Business | Bloodbath

The reckoning at Theranos

A Silicon Valley darling is accused of misleading investors

“The Next Steve Jobs”
|SAN FRANCISCO
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“THE Next Steve Jobs” is how Inc., an American business magazine, described Elizabeth Holmes when her photograph appeared on its cover in 2015. They may share an affinity for black turtlenecks but the reputations of Ms Holmes and Apple’s celebrated late boss could not be more different. On March 14th Ms Holmes was accused of fraud by America’s Securities and Exchange Commission (SEC). She has agreed to pay a $500,000 fine, not serve as an officer of a public company for ten years and turn over much of her stake in Theranos, the startup she founded (she has neither admitted nor denied wrongdoing).

Only a few years ago Ms Holmes, who is 34 years old, was touted as the world’s youngest self-made female billionaire, a shatterer of Silicon Valley’s reinforced-glass ceiling. She graced magazine covers and speechified about Theranos, which was trying to upend diagnostic testing by using pinprick amounts of blood rather than vials. At its height Theranos claimed a private-market valuation of around $9bn and raised more than $700m from investors—until a critical article by the Wall Street Journal in 2015 prompted media and regulatory scrutiny.

It now turns out that Ms Holmes’s claims were deceptive, according to the SEC. She allegedly exaggerated her startup’s capabilities. Theranos only reliably performed a dozen of the 200 tests it offered with its own technology. It also lied about its portfolio of clients. For example, investors were told that its technology had been used by the American military on the battlefield, when it had only been used in studies; and that it was poised to be rolled out by a grocery chain even when the deal had collapsed. The financial figures were apparently concocted, too. Ms Holmes told one investor that Theranos had $108m in revenue in 2014; the real figure was $100,000.

The Theranos saga is not over. Ms Holmes’s business partner, Ramesh “Sunny” Balwani, whom the SEC has also charged with fraud, is contesting the charges. A criminal investigation into Theranos is believed to be ongoing.

Ms Holmes wooed investors while sharing few details about how exactly her technology worked. Today they are being more inquisitive and cautious, especially in health care. The SEC is eyeing Silicon Valley’s firms more closely for foul play, too, for example by asking to see how venture-capital firms mark their investments and how startups value their private shares. The time when plucky wannabe tech titans could do no wrong is gone. Ms Holmes has certainly left a mark on Silicon Valley—and not a mere pinprick.

This article appeared in the Business section of the print edition under the headline "Bloodbath"

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