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Theranos: five investor lessons from the downfall of Elizabeth

Holmes

A proposition that seems too good to be true generally will be

Blood-testing start-up Theranos has become a parable of Silicon Valley over-reach. But the

trial of founder Elizabeth Holmes, who has just been found guilty of fraud, contains wider

lessons for investors. Here are five:

First, they should apply scientific scepticism to fantastical scientific claims. The starting point

here should have been Theranos’s claims it had cracked the problem of drawing blood for tests

from a finger. Capillary blood, unlike venous blood drawn from an arm, contains fluids from

tissues and cells that make measurements less accurate.

Hype is intrinsic to the culture of Silicon Valley. The computer industry’s marketing inspired

the term “vapourware” back in the 1980s. But overpromising and underdelivering is

unacceptable in healthcare, where real human misery may result.

Second, investors must distinguish between sensible protection for intellectual property and

secrecy so intense it signals cover-ups. Having secured patents, there was no reason why

Theranos should not have made its proprietary equipment available for testing by

independent experts, who would have published findings in a peer-reviewed journal.

In healthcare, that sort of transparency is essential — though there are growing concerns

Silicon Valley’s paranoid culture is eroding it. John Ioannidis, a Stanford professor and early

sceptic on Theranos, co-authored a paper showing that more than half of healthcare unicorns

have few citations of their work.

The third lesson is that charisma carries some bosses further than their capabilities merit.

Holmes’s status as a rare female in a male-dominated world combined with her self-belief and

charisma to create a “halo” effect that stifled disbelief. Her charm and plausibility have been
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compared to that of Bernard Madoff, the US financier who perpetrated the largest Ponzi

scheme in history.

Fourth, investors must make their own minds up on a business, discounting celebrity

endorsements. Holmes cosied up to establishment titans such as George Shultz, Jim Mattis and

Henry Kissinger. She created the illusion that her technology was validated using the logos of

pharmaceutical groups such as Pfizer on Theranos documents.

The bigwigs gulled by Holmes avoid a portion of hindsight blame by virtue of her penchant for

fraud. But there was also a glaring illogicality in their mistake. It was to assume big

breakthroughs are as likely in the intractable physical world — in this case, blood testing —

as they are in manipulable cyber space.

The fifth lesson is that a proposition that seems too good to be true generally will be.