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Lies behind Silicon Valley marvel
ELIZABETH Holmes was a 22-year-old wowing the world with an ingenious medical breakthrough. The problem was it was all a lie.

by John Carreyrou

IN 2014, Elizabeth Holmes, a young tech executive, was wowing both Silicon Valley and Big Pharma. She had developed a new technology that allowed quick and easy blood test readings, that could easily be done by patients at home, with the results being sent remotely to their doctor.

Big investors threw millions of dollars at the start-up, and it looked like it was on its way to being the next big tech company. The only problem was, the technology she was promoting didn’t work. And she was about to be found out.

The following is an extract from Bad Blood, which details the rise and fall of Ms Holmes, and her company Theranos.


TIM Kemp had good news for his team.

The former IBM executive was in charge of bioinformatics at Theranos, a start-up with a cutting-­edge blood testing system. The company had just completed its first big live demonstration for a pharmaceutical company. Elizabeth Holmes, Theranos’s 22-­year-­old founder, had flown to Switzerland and shown off the system’s capabilities to executives at Novartis, the European drug giant.

“Elizabeth called me this morning,” Kemp wrote in an email to his 15-­person team. “She expressed her thanks and said that, ‘It was perfect!’ She specifically asked me to thank you and let you all know her appreciation. She additionally mentioned that Novartis was so impressed that they have asked for a proposal and have expressed interest in a financial arrangement for a project. We did what we came to do!”

This was a pivotal moment for Theranos. The three-­year-­old start-up had progressed from an ambitious idea Holmes had dreamt up in her Stanford dorm room to an actual product a huge multi­national corporation was interested in using.

Word of the demo’s success made its way upstairs to the second floor, where senior executives’ offices were located.

One of those executives was Henry Mosley, Theranos’s chief financial officer. Mosley had joined Theranos eight months earlier, in March 2006. A rumpled dresser with piercing green eyes and a laid-­back personality, he was a veteran of Silicon Valley’s technology scene.

After growing up in the Washington, D.C., area and getting his MBA at the University of Utah, he’d come out to California in the late 1970s and never left. His first job was at chipmaker Intel, one of the Valley’s pioneers. He’d later gone on to run the finance departments of four different tech companies, taking two of them public. Theranos was far from his first rodeo.

What had drawn Mosley to Theranos was the talent and experience gathered around Elizabeth. She might be young, but she was surrounded by an all-­star cast. The chairman of her board was Donald L. Lucas, the venture capitalist who had groomed billionaire software entrepreneur Larry Ellison and helped him take Oracle Corporation public in the mid-­1980s. Lucas and Ellison had both put some of their own money into Theranos.

Another board member with a sterling reputation was Channing Robertson, the associate dean of Stanford’s School of Engineering. Robertson was one of the stars of the Stanford faculty. His expert testimony about the addictive properties of cigarettes had forced the tobacco industry to enter into a landmark $6.5 billion settlement with the state of Minnesota in the late 1990s. Based on the few interactions Mosley had had with him, it was clear Robertson thought the world of Elizabeth.

Theranos also had a strong management team. Kemp had spent 30 years at IBM. Diane Parks, Theranos’s chief commercial officer, had 25 years of experience at pharmaceutical and biotechnology companies. John Howard, the senior vice president for products, had overseen Panasonic’s chip-­making subsidiary. It wasn’t often that you found executives of that calibre at a small start-up.

It wasn’t just the board and the executive team that had sold Mosley on Theranos, though. The market it was going after was huge. Pharmaceutical companies spent tens of billions of dollars on clinical trials to test new drugs each year. If Theranos could make itself indispensable to them and capture a fraction of that spending, it could make a killing.

Elizabeth had asked him to put together some financial projections she could show investors. The first set of numbers he’d come up with hadn’t been to her liking, so he’d revised them upward. He was a little uncomfortable with the revised numbers, but he figured they were in the realm of the plausible if the company executed perfectly. Besides, the venture capitalists start-ups courted for funding knew that start-up founders overstated these forecasts. It was part of the game. VCs even had a term for it: the hockey-­stick forecast. It showed revenue stagnating for a few years and then magically shooting up in a straight line.

The one thing Mosley wasn’t sure he completely understood was how the Theranos technology worked. When prospective investors came by, he took them to see Shaunak Roy, Theranos’s co-founder. Shaunak had a Ph.D in chemical engineering. He and Elizabeth had worked together in Robertson’s research lab at Stanford.

Shaunak would prick his finger and milk a few drops of blood from it. Then he would transfer the blood to a white plastic cartridge the size of a credit card. The cartridge would slot into a rectangular box the size of a toaster. The box was called a reader. It extracted a data signal from the cartridge and beamed it wirelessly to a server that analysed the data and beamed back a result. That was the gist of it.

When Shaunak demonstrated the system to investors, he pointed them to a computer screen that showed the blood flowing through the cartridge inside the reader. Mosley didn’t really grasp the physics or chemistries at play. But that wasn’t his role. He was the finance guy. As long as the system showed a result, he was happy. And it always did.

Elizabeth was back from Switzerland a few days later. She sauntered around with a smile on her face, more evidence that the trip had gone well, Mosley figured. Not that that was unusual. Elizabeth was often upbeat. She had an entrepreneur’s boundless optimism. She liked to use the term “extra-­ordinary,” with “extra” written in italics and a hyphen for emphasis, to describe the Theranos mission in her emails to staff. It was a bit over the top, but she seemed sincere and Mosley knew that evangelising was what successful start-up founders did in Silicon Valley. You didn’t change the world by being cynical.

