The conviction of Elizabeth Holmes, former Theranos CEO and founder, a MedTech Entrepreneur, has highlighted some issues about starting up in the MedTech industry and some important lessons can be learnt from it. In this article, we discuss what MedTech in Australia can learn from this fascinating governance story.
But first... what even happened to Theranos?
Theranos was a MedTech business based in California that was founded by Elizabeth Holmes, with the hope of developing technology capable of quickly and inexpensively analysing blood samples.
Holmes rose to fame and fortune and was labelled as the 'next Steve Jobs' and 'the world's youngest self-made female billionaire', including being touted by Time Magazine as one of the most influential people in 2015.
This sounds great, right? Yes, the story was a compelling one - but the start-up's technology never consistently worked. Theranos took the usual spin required by entrepreneurs to raise money and create new technology to the next level, and eventually the hype surrounding the company did not ultimately come to fruition. The conduct of Elizabeth Holmes shows a very dark side of the MedTech entrepreneur.
In early January this year, Holmes was found guilty on three counts of fraud and one count of conspiring to defraud private investors in Theranos. She was acquitted on another four counts, and a mistrial was declared on three other counts. Whilst Holmes was due to be sentenced in late September, this was delayed by her request for a new trial, after one of the prosecution's key witnesses admitted he regretted the role he played in her conviction. Provided a new trial is not granted, Holmes will be sentenced between November 2022 and January 2023. Although the case is not officially closed, there is one key lesson we can learn from her experience thus far: the importance of good governance.
Now let's dive deeper into what MedTech in Australia can learn from the experience of Theranos which has played out in the public media to date.
Lesson 1: The importance of being realistic and transparent
Transparency is critical in all aspects of governance. Not just within your organisation, with your employees, but with investors and customers – who are, when you are a MedTech entrepreneur, also patients.
As an entrepreneur, you would no doubt know the exact feeling when you have a new idea and you are passionate to get started straight away. However, in these moments, it's important to take pause so that you don't miss a step and get in over your head, as Holmes did.
We would all love to change the world in our own way, but it is important that this vision leads to an actionable and achievable strategy. By nature, entrepreneurs are ambitious, and none more so than MedTech entrepreneurs, but it is important to 'keep it real'. Don't get blinded by your own vision. Holmes might have, at least initially, thought that her ambition was realistic. However, she lacked the ability to be transparent with her stakeholders and allegedly made unsubstantiated claims, which in some cases, allegedly put patient's lives in danger.
The Prosecutor of the case, John Bostic, told jurors that Holmes "committed these crimes because she was desperate for the company to succeed" – not because she wanted to cash in. Ultimately, she chose fraud over business failure – which as was seen, can have unfortunate, and lasting, consequences.
Fail small. Don't sweep problems under the rug – they will not be forgotten.
Lesson 2: It's not all about raising capital
Theranos raised $45 million in investment capital in 2010, and in the 8 years following that, raised a total of $400 million. As a MedTech entrepreneur, it is vital you don't incorrectly assume that raising capital will solve the challenges that you face.
Can't find product-market fit? Well, if I had more money, I could hire people to fix it.
Not hitting my sales targets? If I just had more money, I could hire more experienced sales people.
Needing more media attention? Raising more of capital will make your organisation seem more worthy, and valuable...
Right?
Wrong.
This thought process can make smaller problems, turn into bigger ones that eventually become insurmountable. This is particularly true if there are inherent flaws in the organisation's culture or leadership. The risk of distortion and inaccuracy is heightened as start-ups (even the mature ones) often have less robust internal controls and governance procedures than public companies, which are required to have a strong governance framework in place.
Holmes possessed confidence, conviction and charisma, which made her a great salesperson and explains the success of her fundraising efforts. The media commentary in respect of this matter indicates that the Medtech entrepreneur was able to raise such significant capital as reflection of her personal qualities, as opposed to the success of the company's internal operations and product.
Lesson 3: How important it is to keep a knowledgeable Board in the loop
Holmes' board composition raises important considerations and warnings for start-ups. The Theranos board consisted of influential names e.g. previous Secretaries of State Henry Kissinger and George Schultz and former senators Bill Frist and Sam Nunn. Whilst these people may be well known in the capital investment and political sphere, Holmes' board lacked people who knew the product and the market. Some commentary has suggested this may have been on purpose, as having a board that was unfamiliar with the subject matter meant that they were not able to ask the medical probing questions that may have been of assistance to Theranos' potential success.
Another way of looking at it is that, perhaps the Medtech Entrepreneur might have benefited from a more scientifically experienced board, consisting of perhaps molecular biology researchers, or nanotechnologists.
