How A Lie Sent Theranos Crushing Down

Chris McQueen

What caused a company valued at 10 billion Dollars to file for bankruptcy soon after

Background information

Theranos was founded by the 19-year-old student Elizabeth Holmes.

In 2001 she started studying chemical engineering at Stanford University. After less than a year, she dropped out of her studies to found the startup Theranos.

The product of this company was to revolutionize the medical world. Theranos wanted to make blood tests accessible to every citizen. The way the devices worked was simple. With a prick in the index finger, only a few blood drops should be collected in a small capsule.

This capsule should then perform the conventional blood tests in the blood analyzer developed by Theranos. The revolutionary idea was to make blood tests accessible everywhere. In future, every household should have a Theranos device that performs all necessary blood tests. A patient does not have to go to a hospital but can perform regular blood tests from home and send them to the doctor.

After years of research and development, the Walgreens pharmacy chain became aware of Theranos products. In 2013 Walgreens offered its customers products from Theranos. The capsules containing the drop of blood of the customers were regularly sent to Theranos for evaluation. However, Theranos did not publish any peer reviews since the introduction of the blood analyser.

A journalist, John Carreyrou, reported in 2015 in a Wall Street Journal article about what happened at Theranos. He claimed that the blood tests that were carried out in the drugstores were too inaccurate and that most of them were not carried out on Theranos blood analyzers.

More than 85 per cent of the tests had been analyzed on manipulated Siemens devices, and the customers did not know about them. The image to the outside world could be well maintained until disclosure. However, as a consequence of Carreyrou’s discovery, the Federal Drug Association (FDA) immediately started follow-up research at Theranos. The result confirmed the allegations. In this research, it became known that the FDA did not approve both the technology used and the design.

Information Economics

Holmes was the only person in the company who had complete information. Employees often only had information about their own project. Different development teams were not supposed to communicate with each other on Holmes’ instructions. Still, to report exclusively to her.

Not, even the supervisory board was aware of the exact functionality of the blood analysis devices. Although it was staffed with high-ranking members, only one expert from the medical field was on the supervisory board until 2016.

Also, the Supervisory Board generally had little influence. In an interview in which Holmes was asked about the Supervisory Board's role, Peer review is a quality assurance procedure by independent experts in the same field; she describes it as a “placeholder”. She had the final word in the company.

In 2013, Holmes forced a resolution that gave her 99.7 per cent of all voting rights. This meant that the supervisory board had no quorum without Holmes.

This illustrates that even within the company, information asymmetries existed.

Holmes was the only one who was fully aware of the functioning of the analytical equipment. This internal information policy probably served to keep up the appearance of an innovative start-up as long as possible and towards external stakeholders.

Holmes was able to attract numerous well-known investors such as Rupert Murdoch, Betsy DeVos and the Walmart family. The investors believed in the product and its implementation.

However, they did not question the functionality and trusted Holmes’ reports. There is no question that these same investors would not have invested their money in Theranos if they had complete information.

The existing information asymmetry, which directly affects the product, resulted in investors' willingness to invest. The information asymmetries are present in the Theranos case to varying degrees.

On the one hand, customers were deceived concerning the product even before the contract's conclusion (ex-ante).

On the other hand, the deception was maintained after the contract's conclusion (ex-post) by concealing the fact that the tests were actually carried out on manipulated Siemens devices (hidden action).

Under the assumption of full information, Theranos would hardly have been able to win over the number of customers and business partners they could actually acquire.

After all, they were deceived about the actual value of the product.

The offer Theranos placed on the market generated a demand for a product that did not exist.

This demand, which is due to the wrongly assessed value of the product, has a positive effect on the market's pricing from the company’s point of view.

Even though Theranos was not the only supplier of blood analysis equipment, the company was the only supplier of analysis equipment that could deliver a result in such a simple way.

This would at least suggest a monopolistic position—the targeted misinformation results in one’s own advantage.

Medical goods are primarily characterized by trustworthiness. Theranos produced medical devices that were not properly assessed.

Laypersons lack the technical knowledge to understand the functionality of a blood analysis device. An evaluation of the good could not occur; neither before nor after a blood test was performed on the Theranos device.

The procurement of information for external stakeholders was equally difficult.

In general, Holmes always tried to maintain the existing asymmetries.

Employees who tried to obtain information were either fired or dismissed.

This is well illustrated by Tyler Shultz, grandson of former US State Department consultant Georg Shultz. Shultz became aware of how Holmes affected employees and board members and turned to his grandfather, a member of the Theranos supervisory board.

The latter did not want to listen to his grandson; Tyler Shultz was immediately dismissed, as were many other Theranos employees before him who had already asked unpleasant questions.

Tyler later helped expose the fraud.

Behavioural Economics

Holmes used psychological effects to express credibility and strength.

She always spoke with an unnatural baritone voice. This unnatural voice was intended to give her words meaning, prestige and conviction.

Her idol figure was Steve Jobs.

She wanted to partake in the success story of the Apple company. She often referred to her blood analyzer as “the iPod of health care “. She claimed that one-day Theranos products, like many Apple products, would be found in most households.

Holmes always tried to create an emotional bond with her listeners.

This was also reflected in her key slogan:

I want a world where no one has to say goodbye too soon.

Holmes radiated self-confidence through her rare blink of an eye. She thus lent credibility to her lies and removed any doubt from their minds.

Holmes used these behaviours' effects to influence employees, the public, etc., to maintain the information asymmetries already addressed and benefit from them.

Certainly, the company’s media presence, in addition to its supposedly innovative product, can also be attributed to Holmes and its public image.

Positive media reports can have a disproportionate impact on a company's investment due to the anchor effect. The association with the company Apple was of advantage.
Besides the media, the investments of well-known investors can also encourage other investors to invest. When investigating the economic impact of fraud, it must be taken into account that not all investments in Theranos can be attributed to the assumed value or potential of the offered goods.

Psychological effects and Holmes’ targeted approach also played a role.


Auletta, K. (2014): Blood, simpler

Carreyrou, J. (2018): Bad Blood: Secrets and Lies in a Silicon Valley Startup, 1, New York: Knopf, Borzoi Books

Hartmans, A. (2018): Here are all the ways Theranos CEO Elizabeth Holmes has imitated Steve Jobs over the years

Herper, M. (2018): Elizabeth Holmes’ Superpower

Hillenbrand, T. (2002): “Das führende Unternehmen der Welt”

[2]Juetten, M. (2020): Failed Startups: Theranos

Kroll, L. (2016): From Bad To Worse: Forbes 400’s Biggest Drop-Off Elizabeth Holmes Announces More Grim News

Lowenstein, R. (2020): ‘Bad Blood’ Review: How One Company Scammed Silicon Valley. And How It Got Caught. — The New York Times

Ramsey, L. (2015): The FDA’s notes from its visit to Theranos’ labs don’t look good — Business Insider

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