How a start-up worth Sh935b crashed and burned in six days

Three years ago, Elizabeth Holmes, now 33, was tipped by a fawning media to be the next Steve Jobs. And this baptism, to some extent, stuck because of the obviously Jobs-eque dress code this new kid on the tech block adopted: black turtleneck and an aura of supreme mystery.

Holmes’ academic trajectory also bore an uncanny resemblance to Jobs’. Tech-whiz Jobs dropped out of Reed College to innovate gadgets that are still, six years after his death, changing how we view the world. Holmes dropped out of Stanford University to form a biotech firm that would, in her own words, “change the world”.

Sadly, this is where the similarities end. Whereas Jobs, with his inventive flair (and inherent flaws) went on to create a lasting legacy, with his work becoming a by-word for gizmos that are hip and happening; Holmes’ story is now being used in Silicon Valley as a classic cautionary tale that selling hubris, hype and hot air is a slippery slope.

But she enjoyed a good run before the implosion happened.

In October 2014, Holmes topped Forbes’ list of the world’s youngest self-made female billionaire. At the time, she held a 50 per cent stake in Theranos, which had been valued at $9 billion (Sh935 billion at current exchange rates), so she was worth an estimated $4.5 billion (Sh467 billion).

Road to discovery

But Holmes did not set out to peddle snake oil. Born in February 1984 to civil servant parents, her upbringing was as normal as any middle class child’s in Washington, DC, where she was born and spent her early years.

It is reported that aged nine – when most girls her age were thinking about dolls – Holmes succinctly spelt out her life mission in a letter that she wrote to her father after their family moved to Houston, Texas: “What I really want out of life is to discover something new, something that mankind didn’t know was possible to do.”

Her family’s relocation may have pushed Holmes toward this road to discovery, but the outbreak of Severe Acute Respiratory Syndrome (SARS) between 2002 and 2003 shoved the then freshman student towards her ultimate destiny.

She had trypanophobia, which is the fear of needles and injections, yet here she was in Singapore – at the height of SARS – collecting blood samples and facing her biggest nightmare: sticking hypodermic needles into human flesh.

In 2004, while still a freshman, Holmes borrowed a leaf from Jobs’ script: she hang up her lab coat at Stanford University.

And then she did what would make many parents to lose their heads: she funded her first company using her college tuition fees.

After that, nothing – not even a well-meaning warning from a college professor – would stop Holmes’ dogged march to “discover something new”.

Birth of Theranos

That something new was Theranos, an amalgam of therapy and diagnosis, borne out of – you guessed it – Holmes’ fear of needles.

Holmes founded Theranos in 2004 at 19, and built a device that gave the company its reputation. According to the company’s website, “Theranos miniLab is a portable device that is designed to have the capacity to process and analyse very small samples of blood.

“The Sample Collection Device (SCD) is designed to collect small blood samples from a finger prick into a pair of Nanotainer™ tubes. The SCD will allow for finger stick sample collection in a less painful and invasive way than the traditional venous puncture needles, making it easier for everyone to get their lab tests done.”

Theranos’ goal was to create a new era in lab testing that would make it easier for patients to get accurate and thorough test results, faster and at a fraction of the price.

Darling of venture capitalists

Silicon Valley occupies approximately 129-square-kilometres. Or, to bring it closer home, this patch of land in San Francisco Bay Area, California, is slightly smaller than Mathare Constituency.

And more US dollar millionaires are made per second in this hot spot, where tech is the stock-in-trade, than anywhere else in the world.

In Silicon Valley – which has the largest number of mostly faceless venture capitalists with loads of liquid cash to risk on the next big idea – capital injection can turn an idea from a non-entity in a dormitory room, to a brand that hogs every boardroom discussion.

Apart from creating an idea whose time has come, the other factor that swings the funding pendulum in favour of a start-up is weaving a compelling narrative, and controlling this narrative. And that is the route that Elizabeth Holmes took.

She sold venture capitalists the narrative that loosened their purse strings – “changing the world” – although, in hindsight, the narrative had so many holes it could be used as a sieve.

In the US, big pharma is always looking to latch onto the next big thing. Lab work is a crowded industry worth $75 billion (Sh7.8 trillion) where late-adopters can be left counting their losses, sometimes for decades.

By the end of 2004, before the firm was even a year old, Holmes got a nibble of that $75 billion cake when she raised $6 million (Sh623 million) from pharmaceutical companies who went to seek Theranos’ testing and trial services.

Six years later, that figure swelled to $92 million (Sh9.6 billion) from venture capitalists. By 2014, Forbes valued Theranos at a whopping $9 billion (Sh935 billion), with about $700 million (Sh73 billion) coming from the deep pockets of venture capitalists.

That’s what saw Forbes slap the baritone-voiced college dropout with the tag of the youngest self-made female billionaire in the world.

