The Theranos scandal is one of the most infamous stories in Silicon Valley’s history. This medical diagnostics startup, which promised revolutionary advancements in blood-testing technology, ultimately revealed itself as an elaborate deception. Elizabeth Holmes, Theranos’ enigmatic founder, captivated investors, politicians, and military leaders with her charm and seemingly unshakable vision. Yet, beneath Holmes’ carefully crafted persona and the company’s staggering $9 billion valuation lay a hard truth: the technology she promised simply didn’t exist.
To understand Theranos, think of the Mechanical Turk, an 18th-century chess-playing automaton that dazzled audiences with its skill. The “automaton” wasn’t a machine at all. It hid a human chess master who controlled its moves. Similarly, Holmes promised a revolutionary device but relied on outdated technology and deliberate deception to mask its flaws.
How Is This Type of Fraud Perpetrated?
Consider then-VP Joe Biden’s visit to Theranos. Holmes orchestrated an elaborate ruse to sell the Edison machine’s capabilities. Biden was told his blood would be tested on an Edison machine. Instead, his sample was sent to a Quest Diagnostics machine hidden on-site.
Employees scrambled to maintain the illusion. They pretended to load Biden’s sample into the Edison machine before secretly testing it elsewhere. While Biden toured the facility, the Quest machine produced accurate results. Employees then inserted those results into the Edison machine to create the appearance of functionality.
Like the Mechanical Turk deceived audiences, Theranos misled investors and officials with an intricate facade. But this isn’t just about one founder’s fraud. It reveals systemic flaws in the venture capital world. Charisma often overshadows evidence, and due diligence is dangerously superficial.
Examining how Theranos gained traction—and why so many ignored red flags—reveals deeper problems. This isn’t just about Holmes; it’s about a venture capital system that let a $9 billion illusion persist.
Venture Capital’s High-Risk, High-Reward Model
In a previous role, I recruited subject matter experts for private equity and venture capital M&A projects. High-profile clients, including Bessemer Venture Partners and Redpoint Ventures, often made urgent requests. They wanted insights from former startup employees to evaluate potential investments. These requests usually arrived on Friday afternoons, with responses expected by that night or early Saturday. The rush to deliver reflected a larger issue: speed trumped thorough evaluation. My experience revealed a troubling fact. In venture capital, only 10% of investments are expected to yield significant returns. A firm can see 90% of its portfolio fail and still be deemed successful if one or two investments deliver enormous returns. This approach to investing is sometimes called unicorn hunting.
This high-risk, high-reward model fosters a culture where spotting charismatic founders—those with “the stuff”—is often prioritized over rigorous product validation. Elizabeth Holmes embodied this “stuff” perfectly, using her intense persona and promise of innovation to craft an image of herself as a visionary leader. Investors, eager to be part of the next breakthrough, placed more faith in her potential than in any evidence of tangible results.
Theranos – An Alluring Mirage with No Product
My interest in Theranos began long before the scandal erupted in the media. Elizabeth Holmes’ presence was magnetic; she projected a hypnotic intensity, complete with a signature deep voice, an unwavering gaze, and an air of conviction that was difficult to ignore. Holmes positioned herself as the next iconic visionary, expertly tapping into biases within an industry hungry for groundbreaking ideas and disruptive leaders. Her supporters included some of the world’s most powerful figures, from media tycoon Rupert Murdoch to former Secretary of State Henry Kissinger.
The reality, however, was that Holmes had built a $9 billion empire entirely on promises and actively masked the total absence of a viable product from the very start through to the catastrophic end of the Theranos venture. Investors were captivated by her vision and often unwilling to succumb to disbelief even as red flags mounted. So, how did Theranos evade scrutiny for so long? The fact that influential figures and prominent backers ignored the lack of concrete evidence supporting Theranos’ claims points to a much larger, systemic issue within the venture capital ecosystem itself.
The Psychological Power of Charismatic Founders
A critical factor in Theranos’ success was Elizabeth Holmes’ charisma, which cast a powerful spell over investors, the media, and her employees alike. Holmes employed various tactics—her intense gaze, her deep voice, and a signature black turtleneck reminiscent of Steve Jobs—to cultivate an aura of visionary authority and enhance her persuasive influence. This “charisma bias” enabled her to gain the trust of seasoned investors and executives, who were entranced by the promise of bold innovation.
Charisma is undeniably valuable in entrepreneurship; founders who can inspire tend to attract investment and talent. However, Theranos exemplifies how this “founder effect” can dangerously overshadow rational decision-making. When confidence eclipses competence, investors become susceptible to a flawed narrative, allowing the founder’s personality to take precedence over substantive evidence. In Holmes’ case, this charisma bias ultimately diverted scrutiny away from the product and placed it entirely on her image.
The Role of Media in Fueling Startup Hype
Media coverage played a pivotal role in amplifying Theranos’ rise. Major media organizations aided in constructing a compelling narrative around Holmes as a revolutionary player in healthcare technology. Journalists, eager to be one of the first to tell the story of the “next Steve Jobs,” helped solidify her image, often glossing over or failing to investigate the scientific validity of her claims. The media spotlight contributed to Holmes’ larger-than-life persona, feeding a cycle of hype that captured the public’s imagination and reinforced investors’ confidence in her untested product. Some jokingly refer to the media’s tendency to lionize fraudsters as game-changing business minds as “the Forbes 30-under-30 to prison pipeline”.
