Lessons learned from Theranos’ fall

By:

Jul 11, 2016

Late Thursday, Theranos announced that U.S. regulators had finally imposed sanctions on the early-stage diagnostics company, after questions were raised about the validity of its proprietary technology. The sanctions had been expected for some time. But, by revoking the certification of the company’s main laboratory in Newark, Calif., and restricting the company’s founder, Elizabeth Holmes, from owning or operating a laboratory for two years, the regulators have handed down one of the most severe types of punishment on a healthcare company in recent memory.

In my previous blog post, I suggested that the fall of Theranos was an unfortunate outcome of a company with promising technology whose focus and direction might have been derailed by pressure from impatient investors. I still maintain that view, in that Theranos probably never had a fair chance or enough time to perfect its technology and mature its business model. This sad end for Theranos, however, provides a number of lessons for entrepreneurs, managers, and investors.

Elizabeth Holmes Theranos Twitter Cropped 2

Lesson 1: Do not accept too much investment too early.

In the venture capital world, the rule of thumb is to “take as much as you can while the cash is available.” In many cases, however, especially when there is too much hype, inflow of investments, and spiking, valuation can be detrimental to a great start-up. When its valuation skyrockets, investors hope to monetize it as quickly as they can. Although a deep cash reserve eliminates a start-up’s risk of running out of cash, too much cash can undermine its focus. That pressure forced Theranos to try to run faster than it could, pushing it down the slippery slope toward its own ruin.

Lesson 2: Share key data as it becomes available.

It was always puzzling that Theranos’ management was happy to pronounce itself as the transformative agent of healthcare, when it was extremely reluctant to share any clinical data on its technology. Now that sanctions have been imposed, the public will likely conclude that Theranos didn’t share its data because it didn’t have any. We, however, blame management for this strategic error. Theranos was likely afraid to make any data available that could undermine its astronomical valuation. The investors wouldn’t allow it. But, what Theranos should’ve done, was aggressively share its data, even if the data was not up to standards. Theranos’ point-of-care platform was already a leg up on every other diagnostic modality, and transparency would have encouraged trust rather than suspicion.

Lesson 3: Do not expand unproven business models too quickly.

Another major misstep for Theranos was its aggressive “go-to-market” strategy. While partnering with Walgreens added confidence to the potential value of its technology, it exposed the company to a whole new set of performance targets that management was simply not ready to handle. Start-ups must first demonstrate the viability of their business models, but many are often tempted to stretch themselves too thin by making too many promises too early. Instead, entrepreneurs need to focus on proving that their business models are viable before taking giant steps toward growth.

Lesson 4: Manage expectations of enabling technologies.

No innovation in history has nailed everything in its first try. Innovations always improve. The challenge is how innovators are able to manage public expectations regarding what their technology can and cannot do, and it’s essential that they do so from the start. Theranos failed in this regard, which caused investors, the media, and the public to have unrealistic expectations. Had the company been less bold in its claims, the public would have likely been more forgiving of any known errors and the technology would have been able to improve with time.

A start-up usually makes multiple mistakes during its early growth phase. If we study those who succeed in developing sustainable business models, however, most of them will show that they have successfully managed these four lessons. Although a company’s success or failure might appear to be black and white, the truth is that companies generally live somewhere in between, and where they stand is determined by cumulative outcomes of decisions made. By learning from the mistakes made by Theranos, however, the next wave of innovative companies can not only escape the same result, but hopefully live up to their potential.

Spencer Nam

Spencer researches disruptive innovation in the healthcare industry. He has over 15 years of professional experience working with U.S. and international healthcare enterprises, most recently as an equity research analyst covering medical technology companies.

  • Kerry Nielson

    Excellent insights. Money often is the root cause of problems in developing businesses. I agree with your analysis of this unfortunate failure.