News

How a ‘fantasy’ Silicon Valley company defrauded almost $1 billion from investors

‘Fake it until you make it’. The catchy phrase is a popular expression around Silicon Valley, the Californian district famous for its technological innovations. It refers to entrepreneurs with vague ideas who secure investment well before they actually create the product.

Now, however, it seems the faking culture has caught up with several big tech investors there. Elizabeth Holmes, founder of blood-testing start-up Theranos, has been found guilty of defrauding $900 million from entrepreneurs after prosecutors concluded that her ‘miracle’ medical service was a sham.

The theory behind Theranos

Imagine a world where it’s possible to diagnose major diseases like cancer and diabetes with just a few drops of blood. A regular blood test would warn of a life-threatening illness at an early stage: such an innovation would save countless lives, not to mention ease the burden on public health services.

This is what Elizabeth Holmes claimed Theranos was offering as she launched the start-up back in 2003. Still a student at Stanford University, Holmes had first come up with an idea for a wearable patch that would notify doctors of variants in patient’s blood. She developed the idea, using lab-on-a-chip (LOC) technology to create a device that could detect these warning signs in blood samples.

Dropping out of college to pursue her idea, Holmes promised that the machine – which she christened as the ‘Edison’ device – – would revolutionize the healthcare industry. She named the start-up Theranos, derived from the words ‘therapy’ and ‘diagnosis’, and her knowledge and charisma enabled her to win over the right people.

Over the next decade, Holmes secured over $900 million in funding. Supermarket chain Safeway invested $350 million in installing clinics in 800 of its stores that would offer the blood tests. Big names such as media mogul Rupert Murdoch and tech giant Larry Ellison jumped on board. At one point, the company hit a valuation of $6.5 billion, making Holmes the youngest-ever female self-made billionaire.

The world was at Elizabeth Holmes feet: she had discovered a revolutionary technology that would change the world forever – what could possibly go wrong?

Well, if we’re looking for clues, then a good place to start would be the Edison device itself. The machine was named after the American inventor Thomas Edison, who once said ‘’I have not failed. I’ve just found 10,000 ways that won’t work.”

Theranos’ device was about to be added to that list.

How the investigation started

A common saying goes ‘if something sounds too good to be true, it probably is’. It explains why we check a product’s original price before accepting a two-for-one offer, or read up on how casino bonuses work before accepting one from an online operator.

This desire to know answers is what led to the investigation into Theranos. Journalists, investors and politicians all wanted to know how this revolutionary product worked, but they were met with silence. It was enough to prompt a Wall Street Journal investigation in 2015, helped by a Theranos lab employee who supplied them with information. The report found that the blood-testing technology didn’t work, that Theranos were actually using existing methods – created by other companies and available to buy on the common market – to test patients.

The backlash was swift and fierce. Safeway called off their deal later that year, followed by the pharmacy Wallgreens taking similar action. Theranos scrambled for a response, claiming the allegations were ‘factually and scientifically erroneous’, but it was too late. In April 2016, federal prosecutors launched a criminal investigation into the start-up’s activities, and by October that year, Theranos had laid off 40% of its workforce and closed its facilities.

It was the start of a disastrous five years for Elizabeth Holmes, which culminated in last week’s court ruling.

A landmark trial

The U.S. vs Elizbeth Holmes trial started in mid-2021 at the San Jose Federal Court in California. 15 weeks, 30 witnesses, and a surprise defence plea from Holmes later, the jury arrived at their verdict.

It was, in fact, a split verdict. Holmes was found guilty on four counts: conspiracy to commit fraud against investors and three charges of wire fraud: each of them carrying a maximum prison term of 20 years each. However, they also found her not guilty on four charges relating to defrauding the public, and were unable to reach a decision on a further three counts.

The 37-year-old showed little emotion upon hearing the verdict, despite having only recently given birth to her first child. It was also in stark contrast to her impassioned defence plea where she claimed she never knowingly defrauded patients or investors. She also laid blame at the feet of her ex-boyfriend and business partner Ramesh ‘Sunny’ Balwani, who she claims held a corrupting influence over her and subjected her to years of emotional and sexual abuse.

Sentencing takes place on an unknown date in the near future: if the judge decides to hand out the maximum punishment, then Elizabeth Holmes will spend the rest of her life behind bars: a dark end to the Theranos experiment.

Back to top button
SoundCloud To Mp3