The Theranos Debacle

How this healthcare Unicorn fooled many in the Valley with little science and big marketing

Theranos was one of the most promising startups in the Valley until its highly publicized debacle unfolded in late 2015. The Company had risen to prominence by offering to perform blood tests that required smaller blood samples that could be obtained at home in less intrusive fashion than currently available methods. Theranos claimed to develop a breakthrough proprietary technology for almost a decade while the firm operated in “stealth mode.” The potential behind the product was enormous and that lured investors to write bigger and bigger checks that ultimately pushed Theranos’ valuation to a mind numbing USD9.0bn.

 

How did data play a role at Theranos?

Creating an effective testing technology had much to do with the ability to deliver on the promise of requiring smaller amounts of blood to conduct analyses. The technology behind the testing was supposed to be heavily reliant on data and how the analysis of the new samples refined the entire testing technology. Thus, scaling the business could theoretically make the machines testing the samples better because the sample size they operated with expanded and helped the technology become more accurate. Theranos aimed at disrupting the laboratory industry as we know it by simplifying testing and targeting non-consumers. Servicing the non-consumption market would translate in ever increasing pools of data that would translate into better testing, analysis and diagnosis.

That sounds great, but…

The testing technology was not totally there yet and news revealed that Theranos had been conducting testing with conventional technology or even at third party laboratories. In a nutshell, the power of marketing overtook the novelty of data analytics and it did not take long for investors and regulators to begin crying foul. Unfortunately for investors, it might have been too late to recover their capital. Government agencies are currently investigating the Company for fraud and other wrongdoings. Nonetheless, it is not clear yet what type of findings could the investigation yield.

How Theranos’ future looks?

It is very tough to say if the Company and its leadership can pull this one off. Nevertheless, the ideas that Theranos brought to the table are incredibly powerful and deserve further exploration. Blood testing is incredibly cumbersome and large sums of people on this planet have little to no access to proper testing facilities. Thus, the ability to conduct this type of lower cost and easy to perform testing merits the attention of the entrepreneurial community and capital allocators. If the Theranos saga unfolds with the project being labeled as a complete hoax, the damage to similar endeavors could be significant. The backlash could come in the shape of capital drying up for healthcare startups and thus slowing down innovation in the sector.

The best outcome for Theranos will be for it to be acquitted from all the allegations. This scenario seems far from materializing. One would hope that if the technology is actually viable, people in key positions at Theranos could carry on with the promise of better blood testing at other companies/startups. The biggest obstacle for this alternative is that much of the know-how might protected by Therano’s IP and other contractual obligations employees owe to the Company.

 

References

https://www.theranos.com/

http://www.cnbc.com/2017/03/23/theranos-sell-shares-to-investors-promise-not-to-sue.html

https://www.forbes.com/sites/bill-rader/2017/03/07/what-an-entrepreneur-can-learn-from-theranos/#747df6814927

http://www.foxnews.com/health/2017/01/18/second-theranos-lab-failed-major-inspection.html

http://www.vanityfair.com/news/2016/09/elizabeth-holmes-theranos-exclusive

https://www.wsj.com/articles/theranos-whistleblower-shook-the-companyand-his-family-1479335963

https://www.wsj.com/articles/theranos-has-struggled-with-blood-tests-1444881901

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4 thoughts on “The Theranos Debacle

  1. Thanks for the post! Theranos is certainly an interesting case study, and I’m sure it will continue to be talked about as more information comes to light on how much and how exactly it fooled its investors and consumers. What do you think is the takeaway here, re: data? Is it that data is sometimes used as a crutch by companies to “prove” out their CVP? Is it that the power of marketing simply overtook the actual story that the data told, and that the power of the narrative swept investors off their feet? What is the cautionary tale that we can take forth with us?

  2. This company’s rise and fall really has been remarkable. I remember when Theranos first started raising funds and gaining prominent advisors for its “groundbreaking” blood tests. It seemed like such a promising concept. To learn how blatantly and systematically they deceived investors and customers is pretty shocking for such a reputable team. I guess it’s a lesson that just because technology can drive step-changes all the time, we must not be fooled into believing grand results before they are proven. Or maybe that the fraud triangle from FRC applies to start-ups as well…

  3. Great Post. From a data perspective, I understand your point that getting incrementally better at diagnoses is important. However, do you think that beyond a certain level of blood testing accuracy, consumers are indifferent? I think the pricing elasticity around this could be very interesting.

  4. Cool post! I wonder if things would have turned out differently for Theranos hadm they not promised investors they would bring their own testing technology to market. It seems like the real play here was amassing a database of blood test samples and giving it predictive accuracy using the forces of machine learning. I tend to think the company could have taken a different path if they focused more on the software and analytics behind testing vs. promising an integrated hardware test / software experience upfront.

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