This raises another consideration though – striking the right balance between having industry expertise, but not so much that it takes away from the strategic operations of the business – and the potential of raising future rounds of capital, which those influential people very much allowed her to do. It is alleged that Holmes always maintained significant voting power, which gave her a lot of control.
The Board should be kept in the loop. Theranos' board had very limited access to people and information. As a consequence, the fact of the failing technology was able to be kept secret, which fostered a negative culture of mistrust and secrecy. It is alleged that Holmes saw the board as a 'necessary burden' that would lead to further funding and an increase in Theranos' profile. It is arguable that a better outcome may have been achieved if Holmes saw the board as a valuable network of support and an opportunity to impose good governance processes.
It is not always necessarily in bad faith that Medtech entrepreneurs (and other entrepreneurs) alienate their boards, it may be that some are unaware of how much insight, guidance and support can be gained from an informed, engaged board. It is also important for the board to be effective, that the CEO is not so determined to push a specific agenda, that dialogue cannot ensue. Robust dialogue is critical to good governance.
Lesson 4: The legal consequences of interactions with the media
Not only is it ethically wrong, misleading the media can have legal implications. As a MedTech Entrepreneur, you must be mindful of the line between promoting the possibilities you see for your business and telling outright lies - and be sure not to cross it.
The media played a huge role in glamourising Holmes' success. If a story is pitched and picked up by media outlets enough times, it will be believed by the masses and can lead to money, respect and even celebrity status.
The media are equally as powerful on the other side of success, and it was John Carreyrou, a Wall Street Journal journalist who first blew the whistle on the governance issues at Theranos.
Lesson 5: Avoiding the 'blame game'
If things are starting to go sour, one of the worst things you can do is project blame onto someone else. This may not be as simple as saying 'it is his fault, not mine', and may consist of pretending to be unaware, or finding a scapegoat, which Holmes allegedly found in Ramesh Balwani, the former Theranos COO (with whom she was also romantically linked). Holmes' testimony at trial was noted for the lack of fault she found in herself (as an aside it is not uncommon for CEO's to be terrible witnesses). However, the takeaway learning is that it is important that you take accountability for your actions, so that mistakes can be best remedied and your reputation and credibility for client and other relationships can be strengthened.
This also links to the importance, as a MedTech entrepreneur, of maintaining integrity, where honesty and the ability to stand by inactions or actions are required. You want to be trusted by your team, your investors and your customers' – not just for the sake of the venture you are currently working on, but for your future.
At the end of the day, when a business plan, service or product fails, responsibility is usually attributed to the executives, so you should prepare accordingly.
Lesson 6: Exercising Due Diligence
This is an important lesson for everyone in business – not just MedTech entrepreneurs. A vital step in assessing an investment opportunity, or seeking investment from others, is due diligence. Whilst some investors didn't get involved in Theranos because of a lack of information regarding the technology's technical capability and US Food and Drug Administration ('the FDA') status, some did. Despite the FDA never approving Theranos' equipment, the 'story' of how the MedTech start-up was 'going to change the world' was allegedly sold to investors, for a large sum of money.
A quick note on culture
A positive company culture, that has room for criticism of practices or leadership, is vital. Theranos' would-be whistle blower employees were allegedly threatened with lawsuits, fired or marginalised and bullied to the extent they had to leave. If the culture wasn't as toxic as the reports suggest, perhaps Holmes would have been more likely to achieve her vision.
As legendary management consultant Peter Drucker said, "Culture eats strategy for breakfast." What he meant, and what played out at Theranos was, no matter how strong your strategic plan, it's the people implementing the plan that make all the difference. Despite hiring the best of the best, Elizabeth Holmes was unable to create a culture that allowed those team members to excel.
Good to go...?
It is very clear from Theranos' experience that good governance is important in achieving your business' goals and that there may be consequences as a result of failing to implement good practices, check-points and balances. Of course, we haven't even scratched the surface on what went wrong for Theranos (after all, it was labelled 'one of the most epic failures in corporate governance'), but hopefully you have a clearer idea of what to do, and not to do, on your governance journey as these lessons also apply to MedTech in Australia.
Failing a start-up mission is not a crime, it's the deception towards investors who have put their capital and trust in you that is. Having patients put their health in your hands when your device doesn't do what it is intended to do, is also potentially a crime. Hopefully, after reading this article, you feel more empowered and confident that bringing issues to the forefront, rather than sweeping them under the rug, is the best course of action to give your MedTech business the best opportunity to make an impact for investors, patients and all the other stakeholders along the way.