After the respected publication gave Holmes its royal nod, other publications and personalities followed suit.

At an event where Holmes was one of the guest speakers, HuffPost Tech gave her this 84-character salute on Twitter: “The youngest self-made woman billionaire shares some wisdom about female stereotypes.”

But barely two years later, Forbes would trash its royal nod, revise her worth to $0 and virtually write Holmes’ obituary.

Media darling

When selecting board members for Theranos, Holmes went for the who’s who in America; persons of good repute who would, ostensibly, shield her from media and public scrutiny.

In the board, which resembled a kitchen West Wing, were two former secretaries of state, Henry Kissinger and George Shultz, former secretary of defence William Perry, and former Senate majority leader Bill Frist.

At one time, Vice President Joe Biden visited Theranos. So did Senator John McCain, who remarked afterwards, “I enjoyed visiting Elizabeth Holmes’ Theranos lab last night and seeing their innovative blood test in action.”

With a deluge of awards and accolades – “revolutionary”, “rock star” – and hogging the glossy pages of magazines like Glamour, Inc. and Forbes, Holmes was now truly the ‘it girl’; someone who would shatter the glass ceiling to smithereens.

And she did inspire other women, with American journalist Emily Chang gushing, “Girl crush – finally got to interview @Theranos founder and rock star, Elizabeth Holmes”.

Further, she shared a platform with other notable personalities in business, politics and philanthropy. Jack Ma. Sir Richard Branson. UN Secretary General Ban Ki-moon. Bill Gates.

Holmes also took part in boosting her profile, once saying of herself: “I’ve always believed wherever there’s a glass ceiling, there’s an iron woman right behind it.”

Game of Theranos

In 2015, before Holmes’ house of cards came tumbling down, Fortune magazine remarked that, “Elizabeth Holmes is the most mysterious self-made female multi-billionaire and she’s only 31.”

Mysterious. That was the key word. Although they used it as a compliment, in retrospect, the magazine had, unintentionally, put its finger on a scoop.

Holmes was indeed covert about operations at Theranos. Further, her security detail regularly included four guards, and her codename was Eagle 1.

In Silicon Valley, before venture capitalists sign on the dotted line, they seek to know exactly what their last dime is going to do. But when Holmes dropped her spiel, venture capitalists opened their wallets, many with no strings attached. Most did not know the real nature of Holmes’ biotech start-up, as she’d clouded her work with mystery and secrecy.

Visitors to Theranos were required to sign a non-disclosure agreement before they got a foot through the firm’s front doors. What’s worse, the 800-plus workers were not allowed to talk to each other about the nature of their work.

The unravelling

In the end, it took a bold journalist merely scratching the surface for Theranos to begin to bleed.

According to an article in Vanity Fair, “Around August 2015, regulators from the Centers for Medicare and Medicaid Services visited Theranos labs and found major inaccuracies in the testing being done on patients. They also discovered that some of the tests Theranos was performing were so inaccurate that they would leave patients at the risk of internal bleeding, or of stroke among those prone to blood clots.”

Holmes denied the report, but then a series of damning articles by healthcare journalist, John Carreyrou for The Wall Street Journal, followed.

Theranos had claimed it could test for more than 240 health disorders with a simple finger prick and quickly generate results using its proprietary ‘Edison’ machines. But it turned out the Edisons could only process about 15 types of tests, according to sources who spoke to Carreyrou. And even for these tests, the results were often erratic and inaccurate.

Holmes’ initial response was to cast herself as a victim.

“This is what happens when you work to change things. First they think you’re crazy. Then they fight you. And then all of a sudden you change the world,” she said.

But this attempt to recast the narrative didn’t hold. Soon, US government agencies swooped in, and then venture capitalists and partners fled for the hills or the courts.

The Sh935 billion question

In a tweet on October 8, 2015, author, activist and journalist, Maria Shriver, posed: “How does one go from freshman dropout to billionaire by 31?”

That was then. Now the $9 billion question is: “How does one go from billionaire to bust in a matter of six days?”

It was exactly six days after Shriver sent her tweet that the damning articles from The Wall Street Journal opened the real can of worms that was Theranos. And to date, Holmes’ problems are far from over.

Last week, there were media reports about Theranos paying out millions of dollars to settle lawsuits, laying off most of its workforce and putting its once heavily-guarded headquarters up for rent.

Entrepreneur magazine summarised Theranos’ run this way: “Thirteen years. 1,000 employees. $700 million (Sh73 billion) of venture capital. Forty wellness centres. Two labs. Six million blood tests. Nothing to show for it? It’s mind-boggling what some people will do with other people’s money.”

Now, after two years of seeing her company fall apart, Holmes is in the process of rebuilding Theranos as a much smaller outfit, without the hyperbole that characterised its start. So much for being ‘the next Steve Jobs’.