Her vision enticed investors from Rupert Murdoch to Silicon Valley’s Tim Draper, and within a dozen years Theranos was valued at $9 billion. But it was all a fraud, federal prosecutors have alleged: her technology never worked as advertised. Now Holmes faces up to 20 years in prison and a fine of $3 million. She’s pleaded not guilty.
As jury selection began Tuesday ahead of opening arguments next week, Holmes has laid the groundwork for an unusual mental defect defense. The brash confident former CEO who once graced the cover of Time magazine is expected to blame her former boyfriend and the company’s president for emotional abuse that rendered her incapable of making decisions.
Holmes’s attorneys did not respond to multiple requests for comment, and attempts to reach Holmes directly were unsuccessful. Whatever her fate, the landmark trial could help redefine the start-up industry here, which has famously adopted Facebook founder’s Mark Zuckerberg’s motto “move fast and break things.”
Entrepreneurs raise hundreds of thousands of dollars based off ideas that may or may not come to fruition or even be profitable if they do. Failure is considered a necessary part of doing business.
“She is still, in my view, a child of this culture,” said John Carreyrou, the former Wall Street Journal reporter who broke the Theranos story and is now hosting a podcast about the trial. “She surfed on this myth of the genius founder who can see around corners.”
The spectacular collapse of Theranos in 2018 following those investigations triggered some limited soul searching in Silicon Valley, according to interviews with more than a dozen investors, founders and lawyers.
But little cultural change has occurred in the start-up industry in the years since, they say. And venture capital investments have continued to roll in for biotech and pharma companies — skyrocketing to $27.2 billion in 2020, from $10.6 billion in 2015, according to PitchBook Data.
The rise and fall
Over a decade beginning in 2003, she built a team that eventually totaled 800 employees, including adding Ramesh “Sunny” Balwani as president in 2009. Balwani, whom Holmes met on an educational trip to China before she even started college, was a technologist who had been an executive at an Internet company that got acquired in a lucrative deal in 1999, according to Carreyrou’s book, “Bad Blood: Secrets and Lies in a Silicon Valley start-up.” Theranos was housed in a research park in Palo Alto, Calif., also once home to Facebook and Tesla headquarters.
There, the company worked on its flagship technology — a small automated box known as either the MiniLab or the Edison — intended to quickly run hundreds of tests and issue diagnostics with just drops of blood.
In 2013, the company made a more public splash after exiting “stealth" mode, where it operated secretly. Holmes appeared on the cover of Fortune and Forbes. As vice president, Joe Biden visited the company’s offices and called it “inspirational.” She spoke at conferences and gave a TedMed Talk, all the while sporting a “uniform” black turtleneck like Apple’s Steve Jobs and a messy blond bun.
“Make sure it’s something that you love so much that even if you were fired you would do it over and over and over again because you’ll build it differently,” she told Maria Shriver in an interview in 2015.
By then, the company had an estimated value of $9 billion and had raised about $800 million from investors, according to PitchBook Data. It had also announced a partnership with Walgreens in 2013, and had started talks about a deal with Safeway as early as 2011.
It had just one test approved by the Food and Drug Administration, for herpes.
Just two weeks after Holmes’s interview with Shriver, the Wall Street Journal published an article saying the technology wasn’t working as advertised. Prosecutors echo that in the charges brought against Holmes, saying the Edison could consistently perform only a few tests. Most — including some of those performed in Theranos clinics in Walgreens — were instead run on traditional lab equipment, sometimes with samples that were too diluted and prompted inaccurate results, according to the charges and reporting.
Douglas Matje, a former Theranos employee, worked on adapting blood tests for the Edison in 2012 and 2013. He said that at the time, the technology would have supported only 15 tests from the fingertip at most. But by 2015 the company’s website showed a list of more than 100.
Silicon Valley’s culture helped some excuse that, said another former Theranos employee who worked in research and development and reported directly to Holmes and Balwani.
“Problems in the product are easy in Silicon Valley, a working technology demo is always several agile sprints away using iterative prototyping; at least that is what many of us have been brainwashed to think,” Ryan Wistort said in an email. “At Theranos this was the philosophy.”
Holmes denied any wrongdoing in interviews.
