“Vaulting ambition”: Elizabeth Holmes and Theranos - A Cautionary Tale
“That tears shall drown the wind. I have no spur To prick the sides of my intent, but only Vaulting ambition, which o'erleaps itself And falls on th' other.”
(Macbeth Act 1, Scene 7, 26-29)
As she waits for her 13th of July 2021 trial on 9 charges of wire fraud and 2 charges of conspiracy to commit wire fraud, Elizabeth Holmes, former Stanford chemical engineering dropout and Steve Jobs wannabe (right down to the black turtleneck pullovers) and former multi-billion-dollar CEO of the now defunct Theranos health care company, may want to pass the time reading “Macbeth”. Shakespeare’s brooding tale of overriding ambition and the consequences of greed and the ruthless pursuit of power corrupting capable and promising leaders, seems appropriate for a woman who Forbes business magazine in 2015 listed top of their top 50 richest women in the world with an estimated fortune of $4.5bn (Forbes 2015).
The U.S. Securities and Exchange Commission (SEC) complaint against Elizabeth Holmes alleges she and former Theranos President Ramesh “Sunny” Balwani “made numerous false and misleading statements in investor presentations, product demonstrations, and media articles by which they deceived investors into believing that its key product – a portable blood analyser – could conduct comprehensive blood tests from finger drops of blood, revolutionizing the blood testing industry” (SEC 2018). Given the distinguished nature of the Theranos board of directors (featuring Henry Kissinger, George Shultz, James Mattis and Betsy Devos, to name but a few) the obvious question is “how does a 19 (now 36) year old Stanford dropout manage to raise hundreds of millions in venture capital (VC), and establish a management team (with her as CEO of course) of unparalleled experience and savvy?” This article examines five key constituents of Elizabeth Holmes rise and fall from power, which all budding entrepreneurs should note, and reinforce why business schools need to teach “corporate responsibility and ethics” as standard on their MBA courses.
Family Background Matters.
Coming from an ambitious, wealthy family driven by success and the pursuit of power meant that from her earliest years, Elizabeth Holmes would be groomed to be a high achiever. She was fluent in Mandarin in her late teens, an achievement which allowed her to attend Stanford’s summer school whilst still in high school. Her father, Christian Holmes IV, worked for several government agencies following a stint as vice president at Enron, whilst her mother was a foreign policy and defence aide for the US government. Her great-great grandfather was a famous surgeon after whom Cincinnati’s General Hospital was later named and who subsequently married the heiress to the Fleischmann yeast empire, further enhancing the Holmes family name as wealthy and connected. Holmes allegedly emphasised her families’ background in business and medicine as a means of establishing Theranos credibility which seems to have swayed many initially dubious potential investors and advisors, even when the science behind the Edison machine (Theranos’ primary product) was at best questionable and she herself lacked formal qualifications and experience in either medicine or business, or the technical knowledge to explain to more medical tech wise investors how her product worked (Parsow 2019).
It’s not what you know it’s who you know.
Building the “strong management team” is a phrase I’ve heard so many times in meetings with VCs, fund managers, grant funding organisations and business advisors. At an entrepreneurial event I attended in 2019, a fund manager told me “It’s all about the network.” Easier than breathing for Holmes, given her family background and their extensive list of contacts in business, medicine, and government. The management team included Tim Kemp, an IBM executive for thirty years, Theranos CCO, Diane Parks had worked in pharmaceutical and biotech companies for over a quarter of a century, whilst the senior VP for products had overseen the chip making facility of Panasonic. And these were not just good business leaders; they were (mainly) men and women with world class backgrounds in politics and leadership, and very, very deep pockets. George Shultz and Henry Kissinger (negotiator of peace with the North Vietnamese, pioneer of détente between the superpowers and chief negotiator of the SALT 1 and ABM treaties), former marine corps General and former Trump administration secretary of defence James “Maddog” Matthis, Tim Draper, venture capitalist who was an early investor in Theranos, as well as a former next-door neighbour, and continual defender of Holmes (CNBC 2018), and billionaire Mexican Tycoon Carlos Slim (Estevez 2015). This was a board of directors with heavy political connections, as evidenced by Holmes's fund raising on behalf of Hillary Clinton during her battle with Bernie Sanders for the democratic party nomination in 2016 (Kulwin 2016).
