In a case that should serve as a warning to enthusiastic investors, startup blood-testing firm Theranos, once a darling of Silicon Valley, is facing a criminal investigation.
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.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
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.
Sign up for MoneyWeek's newsletters
Get the latest financial news, insights and expert analysis from our award-winning MoneyWeek team, to help you understand what really matters when it comes to your finances.
Ben studied modern languages at London University's Queen Mary College. After dabbling unhappily in local government finance for a while, he went to work for The Scotsman newspaper in Edinburgh. The launch of the paper's website, scotsman.com, in the early years of the dotcom craze, saw Ben move online to manage the Business and Motors channels before becoming deputy editor with responsibility for all aspects of online production for The Scotsman, Scotland on Sunday and the Edinburgh Evening News websites, along with the papers' Edinburgh Festivals website.
Ben joined MoneyWeek as website editor in 2008, just as the Great Financial Crisis was brewing. He has written extensively for the website and magazine, with a particular emphasis on alternative finance and fintech, including blockchain and bitcoin.
As an early adopter of bitcoin, Ben bought when the price was under $200, but went on to spend it all on foolish fripperies.
‘Inheritance tax insurance’ enquiries are soaring – but is it worth it?
MPs warn over Lifetime ISAs which could leave savers out of pocket