The media often glamorizes ambitious founders, prioritizing compelling narratives over thorough investigations. Extensive coverage can give startups premature legitimacy, creating momentum based on stories rather than outcomes. Theranos illustrates how unchecked hype can mislead investors and obscure the need for critical evaluation.
The Bigger Questions on Intent and Fraud in Silicon Valley
The Theranos case raises questions about Elizabeth Holmes’ intentions: did she genuinely believe in her product or knowingly deceive? Her defense argued she was a “true believer,” convinced her technology could succeed with enough time and resources. This argument suggests intense belief might excuse fraudulent actions, framing her as idealistic rather than calculating. However, fraud is defined by deception and the harm it causes, regardless of intent. Holmes misled investors, employees, and patients while pursuing her vision, which led to her fraud convictions. A jury found her guilty of wire fraud and conspiracy based on overwhelming evidence.
The “true believer” defense becomes dangerous when it excuses harmful actions rooted in strong belief. Silicon Valley’s culture often rewards boldness and vision over accountability, letting image outweigh ethics. Scandals like Theranos, Wirecard, and FTX reveal how charismatic founders can hide financial deception behind big promises.
The Cost to Patients and the Healthcare System
Theranos differed from typical startups because its product directly affected people’s health and medical decisions. Faulty technology misled patients, leading to incorrect test results and serious consequences for their health and well-being. Some patients were misinformed about conditions, causing anxiety, delayed treatment, or inappropriate medical interventions. This added a grave dimension to the usual risks of venture-backed startup failures in less critical industries.
Overlooking flaws in high-stakes fields like healthcare endangers public health, extending harm beyond financial losses. Theranos shows the risks of applying high-risk venture models to industries with life-altering consequences.
Who Benefits When Startups Fail?
A curious incentive exists within the venture capital system: in certain cases, failure can be more profitable than success. When a startup collapses, investors can benefit from writing off losses for tax purposes, offsetting gains from other ventures. Rupert Murdoch, for instance, invested $125 million in Theranos, only to later sell his shares back for a nominal $1. For ultra-wealthy investors, such losses can be cushioned by tax benefits, reducing the financial blow and making high-risk ventures less risky than they may seem.
Beyond tax benefits, venture capital thrives on the hype surrounding high-profile investments. Even if a startup fails, the buzz can elevate a firm’s profile and bolster its reputation as a significant player in Silicon Valley. This dynamic creates a cycle in which hype and visibility are prioritized, and the risk of failure is normalized as long as it aligns with the broader strategy. In Holmes’ case, her charisma and bold promises drew investors willing to accept massive risk despite clear practical red flags.
Lessons from Theranos – The Need for Stricter Due Diligence
Theranos isn’t the only case where due diligence catastrophically failed. Similar lapses have appeared with companies like Wirecard and FTX, where investors ignored obvious red flags. In Theranos’ case, VCs granted Holmes a $9 billion valuation without verifying the functionality of her technology. This failure wasn’t limited to one or two bad actors; it reflects a culture that values potential over proof.
Silicon Valley’s relentless drive for “the next big thing” creates an environment where due diligence becomes a checkbox rather than a safeguard. Due diligence should act as a critical checkpoint to assess feasibility and validity. In Theranos’ case, however, the emphasis was on promises of innovation. Founders who “looked the part” often received investment even if they lacked technical expertise or a functional product. Theranos starkly illustrates the dangers of this bias. For venture capital to avoid more Theranos-like failures, it must prioritize substance over style, adopting due diligence practices that go beyond surface-level evaluations and charismatic pitches.
Conclusion
The Theranos scandal is a sobering reminder of the systemic vulnerabilities within venture capital. Elizabeth Holmes’ rise was powered not just by her charisma. It was also enabled by a venture ecosystem willing to overlook due diligence in favor of a compelling narrative. Her story is not an isolated failure but a symptom of a broader culture that often rewards bold claims over verified results. So, how can proactive compliance measures be applied and improved to prevent further damage by bad actors in financial and investment spaces?
Venture capital is frequently criticized – and rightly so – for the lack of institutional accountability for scandals like the collapse of FTX and the dishonesty of CEOs like Elizabeth Holmes and Charlie Jarvis. As we mention in our FTX blog, the crypto exchange was evaluated for viability and merit by some of the best-regarded due diligence teams in the country. This list includes the due diligence team at Bain Capital. So that raises the question – why do we never hear about consequences being leveled against these large players whose good reputations enabled large-scale fraud?
Venture capital claims to serve as a true driver of positive change. For this to be true going forward, the field must ensure that the next generation of founders delivers real value—not just slick pitch decks. To prevent more Theranos-like deceptions, Silicon Valley must make substantive changes. Due diligence should be restored as a cornerstone of responsible investing rather than a cursory check. By prioritizing genuine innovation over high-risk hype, the industry can avoid the costly repercussions of betting on empty promises.