They were investors as well as Theranos board members, but none had backgrounds in medicine, biochemistry, or healthcare. If this had not been the case, it would be interesting to speculate whether Theranos’ Edison device would have received any investment considering the impossibility of what it was intended to do. It is important to note that the one person who did have such a background became a mortal enemy of Holmes and a principal instrument in Theranos destruction. Nobody on the board seems to have questioned whether a teenage, Ivy League drop out had either the technical knowledge or the business acumen to achieve what she had set out to do. But with such a stellar management team, many of whom were major investors, it provided Holmes with a shield from external (and in some case internal) criticism of her methods and behaviour for several months.
Table 1: Donations to Thernanos (Sheetz 2018, Proctor 2018)
Good presentational skills, ruthlessness (and Turtlenecks)
Elizabeth Holmes idolised the late Steve Jobs, founder and CEO of Apple and modelled both her public persona and her management style on his. The Theranos publicity photo of Holmes gazing intently at a small capsule used to hold blood samples was derived from the famous image of Jobs with an iPhone prototype. She kept a newspaper clipping on her desk comparing her to Jobs, dressed in black and wore his trademark turtleneck pullovers. Such power dressing is not uncommon in business, designed to create an impression of confidence and maturity on the part of the wearer. Holmes copied more than just Jobs’ dress sense and flair for the dramatic photo op. Dropping out of Ivy League universities had become de rigueur among aspiring tech entrepreneurs, post 2000 and Holmes was no exception. An “achievement” she seems to have emphasised in her efforts to impress and charm investors and board members. Yet, when faced with a serious threat to her position, she demonstrated the ability to mix contrition, charm, and ruthlessness in equal measure. When Henry Mosely, Theranos CFO, began to question the efficacy of the device based upon a realisation that product demos were being falsified, his warnings to Holmes over the legality of lying to shareholders and investors led to his immediate sacking. Interestingly, she never replaced him, running the company for several years without appointing another CFO. In March 2008, a more serious challenge to her authority manifested itself when her board of directors, concerned at her inexperience held a meeting which resulted in their decision to remove her from the company. Summoned to hear her fate, Holmes, incredibly turned the situation to her advantage impressing seasoned businessman and Theranos board member Tom Brodeen by how she “used just the right mix of contrition and charm to win back his three colleagues. It was an impressive performance, he thought. A much older and more experienced CEO skilled in the art of corporate infighting would have been hard pressed to turn the situation around like she had” (Carreyrour 2018, p.51). However, if the board members thought there would be a rapprochement between themselves and Holmes, they were mistaken. Within a few weeks she had put down what she perceived as a mutiny against her rule by sacking two of the four board members who had pushed for her removal from the company.
Be careful who you hack off.
Endless sackings of senior members of the company, and a high turnover of other key engineering and technical staff within Theranos began to earn Holmes antipathy in many circles. Three enmities would ultimately have devastating consequences for her, as details of her lies and obfuscation seeped out. When Holmes attempted to sue Richard Fuisz for stealing and filing patents for fluid monitoring devices like those Theranos was attempting to develop, she made a mortal enemy of a man with a long history of holding personal grudges and settling scores. So much so that Fuisz labelled his device “The Theranos killer”, an enmity enhanced by the gradual souring of his families previously close friendship with the Holmes. His gang of Theranos sceptics would make first contact with John Carreyrou, investigative reporter at the Wall Street Journal. Richard Fuisz’s account of Theranos would be reinforced a few months later by Tyler Shultz, disgruntled employee, and Grandson of former defence secretary (and Theranos advisor) George Shultz. Tyler’s disparaging treatment by the company’s then-President Sunny Balwani, following his warnings over the wildly inaccurate results Theranos blood testing machines, were producing led him to contact Carreyrou, whose subsequent series of articles and book “Bad Blood” marked the beginning of the end for Theranos. Shortly after the first WSJ hit the news-stands, Holmes was forced to discontinue her attendance at a Harvard Medical School’s board of fellows meeting to appear on CNBC’s “Mad Money” to rebut Carreyrou’s reporting (CNBC 2015).
