Elizabeth Holmes founded Theranos in 2003 with a laudable aim – to revolutionise the blood-testing industry by designing a machine that could conduct a wide range of tests from just a single drop of blood. Over the following 15 years, Theranos raised more than $700m in funding to pursue this goal, recruiting a high-profile board that included former Secretaries of State and Defence and US military grandees, reaching a valuation of more than $10bn in 2013 and 2014. Holmes was lauded as ‘the female Steve Jobs’, appearing in countless high-profile interviews and on the cover of Forbes magazine. 

Behind the headlines, however, another story was playing out. The stark reality was that the machine Theranos designed simply could not do what was claimed. The company kept this failure hidden from investors, the board and potential customers, buying existing blood-testing machines from other suppliers to use in secret while they desperately tried to resolve the issues with their own technology. 

Eventually, the facts caught up with Theranos, and a Wall Street Journal exposé in 2015 triggered the public unravelling of the company – and Holmes’ reputation. 

In January 2022 Holmes was found guilty of four counts of wire fraud and awaits sentencing. Regardless of the sentence Elizabeth Holmes receives for her role in Theranos, it will forever be a case study in what can happen when hubris and ambition outrun reality. However, reality always catches up in the end. 

Whatever your role – whether founder, leader, adviser, investor or non-exec – this fascinating tale of a business gone wrong has lessons for us all. 

1. Don’t ‘fake it till you make it’

In every start-up or scaling business, there is a gap between ambition and current reality. The art of entrepreneurship – and raising investment in particular – is to convince others that you can bridge that gap and realise the ambition. This is the tension that drives the ‘fake it till you make it’ mentality.

At Theranos, the gap between vision and reality became ever larger over time as the company’s technology consistently failed to keep up with the claims being made by Holmes. As the gap became larger, so too did the size of climbdown needed.

The Theranos judgement should act as a brake on this approach, where unsubstantiated claims are made without a solid basis by entrepreneurs. Hopefully, a more rational, evidence-based approach will replace it and the risk of dangerous, hype-driven valuation bubbles will abate.

2. Be honest above all else

Honesty and transparency lie at the heart of many great businesses – Ray Dalio’s Bridgewater Associates being a prime example. An unwillingness to accept the truth, no matter how unpalatable, rarely leads to success. 

At Theranos, Holmes ruthlessly guarded the company’s true capability from most of the staff and went to great lengths to prevent investors, board members, regulators and customers from seeing the reality of their operation. For example, the laboratory where their teams were using third-party equipment to run blood tests were access-restricted to a few staff and not disclosed at all to most visitors – including inspectors. This secretive approach created a toxic culture. 

Withholding crucial information – or gaslighting – disempowers your team. Being honest about where you are and the key challenges you face will help bring your organisation together to overcome them. 

3. Don’t ignore the experts

Theranos’s shortcomings were obvious to the many technical experts the company hired. However, when they spoke truth to power they were frequently deemed disloyal and pushed out of the business. Holmes repeatedly ignored the advice of her expert employees on the shortcomings of their technology, without any basis for believing they were wrong, just a bloody-minded belief that they could make it right. 

Whatever the ambitions of leaders, in technically-based businesses – such as technology or pharma – the insights and advice of technical experts are crucial. This means that non-technical leaders will have to accept that, at times, their ambitions may not be realised. 

4. The board plays a crucial role

Boards can have many competing roles to play. Not only may they be investors and advocates, but they must also challenge the executive and hold them to account. This last function can cause management to see the board as a ‘necessary evil’ to be managed, rather than a valuable source of support and advice.

At Theranos, the board was used to create valuable connections and routes to funding – and nothing more. Non-execs who asked probing questions or challenged statements and assertions made by Holmes were forced out, regardless of their credibility, experience or competence. The remaining board members who played by Holmes’ rules were feted and rewarded with swathes of stock options.

5. Due diligence needs to balance the story with facts

The Theranos case emphasises the importance of robust due diligence. While several potential suitors declined the opportunity to invest because they couldn’t get satisfactory answers to their questions – especially around technical capability and US Food and Drug Administration (FDA) status – many took the story they were told at face value and invested huge sums without any real interrogation of the true status of the business.

When conducting due diligence, it is essential to gather and validate objective data to back up management claims, as well as assess the business’s potential from a more subjective basis. This is especially true where technology or complex scientific issues are involved, for example in the pharmaceutical sector or where third-party certification or regulation or assessment is key.The FDA never approved Theranos’ equipment, a fact that was enough to put off many potential investors and customers, but entirely disregarded by others. 

Matt Spry is a strategy consultant and founder of Emergent, which helps scaling businesses thrive.