What was odd, though, was that the handful of colleagues who’d accompanied Elizabeth on the trip didn’t seem to share her enthusiasm. Some of them looked outright downcast.

Did someone’s puppy get run over? Mosley wondered half-jokingly.

He wandered downstairs, where most of the company’s 60 employees sat in clusters of cubicles, and looked for Shaunak. Surely Shaunak would know if there was any problem he hadn’t been told about.

At first, Shaunak professed not to know anything. But Mosley sensed he was holding back and kept pressing him. Shaunak gradually let down his guard and allowed that the Theranos 1.0, as Elizabeth had christened the blood-­testing system, didn’t always work. It was kind of a crapshoot, actually, he said. Sometimes you could coax a result from it and sometimes you couldn’t.

This was news to Mosley. He thought the system was reliable. Didn’t it always seem to work when investors came to view it?

Well, there was a reason it always seemed to work, Shaunak said. The image on the computer screen showing the blood flowing through the cartridge and settling into the little wells was real. But you never knew whether you were going to get a result or not. So they’d recorded a result from one of the times it worked. It was that recorded result that was displayed at the end of each demo.

Mosley was stunned. He thought the results were extracted in real time from the blood inside the cartridge. That was certainly what the investors he brought by were led to believe. What Shaunak had just described sounded like a sham. It was OK to be optimistic and aspirational when you pitched investors, but there was a line not to cross. And this, in Mosley’s view, crossed it.

So, what exactly had happened with Novartis?

Mosley couldn’t get a straight answer from anyone, but he now suspected some similar sleight of hand. And he was right. One of the two readers Elizabeth took to Switzerland had malfunctioned when they got there. The employees she brought with her had stayed up all night trying to get it to work. To mask the problem during the demo the next morning, Tim Kemp’s team in California had beamed over a fake result.

Mosley had a weekly meeting with Elizabeth scheduled for that afternoon. When he entered her office, he was immediately reminded of her charisma. She had the presence of someone much older than she was. The way she trained her big blue eyes on you without blinking made you feel like the centre of the world. It was almost hypnotic. Her voice added to the mesmerising effect: she spoke in an unusually deep baritone.

Mosley decided to let the meeting run its natural course before bringing up his concerns. Theranos had just closed its third round of funding. By any measure, it was a resounding success: the company had raised another $32 million from investors, on top of the $15 million raised in its first two funding rounds. The most impressive number was its new valuation: $US165 million ($A218 million). There weren’t many three-­year-­old start-ups that could say they were worth that much.

One big reason for the rich valuation was the agreements Theranos told investors it had reached with pharmaceutical partners. A slide deck listed six deals with five companies that would generate revenues of $120 million to $300 million over the next 18 months. It listed another 15 deals under negotiation. If those came to fruition, revenues could eventually reach $1.5 billion, according to the PowerPoint presentation.

Elizabeth Holmes was great at selling her brand to the world and received accolades for her business acumen. The problem was, her company’s key product didn’t work. Picture: Kimberly White/Getty Images for Breakthrough Prize
Elizabeth Holmes was great at selling her brand to the world and received accolades for her business acumen. The problem was, her company’s key product didn’t work. Picture: Kimberly White/Getty Images for Breakthrough PrizeSource:Getty Images

The pharmaceutical companies were going to use Theranos’s blood-­testing system to monitor patients’ response to new drugs. The cartridges and readers would be placed in patients’ homes during clinical trials. Patients would prick their fingers several times a day and the readers would beam their blood-­test results to the trial’s sponsor. If the results indicated a bad reaction to the drug, the drug’s maker would be able to lower the dosage immediately rather than wait until the end of the trial. This would reduce pharmaceutical companies’ research costs by as much as 30 per cent. Or so the slide deck said.

Mosley’s unease with all these claims had grown since that morning’s discovery. For one thing, in his eight months at Theranos, he’d never laid eyes on the pharmaceutical contracts. Every time he inquired about them, he was told they were “under legal review”. More important, he’d agreed to those ambitious revenue forecasts because he thought the Theranos system worked reliably.

If Elizabeth shared any of these misgivings, she showed no signs of it. She was the picture of a relaxed and happy leader. The new valuation, in particular, was a source of great pride. New directors might join the board to reflect the growing roster of investors, she told him.

Mosley saw an opening to broach the trip to Switzerland and the office rumours that something had gone wrong. When he did, Elizabeth admitted that there had been a problem, but she shrugged it off. It would easily be fixed, she said.

Mosley was dubious given what he now knew. He brought up what Shaunak had told him about the investor demos. They should stop doing them if they weren’t completely real, he said. “We’ve been fooling investors. We can’t keep doing that.”

Elizabeth’s expression suddenly changed. Her cheerful demeanour of just moments ago vanished and gave way to a mask of hostility. It was like a switch had been flipped. She levelled a cold stare at her chief financial officer.

“Henry, you’re not a team player,” she said in an icy tone. “I think you should leave right now.”

There was no mistaking what had just happened. Elizabeth wasn’t merely asking him to get out of her office. She was telling him to leave the company — ­immediately. Mosley had just been fired.

This is an extract from Bad Blood by John Carreyrou, published by Pan Macmillan, RRP $32.99. Bad Blood is available from Tuesday May 29 at all good book stores.

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