported attacks on my credibility.

Yet using her charisma and persuasive powers, Holmes attracted prominent people like General Jim Mattis, former Secretaries of State George Schultz and Henry Kissinger, and former Wells Fargo CEO Dick Kovacevich to her board. Few on her board had any relevant health care background or experience.

She also raised capital from wealthy people like Oracle’s Larry Ellison, News Corp’s Rupert Murdoch, and the DeVos family of Amway fame to invest in her idea, building up a $9 billion valuation on paper before it all collapsed and Theranos declared bankruptcy.

Blood testing is a serious business, with billions of blood draws taken annually. False negatives have potentially life-threatening consequences if diseases are overlooked. Leading commercial companies like LabCorp and Quest Diagnostics employ very rigorous blood testing procedures.

As a Mayo Clinic board member, I once asked the hypothetical question of how many cases of HIV or leukemia Mayo would have to miss using the finger prick before it stopped using Theranos’s new test. Mayo’s chief clinical officer answered, “None, because we would never use this test until it had been confirmed using rigorous statistically-controlled clinical tests, which of course has never been done.”

Holmes apparently knew she had a problem with getting confirmation for her idea through clinical trials to gain FDA approval, so she tried to go around the system by going directly to retail outlets, namely Walgreen’s and Safeway to get them to set up testing sites not requiring FDA approval. In 2016 both companies reneged on their contracts with Theranos when it became apparent that Holmes’ approach was invalid. Shortly thereafter, the Centers for Medicare and Medicaid Services (CMS) revoked Theranos clinical laboratory license and banned Holmes from owning or operating a lab for at least two years.

Assistant U.S. attorney Robert Leach summed up the government’s case, saying, “This is a case about fraud and about lying and cheating to get money.” The jury agreed.

The leadership lesson here is clearer than ever: “fake it until you make” is a losing strategy, regardless of whether your company saves lives or makes ordinary consumer products. Holmes played with fire and got burned. For young founders seeking success, I recommend dedicating yourself to serving customers, engaging employees and bringing a transparent, open and honest approach to problems.