And then there was Safeway. The grocery company had gambled $350m (nearly half of its 2012 net income) on extending and expanding their chain of stores across the nation to provide customers with access to Theranos blood testing machines. In addition, Safeway was also a $10m investor in Theranos. Once the WSJ articles began to gather momentum, backed as they were by credible sources, the company made efforts to distance itself from Theranos, subsequently converting testing stations intended to house Theranos testing devices into flu and travel vaccination stations. WSJ interviews with Safeway executives past and present, revealed serious reservations over missed deadlines for delivering and installing blood-testing machines, along with questions over the veracity of results from tests made on Safeway employees. Although Theranos legal counsel dismissed the WSJ story as “inaccurate and defamatory”, the publication of Safeway’s report and the increasing number of WSJ stories on all aspects of Theranos dealings began to alert US government organisations with the power to order inspection and demand detailed explanations of how Theranos technology worked.
Figure 1: Impact of Fortune magazine and Wall Street Journal articles on reader sentiment of Theranos
A noble endeavour can trump proper due diligence.
If Theranos had been able to successfully develop and market the Edison analysis device, it would have been nothing short of a breakthrough in medical analysis technology. Saying “goodbye to the big bad needle” and combining several tests into one package with the promise of results in hours instead of weeks is a noble goal. Yet, the entire endeavour required the development and perfection of analytical, engineering and internet transmission technologies which either did not exist or were impossible given the current state of the art. Chance and circumstance seem to have played a significant role in clouding the judgement of experienced board members from critically analysing Holmes’s proposition. Everyone wanted to believe that what Holmes was doing could and would work. For example, Larree Renda, Safeway’s executive vice president’s husband was battling lung cancer and the prospect of a machine with a quick, painless, and accurate analysis of his blood was an easy sell to her. According to Carreyrou, “each blood draw was an exercise in torture because his veins were collapsing. Theranos’s finger prick system would be a godsend for him, she thought” (Carreyrou 2018 p 92). Whilst Dr. Jay Rosan of Walgreens was “a health nut” who watched his diet, exercised religiously and was generally obsessive about health, exercise and diet with a passion for empowering people to live healthier lives. In Theranos, “he’d found a company he was convinced would change the face of the pharmacy industry.” (Carreyrou 2018 p.83). David Shaywitz succinctly summed this up in his Forbes article on lessons to be learned from Theranos when he wrote: “…..the Theranos story emphasizes the importance of scrutinizing data, reviewing evidence, performing careful diligence, subjecting findings and methodology to peer review, etc, vs investing in hype” (Shaywitz 2018).
The bottom line
So much of Elizabeth Holmes attempts to develop the Edison will strike a chord with anyone who has tried to take a start-up from conception to product. The inspiration from seeing the impact of SARS in Asia during her 2003 visit, the hard work in writing her first patent application in five days, endless lobbying and presentations to VCs, potential board members and customers, is a path all would be entrepreneurs have to tread. However, Holmes was luckier than many of her peers who’ve taken this journey. She came from a family with extensive business and political connections enabling her to recruit a very strong management team (in an advisory capacity), and she used those connections to access finance for her project. Additionally, her abilities to persuade and charm a wide variety of people seem to have been unparalleled. Yet ultimately, no matter how well connected and financed a company is, no matter how strong the management team is, it still must deliver something, a prototype, a beta test, something, anything that works. One of the ironies of the Theranos scandal is that it was not the WSJ stories, the lies or the SEC investigations that finally finished off the company, they simply ran out of money. Following the failure of a $100m loan from Fortress VC to Theranos, the financiers opted to take over the company and secure its patents rather than push for a bankruptcy filing. Holmes’ successor as CEO went on record as saying; “For two years, we worked day and night to turn the company around. We filled the management team with experienced professionals and routinized our governance, compliance and finance functions. We resolved multiple investigations and lawsuits related to the company’s past. And in December 2017 we closed on a $100 million debt facility, secured by the company’s intellectual property, that gave us a clear path forward.” (McKenna 2018).
