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4 red flags that signaled Theranos' downfall

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The technology being developed by medical diagnostics startup Theranos — a novel device allowing a galaxy of blood tests to be performed on one small, finger-prick sample — had the potential to revolutionize the industry and launch CEO Elizabeth Holmes into the pantheon of billionaire Silicon Valley tech founders.

The only problem? The device didn’t work properly and produced inaccurate results — even though the company publicly claimed by 2013 that it could perform hundreds of tests and had started deploying it in Walgreens stores in California and Arizona to raise funds. In reality, the company was running its tests on commercial machines produced by a German company and diluting blood samples to make it work, according to John Carreyrou, the Wall Street Journal investigative reporter who first broke the Theranos story in 2015

Now, Holmes and former Theranos president Ramesh “Sunny” Balwani, are facing federal wire and fraud charges, and the company, valued at $10 billion at its peak, dissolved at the end of August. 

Carreyrou recently released a book about the scandal entitled “Bad Blood: Secrets and Lies in a Silicon Valley Startup,” and spoke at MIT on Oct. 2, where he described the red flags that should have signaled something was amiss at the company.

A culture of silencing and secrecy

Carreyrou said the company’s culture of extreme secrecy and swift retaliation against anyone who went against the grain set the stage for its eventual failure.

“There was sort of an Omertà in that from the early stages of the company — and it got worse and worse — there was really unethical behavior and employees who would try to raise questions were either fired, or marginalized, or left of their own volition,” Carreyrou said.

Many other employees didn’t blow the whistle to regulators, the media, or the board of directors, Carreyrou said, because Holmes forced them to sign “airtight” non-disclosure agreements and aggressively pursued lawsuits against ex-employees. 

“You could argue that if the culture at Theranos hadn’t been so toxic, they could have made better progress and maybe even gotten there,” Carreyrou said. He continued: “Be mindful of a company’s culture and if you feel the culture is really going off the rails and becoming toxic, then perhaps it’s not the place that you want to keep working at.” 

Proven approach, wrong product

Also problematic was Holmes’ attempt to adapt the traditional Silicon Valley business model of “fail fast” and “fake it until you make it” to a tech startup developing a product with public health implications, Carreyrou said. In much of the computer software industry, it’s possible — and common — to safely release and then iterate on incomplete products to fix bugs until they work. 

“You can’t do that in medicine, especially with a blood testing machine that patients and doctors rely on for very important medical decisions,” Carreyrou said. “There’s a limit to that playbook, and it doesn’t transfer well to the realm of medicine. If there’s one big thematic lesson from the Theranos scandal, that’s it.” 

A lack of expertise on the board

Theranos’ leadership also distinctly lacked the expertise required to develop a sophisticated medical testing technology, Carreyrou said. The company was criticized for having a board of directors primarily composed of former diplomats and military personnel.

“The whole notion that she had dropped out of Stanford without any medical training, any science training really to speak of, and suddenly revolutionized a field of medicine — from my experience reporting on health care, that’s not really how these things happen,” he said.

Crossing the line

Holmes’ vision for a better blood test was legitimate and the cause was good, Carreyrou said. But she crossed a line when she began to grossly misrepresent what she’d achieved in her efforts to raise the support she needed to truly reach that point. 

“I think they really did try to develop a technology, they just never got to the point where it worked,” he said. “Where it became fraud is that she and Sunny lied about the fact that they had succeeded when, in fact, it was still very much a work in progress.”

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