27: Theranos and Principled Entrepreneurship
27: Theranos and Principled Entrepreneurship
For our penultimate class, we will discuss the case of Theranos and the theme of principled entrepreneurship. As you contribute to, and perhaps build, high-tech ventures, it is important to think critically about how your personal values and principles inform the difficult decisions you may face throughout your career.
Read the article The Big Idea: Before You Make That Big Decision (HBR June 2011 available at https://hbsp.harvard.edu/tu/95192622) co-authored by Nobel laureate Daniel Kahneman. Earlier this semester, on Feb 8th, we discussed Professor Kahneman’s acclaimed work on cognitive biases and how they can impair rational decision making. At that time, we specifically discussed optimism bias, planning fallacy bias, confirmation bias, and sunk cost bias. These and other biases discussed in this article can creep into strategic choices and lead one astray. As you read the Theranos saga below, think about decisions made by Elizabeth Holmes and how they may, or may not, have been impaired by one or more cognitive biases.
Then read the case study
Theranos: How Did a $9 Billion Health Tech Startup End Up DOA?
available at https://hbsp.harvard.edu/tu/c973fa0f.
Think about how you would answer the six study questions at the end of the case:
- The outcome of the Theranos saga is quite exceptional. How exceptional do you think the underlying situation and pressures highlighted in this case are, relative to other innovative ventures?
- Consider the incentives for innovative entrepreneurs when it comes to extolling the virtues of their product. Should innovative entrepreneurs overpromise, or misrepresent in any way their products? Can they avoid it?
- How would you characterize the working conditions and culture in Theranos, especially in regards to to the flow of information and leadership attitudes toward dissent?
- Employees can question managerial practices and potentially act as whistleblowers. What were the incentives to do so in the case of Theranos?
- What factors make it harder to detect fraud and other violations of public trust in the corporate world?
- What might be the role of media, regulation, and moral values in curbing violations of trust?
After studying the Theranos case, read the brief article, Theranos and the Dark Side of Storytelling (HBR 10/18/2016) available at https://hbsp.harvard.edu/tu/5457181b. Think of Elizabeth Holmes as a storyteller and why, for a while at least, she was so good at it. The article discusses how entrepreneurship programs, including our Engineering Entrepreneurship Program here at Penn, introduce storytelling into their curricula. Why do we do this and what imperative must accompany these lessons?
Next, read the brief article, Why Startups Should Embrace Radical Transparency (HBR 11/22/2022) available at https://hbsp.harvard.edu/tu/54a5e98f. Think of transparency, or lack thereof, at Theranos. As a founder of a technology startup, what should you do to manage transparency?
Be prepared to discuss the case and the related three articles.
DUE:
There will be a short 12-minute closed-book, closed-notes quiz on one or more of today’s readings at the beginning of class. The quiz will be available via Canvas, so be sure to bring a laptop or tablet to class to take the quiz. Make sure your laptop/iPad is configured for Respondus Lockdown Browser.
Quiz questions are typically derived from the study questions provided above as part of the day’s assignment. While the quiz question may not exactly duplicate a study question, it usually will relate to the substance of one or more of the study questions. To prepare for a closed-book quiz, be sure you are prepared to address each of the posted study questions.
NOTE: Days on which we have quizzes, no essays will be due.
1. How exceptional were Theranos’s outcome and pressures?
Theranos’s ultimate collapse was dramatic, but the underlying pressures—raising funds, showing quick progress, and promising groundbreaking innovations—are common in startups. What stood out was the extreme gap between its claims and actual results, compounded by a star-studded board and rapid media hype.
2. Should entrepreneurs overpromise or misrepresent their products? Can they avoid it?
Exaggerating product potential is tempting when competing for attention. However, deliberately false claims harm investors, customers, and a startup’s credibility. Entrepreneurs should present a vision balanced with transparent, verifiable facts.
3. How would you characterize the working conditions and culture at Theranos?
A highly secretive, top-down culture discouraged open dialogue and punished dissent. Employees were often isolated, monitored, and afraid to question leadership. This stifled healthy debate and hindered honest assessment of the technology’s flaws.
4. What incentives did employees have to question or blow the whistle?
Whistleblowing risked job loss, legal threats, and reputational damage. Strict contracts and a culture of intimidation created few internal or external safe channels for raising concerns. Consequently, most employees stayed silent until external investigations began.
