The cautionary tale of Theranos, the blood sucking unicorn

160419-theranos-b — Elizabeth Holmes of Theranos became the youngest ever female self-made billionaire

Lest anyone be in any doubt about the dangers of investing in some of the "disruptive" new industries emerging from the likes of Silicon Valley, the story of blood-testing "unicorn" (a startup company valued at more than $1bn), Theranos, should serve as ample warning.

Elizabeth Holmes dropped out of her chemical engineering degree at Stanford University and started her company, Theranos (the name isacombination of "therapy" and"diagnosis") in 2003, when she was just 19.

Her aim was to disrupt the blood testing industry with her revolutionary new technology. Before Theranos came along, a blood test involved taking a whole needle-full from your veins, then waiting days for the analysis to be returned. Holmes, who says she is terrified of needles, claimed her method could do it with just a finger prick, with the results back in a day.

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It certainly captured investors' imaginations. Holmes was lauded in the press, gave inspirational talks, and appeared on many a TV programme, raising $400m from investors. At its peak, her company was worth $9bn, and Holmes, now 31, became the youngest ever female self-made billionaire.

Holmes has always been vague about the science behind her startup. And many in the industry doubted her claims. In October, the Wall Street Journal claimed the company performed only a "small fraction" of the tests it did on its own machines. The rest, says the WSJ, was done on "traditional" machines.

Today, the WSJ reports that "federal prosecutors have launched a criminal investigation" to find out if Theranos "misled investors" about its technology. Holmes also faces the possibility of being "forced out of blood-testing business" by federal health regulators, says the WSJ. Centers for Medicare and Medicaid Services plans to "revoke the California lab's federal licence and prohibit its owners from owning or running any other lab for at least two years", the WSJ says.

Chris Myers, himself head of a startup that helps small business owners with their finances writes on Inc.com that "Silicon Valley has an honesty problem". Entrepreneurs "will do whatever it takes" to get finance, even if that means "stretching the truth from time to time".

Investors beware.