“This is what happens when you work to change things,” she said in an October 2015 interview with CNBC. “First they think you’re crazy, then they fight you, then you change the world.”
But things rapidly collapsed. Current and former employees told reporters about demanding work conditions, fear of legal repercussions for speaking out and a technology that was being used on live patients — but that wasn’t working as advertised.
The FDA had already started to investigate, according to the Wall Street Journal. The Safeway deal never came to reality, and Walgreens later sued the company for $140 million. The Centers for Medicare and Medicaid Services issued a report in January 2016 that found that “the deficient practices of the laboratory pose immediate jeopardy to patient health and safety.”
The next year, it agreed with CMS to stay out of the blood testing business for two years. Holmes and Balwani made a deal with the Securities and Exchange Commission to settle allegations of massive fraud. As part of the deal, Holmes would not be allowed to serve as an officer of a public company for 10 years.
In 2018, Theranos shuttered as its next chief executive said the company ran out of cash.
Her day in court
Prosecutors have charged Holmes and Balwani with 10 counts of wire fraud and two counts of conspiracy to commit wire fraud. The indictment alleges that Holmes knowingly lied to investors, doctors and patients to get paid.
“Despite representing to doctors and patients that Theranos could provide accurate, fast, reliable, and cheap blood tests and test results, Holmes and Balwani knew — through, among other means, their involvement in Theranos’s day-to-day operations and their knowledge of complaints received from doctors and patients — that Theranos’s technology was, in fact, not capable of consistently producing accurate and reliable results,” the indictment says.
Wire fraud, along with mail fraud, is a common white collar crime that involves money being sent across state lines and is considered a federal crime. Holmes and Balwani had their trials severed, and Balwani will be tried second, probably in January. Opening arguments in Holmes’s case are currently expected Sept. 8.
An attorney for Balwani did not return requests for comment.
In an April 2016 interview with the “Today” show, Holmes said she was “devastated” that the company hadn’t found and fixed problems earlier, and that Theranos was rebuilding its lab from scratch.
“I’m the founder and CEO of this company,” she said. “Anything that happens in this company is my responsibility at the end of the day.”
But on Saturday, in unsealed court documents, her lawyers appeared to outline a different line of defense.
“Ms. Holmes plans to introduce evidence that Mr. Balwani verbally disparaged her and withdrew ‘affection if she displeased him’; controlled what she ate, how she dressed, how much money she could spend, who she could interact with — essentially dominating her and erasing her capacity to make decisions," according to one of the documents.
Holmes was evaluated by a psychologist who specializes in violence and trauma, including violence against women. In turn, prosecutors gained approval from the judge, Edward J. Davila, to have a psychiatrist and psychologist evaluate Holmes.
“It’s not unusual to have some sort of psychological defense in a similar case,” said Jeffrey Bornstein, a white-collar criminal defense lawyer and partner at Rosen Bien Galvan & Grunfeld. “It’s a question of trying to explain away or at least put context in why would somebody do this.”
Another common defense is for lawyers to argue that the defendant was acting in good faith and just made mistakes, said Rodney Villazor, a white-collar defense lawyer at Smith Villazor and former federal prosecutor. That’s in line with the Silicon Valley ethos.
Since the collapse of Theranos, Holmes has kept a low public profile. Her trial has been delayed at least three times because of pandemic constraints, and most recently because she was pregnant. She gave birth to a baby boy on July 10 in San Mateo County with her partner, hospitality heir Billy Evans.
In late August, Holmes showed up in court for a pretrial hearing, her first time in the public courthouse in more than a year. She appeared calm, clad in a dark-colored dress and blazer with a baby-blue face mask. She took notes in a small book.
Draper, who has also invested in Tesla and Twitch, said in an email he hopes she’s cleared of any wrongdoing and allowed to be more productive for society as an inventor.
“I still believe her to be a visionary and potentially a great scientist who can improve our world,” he said in an email in August.
For Wistort and some of his fellow former Theranos employees, the trial is a chance to get the full story of what happened inside the company, and an opportunity for the Silicon Valley ethos to be held in front of a public mirror.
“My hope is that this trial and this story is a wake-up call for Silicon Valley, a call to action,” he said.
Matje, the other former employee, suspects that the cultlike environment that prompted a lack of questions is doomed to repeat itself.
“Things like that will happen again,” he said.