5. Which factors make fraud harder to detect in corporations?
Charismatic founders and influential backers can overshadow warning signs. The excitement of a “revolutionary” narrative may bias investors and media into overlooking gaps in proof. Lack of transparent data and weak oversight further delay exposure of fraud.
6. What is the role of media, regulation, and moral values in curbing violations of trust?
Media can investigate and expose inconsistencies, but must remain skeptical of compelling stories. Regulators enforce accountability through audits and legal consequences. Ultimately, entrepreneurs need to uphold honesty and integrity so that storytelling does not undermine genuine innovation.
1. How exceptional were Theranos’s outcome and pressures relative to other innovative ventures?
Theranos’s meteoric rise and dramatic fall were striking, but the fundamental pressures the company faced—such as pressure to demonstrate rapid breakthroughs, woo investors, and secure market traction—are not unique in startups. What was exceptional was how far Theranos’s technology lagged behind its claims, combined with the high-profile board, massive funding, and intense media spotlight. Many startups exaggerate a bit to attract interest, but Theranos pushed this to an extreme. Ultimately, the company exemplified what can happen when strong market hype and founder charisma override critical checks, rigorous testing, and transparency.
2. Should innovative entrepreneurs overpromise or misrepresent their products? Can they avoid it?
Entrepreneurs often face incentives to showcase the grand potential of their product, which can lead to optimistic projections or selective presentation of data. However, deliberately misrepresenting products crosses an ethical and legal line. As the Theranos case shows, overstating capabilities can harm customers, employees, and investors if real performance never matches the claim. Avoiding this pitfall requires clear communication of limitations, testing data, and realistic timelines. While a certain “visionary pitch” may be common, it must remain grounded in verifiable facts, so that aspiration does not turn into deception.
3. How would you characterize the working conditions and culture at Theranos, especially regarding information flow and dissent?
Insiders described a culture of secrecy and fear, with closely guarded labs, strict non-disclosure agreements, and a dismissive attitude toward questions. Leadership discouraged dissent, monitored employees’ communications, and fired people who spoke up about technical problems. This siloed culture stifled internal checks and honest feedback. Instead of fostering open dialogue, Theranos relied on top-down directives and maintained an “us-versus-them” mindset. Ultimately, the lack of transparent communication and respect for dissenting voices contributed to unchallenged errors in the technology and misleading practices.
4. What incentives did Theranos employees have (or not have) to question practices or become whistleblowers?
Many employees realized something was wrong—test failures or data manipulation—but faced personal, financial, and legal risks in speaking out. Theranos used threats of litigation and strict contracts to discourage sharing concerns externally. Meanwhile, some employees hoped the technology would eventually succeed or that leadership would correct the issues. The small number who did blow the whistle risked lawsuits, damage to their reputations, and intense personal strain. Thus, there were few incentives to come forward and significant disincentives to do so, creating a strong chilling effect.
5. Which factors make fraud and violations of public trust harder to detect in the corporate world?
Several factors help obscure corporate misdeeds. First, corporate hierarchies can suppress internal dissent, as happened with Theranos employees fearful of retaliation. Second, high-profile supporters (such as a star-studded board) can create an aura of legitimacy that discourages deeper scrutiny. Third, cognitive biases—like confirmation bias or halo effect—cause investors and journalists to overlook warning signs when they are enthralled by a compelling story. Finally, a lack of rigorous external oversight or transparency allows problematic practices to remain hidden until whistleblowers or investigative reporters step in.
6. What might be the role of media, regulation, and moral values in curbing violations of trust?
Media can serve as an investigative force, questioning bold claims and shedding light on inconsistencies (as The Wall Street Journal did for Theranos). However, reporters themselves must guard against being swept up by charismatic founders or “great stories.”
Regulation (through agencies like the SEC or CMS in the Theranos case) imposes oversight and legal accountability, but it relies on honest disclosures and audits. Ensuring robust compliance mechanisms is key.
Moral values should underlie corporate storytelling and entrepreneurial ambition. As experts on storytelling caution, a culture that prioritizes honesty—even while pitching a grand vision—helps preserve long-term trust and integrity. In other words, telling a great story should never come at the expense of telling the truth.
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