Lessons Every Entrepreneur Needs to Learn from the Downfall of Elizabeth Holmes and Theranos
It is hard to believe that Theranos was valued at more than $9 billion just a few years ago. Today, it's worth less than nothing. What happened? Elizabeth Holmes founded the company in 2003 after dropping out of Stanford University. She had an idea to make blood tests faster and easier through new technology she called "the Edison machine." Theranos promised that its Edison test could quickly detect conditions such as cancer and diabetes without the hassle of needles.
The company raised millions of dollars from investors with promises of disrupting the laboratory testing industry with fast, accurate results. However, the promise never became a reality because there were problems with its technology from day one.
In October 2015, It all came crashing down. The Wall Street Journal published a devastating investigation questioning the company's proprietary blood-testing machine, Edison, and its testing methods. Investors subsequently sued Theranos for fraud, the U.S. government revoked its blood-testing license, and Holmes settled "massive fraud" charges with the Securities and Exchange Commission before dissolving the company in September 2018.
The Holmes trial is currently underway more than three years after being indicted on multiple federal fraud and conspiracy counts over claims she lied about the capabilities of her company's unique blood testing technology. If convicted of all 12 counts of fraud against her, Holmes faces up to 20 years in prison.
There are many lessons to learn from story of Elizabeth Holmes and Theranos. While the drama unfolds in the Courtroom, here are few critical lessons that business owners can take away from the Theranos implosion.
Don't Promise More than You Can Deliver.
Entrepreneurs are confident, enthusiastic, and optimistic — to a fault. CEOs of fast-growing businesses frequently succumb to the temptation of overselling outcomes since it is so easy to do so. But be aware that once a promise has been made, there is tremendous pressure on the firm to achieve potentially unattainable objectives — and this is where things can go wrong.
Don't Lose Touch with Reality.
When leaders start believing in their hype without realizing it or stop paying attention closely enough, this causes serious problems at fast-growing companies since there may be no one left who knows how things work anymore (e.g., Theranos).
Business growth can be intoxicating, especially when it's happening fast. When leaders change who they are for their company (or worse, by being corrupted during the venture-building process), this is often an indicator of future problems with culture fit at best and fraud at worst down the road. There may come a time where those compromises become too much to bear. Many entrepreneurs feel like they have lost themselves along this journey because they were never able fully to live up to what was expected from them, which makes it even harder to maintain your integrity and confront the challenges that come with building a business.
Don't Become Drunk with Success.
The most dangerous time for any company is when it has achieved a high level of success because the top leaders tend to relax and let their guard down. Overconfidence can lead you astray in several ways: First, this kind of thinking may cause executives to stop looking at market signals that might indicate trouble ahead; second, overconfidence causes companies to rest on their laurels instead of continuing efforts necessary for growth — as happened with Theranos; third, once they reach a target number that was set early on (e.g., revenue goal or valuation), entrepreneurs often suspend critical analysis and planning activities out of an unwarranted belief that things will continue going well indefinitely into the future.
Look Before You Leap
It's amazing how many intelligent people will jump on the bandwagon simply because it's packed with other intelligent individuals. Theranos had no lack of star power, with Secretary of Defense James Mattis and former Secretary of State Henry Kissinger serving on the board. But did they or any other big players independently validate the company's claims before joining up?
Entrepreneurs should do as much research on their financial partners as their investors do on them. It's time-consuming to pore over the small print, ask tough questions, and form your viewpoint — but it's well worth it. You should always verify the information provided to you.
Honesty (with Yourself and Others) is Always the Best Policy.
Elizabeth Holmes should have been upfront with investors from the beginning and not started a snowball of lies that would eventually turn into an avalanche. If she had told the truth from day one, she and her company would not be in their situation. Rather than trying to fool everyone, she could have established Theranos' reputation for integrity by presenting its technology honestly and transparently.
Clearly, it was a bad idea from the start for Elizabeth Holmes to base her business on a product that didn't work as claimed when starting out — this led directly to all of the problems with secrecy and dishonesty down the road (e.g., Theranos). It is critical in your personal life and in building any enterprise worth pursuing that you are honest both with yourself and others about what you're doing at every step along the way.
It is critical in your personal life and in building any enterprise worth pursuing that you are honest both with yourself and others about what you're doing at every step along the way.
Don't Get Paralyzed by Perfectionism.
It is vital for leaders of fast-growing businesses not to be afraid of making mistakes or taking risks since these are essential parts of running a successful company in today's world (e.g., Theranos). If you don't make at least some missteps along the way, it means that either you aren't pushing yourself hard enough or that something isn't working as well as it should be — neither one being good for business long term! Be open about failure when things do go wrong, own up to them, learn from your mistakes, and then move on towards doing better next time around.
The tragic story of Elizabeth Holmes and Theranos provides entrepreneurs with valuable business (and life) lessons. You can avoid the mistakes of Theranos by understanding and applying lessons discussed in this post: don't promise more than you can deliver, don't become overconfident after success, look before you leap, don't lose touch with reality, be honest with yourself, and others about what you're doing at every step along the way, and don't get paralyzed by perfectionism or fears that are holding you back from succeeding in business!
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