Explainer | Theranos: the rise and fall of a Silicon Valley healthcare tech start-up

Elizabeth Holmes founded Theranos - a blood-testing technology company - in 2003, when she was 19. On January 3, 2022, she was found guilty on four charges of fraud. (Illustration: Moneycontrol)

She once aspired to be the next Steve Jobs, but Elizabeth Holmes, founder of healthcare start-up Theranos, was sentenced on November 18, 2022 to more than 11 years in prison for deceiving investors in the failed startup that vowed to revolutionize blood testing but instead made her a figure of Silicon Valley ambition that turned into deceit.

She was found guilty of four of 11 charges of fraud on January 3, 2022, in a case that came to symbolize the pitfalls of Silicon Valley’s culture of hustle, hype and greed.

ALSO READ: Elizabeth Holmes gets more than 11 years for Theranos scam

After selection was completed, the jury of seven men and five women were reportedly sworn in and the trial began on September 8.

Theranos’ former president and chief operating officer Ramesh ‘Sunny’ Balwani is to be tried separately on the same charges, with the proceedings set to start later in January  2022.

Moneycontrol, using information available on the Internet and recent news reports from the US, chronicles Theranos’ spectacular rise and precipitous fall. 

Who are Elizabeth Holmes and Ramesh Balwani? 

Holmes, now 37, dropped out of Stanford University to found in 2003 the Palo Alto, California-based blood testing start-up Theranos, which she went on to claim, had developed a portable device called the Edison that could test a drop of blood for myriad ailments. She earned the sobriquet “the next Steve Jobs,” a label she encouraged with her description of the Edison as the “iPod of healthcare technology” and sporting the turtleneck sweaters favoured by the founder of Apple Inc.

Holmes, born to a mother who worked as a Congressional committee aide and a father who worked for Enron Corp., the power company brought down by scandal, was so inspired by Apple gadgets that she reportedly poached designers from the company to work on the Edison.

Balwani, 56, born in Pakistan to a Hindu family that moved to India and then to the US, joined Theranos in 2009 and rose to become president and COO.  He studied information systems at the University of Texas at Austin and received an MBA from the University of California Berkeley. Balwani and Holmes were involved in a romantic relationship they kept secret from investors in the company.

What is the background of Theranos?  

The name (Holmes originally called it Real Cures) was coined from the words ‘therapy’ and ‘diagnosis’ and the company founded in 2003 claimed that the device it invented, the Edison, would revolutionise traditional blood testing; all it would require was a drop of blood to test for scores of medical conditions in convenient locations like pharmacies and groceries, and would provide an early diagnosis.

Many investors and eminent people were impressed enough – perhaps also swayed by the flattering write-ups that Holmes received in mainstream business publications – to back it with funding and by joining its board of directors. At the peak of its valuation, after a decade of fund-raising to the tune of $700 million, Theranos was estimated to be worth $10 billion before its fortunes started going downhill around 2015.

The net worth of Holmes, once known as the world’s youngest female billionaire, reportedly fell to zero by June 2016 from $4.5 billion. In 2018, the company was closed down.

Who were the prominent investors in and directors of Theranos?  

Oracle Corp. founder Larry Ellison, Tim Draper of venture capital firm Draper Fisher Jurvetson, the Walton family that controls Wal-Mart Stores Inc., media baron Rupert Murdoch, and the family of former US secretary of education Betsy DeVos were reportedly among the investors in Theranos. Members of a South African diamond family and Mexican tycoon Carlos Slim also reportedly risk big losses.

Late economist and businessman George Shultz, who served in several Republican administrations, former defence secretary General Jim Mattis, and former secretary of state Henry Kissinger served on the company’s board of directors, among others.

How did the tide start to turn?  

According to the Columbia Journalism Review, Theranos was undone by increasing scepticism about its claims and some dogged investigative journalism, especially by John Carreyrou, who published a series of articles about the company  in the Wall Street Journal starting in 2015, and authored a book about it called  Bad Blood.

“Elizabeth and her henchmen pulled out all the stops to try to keep me from reporting what I’d discovered,” Carreyrou was quoted as saying in Bad Blood: The Final Chapter, a new podcast linked to the trial. “They had my sources followed by private investigators… They threatened doctors who had spoken to me and tried to get them to recant.”

In 2015, the Wall Street Journal published a report based on whistle-blower accounts and data that showed the Edison technology operated inconsistently, and that tests were being done on traditional lab equipment behind closed doors.

What is Holmes accused of?  

Holmes and Balwani were being charged with conspiracy to commit wire fraud and for allegedly engaging “in a multi-million-dollar scheme to defraud investors, and a separate scheme to defraud doctors and patients”, according to the indictment quoted in news reports. One of the most closely watched trials in the Silicon Valley, the trial in a federal court in San Jose could last longer than three months, after the opening arguments on September 8.

Balwani faces the same charges as Holmes.

What punishment did Holmes faced once convicted? 

Up to 20 years in prison and a $3 million fine. However, the sentence announced on November 18, 2022 was of more than 11 years in prison.

What was the defence strategy adopted by Holmes? 

Her lawyers argued that Holmes was a well-meaning entrepreneur who is now a devoted mother. Their viewpoints were supported by more than 130 letters submitted by family, friends and former colleagues praising Holmes, according to a Associated Press report.

Holmes lawyers painted her as a selfless visionary who spent 14 years trying to revolutionize health care. They asserted that Holmes never stopped trying to perfect the technology until Theranos collapsed in 2018, the AP report added.

They also pointed out that Holmes never sold any of her Theranos shares a stake valued at $4.5 billion in 2014.

The case is US v. Holmes, 18-cr-00258, US District Court, Northern District of California (San Jose).