Unfortunately for the new management team, time ran out. Even with an additional $35m from Fortress by the summer of 2018, the company would not have had sufficient cash to support itself for the 12 months runway it needed (McKenna 2018). Elizabeth Holmes’s fate should be decided in a Federal court by the Autumn of 2021. Even if one makes allowances for her youthfulness, her excessive zeal, and the unwillingness of more experienced executives within the company (including Larry Ellison, former mentor of the ORACLE founder) to reign in Holmes more effectively, what is unforgiveable is her use of Edison machines in a pilot test with Pfizer on terminally ill cancer patients. This act gave false hope to desperately ill people. For that, if nothing else, she deserves the possible twenty-year jail sentence she is facing. I find myself in agreement with John Carreyrou’s assessment of Elizabeth Holmes in the epilogue of his book.
“Her ambition was voracious, and it brooked no interference. If there was collateral damage on her way to riches and fame, so be it.” (Carreyrou 2018, p299)
 SALT 1 = Strategic Arms Limitation Talks (1st round) ABM = Anti-Ballistic Missile Treaty)
 Walmart owners
 Including former US Education secretary Betsy Devos
 Cox Communications
 Telemex, American Movil
CNBC (2015) “Theranos CEO Elizabeth Holmes: Firing Back at Doubters”, Mad Money CNBC, https://www.youtube.com/watch?v=rGfaJZAdfNE
CNBC (2018) “VC Draper: Theranos founder Elizabeth Holmes was bullied into submission”, CNBC, https://www.cnbc.com/video/2018/05/10/vc-draper-theranos-founder-elizabeth-holmes-was-bullied-into-submission.html
Shaywitz, D (2018) “Learning The Right Lesson From Theranos: Fraud Is Bad, Wanting To Disrupt Healthcare Isn't”, Forbes, https://www.forbes.com/sites/davidshaywitz/2018/06/04/learning-the-right-lesson-from-theranos-fraud-is-bad-wanting-to-disrupt-healthcare-isnt/
Estevez, D (2015) “With Carlos Slim, Billionaire Elizabeth Holmes Brings Innovative Blood Testing Method To Mexico”, Forbes, https://www.forbes.com/sites/doliaestevez/2015/06/22/with-carlos-slim-billionaire-elizabeth-holmes-brings-innovative-blood-testing-method-to-mexico/
Forbes (2015) “Forbes Announces Inaugural List Of America's 50 Richest Self-Made Women”, Forbes Press Release, https://www.forbes.com/sites/forbespr/2015/05/27/forbes-announces-inaugural-list-of-americas-50-richest-self-made-women/
Kulwin, K (2016) “Theranos CEO Elizabeth Holmes Is Holding a Hillary Fundraiser With Chelsea Clinton”, Vox, https://www.vox.com/2016/3/14/11586966/theranos-ceo-elizabeth-holmes-is-holding-a-hillary-fundraiser-with
McKenna, F(2018) “The last days of Theranos — the financials were as overhyped as the blood tests”,MarketWatch, https://www.marketwatch.com/story/the-last-days-of-theranos-the-financials-were-as-overhyped-as-the-blood-tests-2018-10-16
Pasarow, A (2019) “Inside Elizabeth Holmes's Family Tree & Legacy Before Theranos”, https://www.refinery29.com/en-us/elizabeth-holmes-family-worth-rich-parents-grandparents
Proctor R (2018) “Betsy DeVos, Rupert Murdoch, Carlos Slim and others lost hundreds of millions of dollars investing in Theranos”, bizjournals, https://www.bizjournals.com/sanjose/news/2018/05/04/theranos-investors-money-lost-betsy-devos-murdoch.html
SEC (2018) “Theranos, CEO Holmes, and Former President Balwani Charged With Massive Fraud: Holmes Stripped of Control of Company for Defrauding Investors”, SEC Press Release, https://www.sec.gov/news/press-release/2018-41
Sheetz M (2018) “Secretary Devos, Walmart heirs and other investors reportedly lost over $600m on Theranos”, CNBC, https://www.cnbc.com/2018/05/04/theranos-devos-other-investors-reportedly-lost-over-600-million.html