Theranos was a private company that was founded in 2003 by a 19 year old Stanford University undergraduate Chemical Engineering student. Theranos garnered a massive amount of hype and attention for its claims that it had developed technology for performing blood tests that required much smaller amounts of blood and were drastically less expensive than the types of tests in use at the time. The company raised substantial amounts of money from venture capitalists and private investors.
Unfortunately, the company was never able to deliver on what it claimed it would be able to do. The company’s two founders were charged with “massive fraud” in which they “exaggerated or made false statements about the company’s technology, business, and financial performance” to continue to raise investment capital, ultimately resulting in the company being valued as high as 9 Billion USD. One of the company’s cofounders, the CEO, agreed to surrender her stake in the company and was ordered to be ineligible to be an officer in a public company for a period of ten years. The other cofounder, also its COO, had charges brought against him in Federal Court.
The company was universally hailed at the time as a breakthrough technology company that would be wildly successful as an industry disruptor. Over time however, the company doubled down on its failures to deliver on its incredible claims by deceiving its many business partners and using other technologies and claiming it was their own. The company was exposed by these business partners and eventually by the press.
The company was backed financially and otherwise by many prominent individuals, including Henry Kissinger, James Mattis, and Rupert Murdoch.
Risk management is a key concept anytime investment is concerned. To a very large degree, investing is a calculated gamble that the investment will pay off and result in profit for the investor. In the simplest terms, the risk in investing is that the investment will not be successful and the investor will not make any money. Therefore it is up to the investor to ensure that she is as well informed as possible before committing capital to any endeavor.
The investors and venture capitalists who supported the formation and growth of Theranos were badly burned by the company’s cofounders. Some of the company’s early investors made significantly large investments upwards of 100 Million USD, many under false pretenses of what the company’s technology was allegedly capable of doing, or even worse, what it was successfully doing when that simply was not the case. Ultimately, the asset that was compromised was the investors’ money.
The vulnerability was the tremendous hype that was generated by the company. The company’s founder was a charismatic and extremely intelligent young woman who had dropped out of the Stanford University College of Engineering to found the company on the back of extravagant claims of what the company’s technology would do, revolutionizing the healthcare industry in the process.
The threat was the reality that the technology that the company was promising was something that they simply were incapable of delivering. The company was rife with ambition and great ideas, but they were simply incapable of bringing them to reality. For instance, the company had applied for patents for a blood analyzer machine that would perform 200 specific tests. The company’s two founders were fully aware that the machine was only capable of performing 12 of those tests, but continued to lie to investors about it.
What should have been a simple case of another failed Silicon Valley tech startup became something far more sinister. The company was very much defined by the hype that it created for itself. Unfortunately, that also meant that the company carried a tremendously visible public profile. Everything that happened with the company as the wheels started to come off was big news in the technology press, the business press, and ultimately the mainstream media. The world watched the company fall apart and its cofounders’ reputations permanently sullied.
This was such an interesting case because Theranos became a train that, once it gathered the incredible momentum that it did, was nearly impossible to stop. The only real control that could have prevented the company becoming the scandal that it did would have been for one of the company’s two top executives to face the reality and be honest to the company’s investors and the SEC. Had the executives been lied to by the company’s employees, perhaps my perspective might be a little different. But there was every indication that the cofounders were fully aware of the company’s shortcomings and very willingly deceived everybody that was necessary to keep the train rolling. Their deceit caught up to them and they paid the price. Unfortunately, so did their investors.
A proper risk management would have done wonders to prevent much of what went wrong with Theranos. The investors could have been a little more skeptical about the company’s extravagant claims. The company’s employees could have been a little more aware of what was going on around them and been a little more compelled to blow the whistle to authorities if they were concerned about going to their own management. Ultimately, it was many of the company’s business partners that began to question what the company was promising and initiated inquiries and lodged complaints to regulatory bodies that eventually led to the company’s downfall.
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