The $10 Billion Magic Trick

Happy Friday!!

Did you watch Scam 1992? I did, and as a finance major, it blew my mind. I mean, who knew you could bend financial rules so far without them snapping?

The funny part is in 2020 during that same time, my professor introduced us to the Worldcom scandal, and I thought, “Okay, this is wild.” But little did I know, Silicon Valley had a different kind of scandal brewing—one that made fraud look like child’s play.

Enter Elizabeth Holmes. No, not the long-lost sibling of Sherlock Holmes, though her story could’ve used some detective work.

She started a company at 19, wore Steve Jobs’ signature black turtleneck, and convinced the world she was about to revolutionize healthcare with a magical blood test machine. Spoiler alert: The machine was more of a prop than an actual product.

The Next Steve Jobs (Youngest Self-Made Billionaire)

In the mid-2000s Elizabeth Holmes was all over the headlines and was regarded as the next Steve Jobs as she had the vision to change the whole healthcare industry.

Her company, Theranos promised a magical device that would run 200 blood tests from a single drop of blood and provide instant results.

That magical device was named Edison which claimed to perform 200 tests with a single blood drop and perform the test that ranges from detecting cholesterol levels to screening cancer.

The message was simple: provide simpler, cheaper, and more efficient blood testing. This message made Elizabeth the youngest billionaire by the year 2014 and her company Theranos was valued at over $10 Billion.

If Sherlock Holmes were associated with this case he would have cracked the case much sooner as there were so many loopholes and instead of me writing this, you would have read it in Watsons’ (Sherlock’s Right Hand Man) blog.

The Promise That Never Got Delivered

Elizabeth’s so-called magical device Edison was promised to deliver 200 blood test reports in the most efficient way as it will replace the traditional blood testing process where the patient needs to provide a good amount of blood.

The promise shook Silicon Valley and everybody wanted to get on board with Elizabeth as it was marketed as the “Next Big Thing.”

Even US diplomats praised this invention and many big names joined the journey of Elizabeth Holmes. Walgreens which is a large pharmaceutical company invested a good amount in Theranos.

What did Edison deliver?

If you ask me, I would say it delivered only disappointment.

Edison promised to be the microwave of blood tests—quick and easy. Instead, it was like one of those fancy coffee machines that take up counter space and provide lukewarm water in the name of Coffee.

It did even worse, it produced highly inaccurate results. Now, you may ask what scam Elizabeth performed.

Elizabeth knew that Edison failed miserably but she continued to hide the facts and provided false information to the investors to raise funds.

How Did She Get The Funding?

The initial funding she raised through family connections. She was very good at selling her visions and imagination.

She utilized that and got funding from some big investors which created a false trust for others as they thought if those investors were investing in Theranos then it must be something big.

Imagine pitching your imaginary friend as your business partner and people throwing cash at you because, hey, he sounds legit. That’s basically what Elizabeth did.

If you are familiar with investing you would know that before any big investment, it goes through due diligence. In simple terms, it means investors check everything before providing their money.

However, there was no proper due diligence done in the case of Theranos. The reasons behind that are:

• In the mid-2000s investors were driven to invest in the next big thing and they had the fear of missing out on an opportunity like that. Elizabeth was able to sell the dream of the next big thing and investors got blinded because of that.

• Extreme secrecy was maintained in Theranos regarding Edison’s tests. It gave the vibe of Coca-Cola hiding its secret formula. The investors did not barge in as they believed it may have negative consequences on the company’s reputation.

• Surrounded by big names and even pharmaceutical investors like Walgreen she was always out of suspicion radar.

• Elizabeth was able to sell the story that her company is for the greater good and it is not some profit-generating machine which drove an emotional appeal that safeguarded her for a long time.

The Crack In The System

Theranos was so popular that everybody wanted to work in Theranos.

The employees that got hired were very encouraged as they thought they were going to be a part of a revolutionary invention.

Well, they have been a part of something revolutionary but not in a good way and not the way they wanted. I can only imagine how they felt.

Thinking I was part of the healthcare revolution, only to realize I was part of a live-action episode of Black Mirror. 😅 

In 2015 a journalist of The Wall Street Journal named John Carreyrou received some insider news from some employees of Theranos. The whistleblowers claimed that Elizabeth was manipulating the test results.

The hype bubble that was growing day by day was just an eyewash. Edison never delivered what it promised, it provided inaccurate results. Elizabeth was hiding it and threatening others to keep that a secret.

Traditional machines were performing the tests that were showcased to the outside world as Edison’s glory.

Once the story got published the hype bubble popped and that truth came in front of everyone. Federal Investigation began and big backers like Walgreens terminated their partnership.

By 2018 Theranos was dissolved and Elizabeth Holmes along with some other key executives were charged for fraud.

The changing of the healthcare system through Edison became a fairy tale story.

Honestly, by the end of this story, I felt like I’d binge-watched a drama series where everyone’s in the joke except the investors. If there’s one takeaway here, it’s that you should probably make sure your miracle machine does more than just look cool before raising billions.

See you next Friday!!