The Fall of Theranos: The Gap Between Innovating and Optimizing

The troubles at blood-testing company Theranos continue to mount as CEO Elizabeth Holmes waits to hear if the Centers for Medicare and Medicaid Services will propose sanctions that could ban her from the diagnostics business and stop her start-up from receiving payments from Medicare. With its vision of providing comprehensive health screenings with only a few drops of blood, this former biotech darling was once valued at close to $9 billion. The promise of Theranos, of being able to streamline preventive medical care in ways previously unimaginable, seemed world changing. But after failed inspections and the threat of government sanctions, it’s looking like the dream of Theranos was just that, a dream. The evidence is mounting that the closely guarded process by which Theranos claims to be able to run a myriad of tests from a few drops of blood amounts to a fairly scattershot approach to preventive care.  

In my earlier posts chronicling the downward spiral of HR software start-up Zenefits into the ash heap of former Silicon Valley sweethearts, I discussed how the lack of an exhaustive vision can be a death knell for young start-ups, particularly when their growth goes into hyperdrive. So what’s going on here? Has Silicon Valley just become Vegas for every young wannabe entrepreneur with a half-good idea?

As a recent New York Times op-ed piece explored, the downfall of Theranos can’t only be chalked up to the foolhardiness of youth. When Elizabeth Holmes founded Theranos in 2003, she was a nineteen-year-old Stanford engineering dropout with dreams of revolutionizing health care, but since then, she has curated a board of directors whose faces could make up a veritable Mount Rushmore of business, international politics, and strategy legends. Among them are such heavyweights as Bill Frist, Henry Kissinger, and Sam Nunn. With this combination of experience (although little of it based in medicine), it got me wondering: If the young CEO had the gravitas to put together this board of directors, men who negotiated detailed international treaties and complex legislation decades before she was born, then why did they not push for more attention to detail regarding the scientific accuracy and reliability of their tests? Theranos should have obsessed over these details, when in reality it seems they were sorely neglected.

For decades, big companies thrived and survived by building formidable “castles” to protect their positions. Competitors were thwarted by incumbents exploiting competitive advantages, erecting steep barriers to entry, and building powerful organizations with scope, scale, quality, and efficiencies that could resist disruption. But these castles were not built for today’s rapid and seismic market evolution, and as a result, many have seen their walls breached.

It was in the world of massive, seemingly impenetrable, bureaucratic medical laboratories that Ms. Holmes saw the weakness she could exploit. Small start-up businesses like Theranos thrive and survive by creating discontinuous innovations—sidestepping barriers to entry by creating new markets, wresting customers away from established organizations by offering them compelling new value propositions (like pain-free blood testing). But companies like Theranos have their own Achilles’ heel. They are organized for innovation, but not for efficiency and attention to detail.

While these companies have the ability to pivot more quickly than their larger, more established peers, they struggle with—or sometimes completely avoid—developing the ability to optimize operations by becoming as efficient as possible as quickly as possible once a disruptive innovation has proven successful. The problem here is with Theranos’ “success.” In offering a radically new approach to medical testing that positively transforms the patient experience, Theranos succeeded. But that success matters little if the test results for life-threatening illnesses are unreliable.

A decade plus of academic research is illuminating the fact that what organizations must develop to be successful in the long run is the capacity to become ambidextrous: those who cultivate this quality can optimize organizational efficiencies and quality services for their customers and devote resources to riskier endeavors that become the source of new innovations (experiment). Furthermore, companies that can successfully pull this off once can replicate the process for future cycles of innovation/optimization.

Unfortunately, Elizabeth Holmes is not instilling confidence that she can lead the organization through the tensions in these inherently oppositional activities. If she were hyping a compelling new app or game and it just wasn’t ready for prime time, we probably wouldn’t blink an eye. But the consequences of this business reach much further. She has shown that she can innovate (the experimentation side of the equation) but her ability to optimize seems weak, a catastrophic failing if you hold people’s health in your hands.

One hopes Holmes will learn from this humiliating debacle. After all, the wisdom to innovate and optimize—rather than only innovate—is most often forged by years, even decades, of failing and regrouping. Most start-ups now need to do both. It wasn’t until Steve Jobs was ousted and then returned to his company that the vision of Apple truly blossomed. From what past mistakes in the field of biotechnology and life could Holmes draw upon to improve the process? She and her board members should have been paying obsessive attention to not only disrupting a bloated, byzantine health care industry but also following through on the heady promises the company made to those who trusted them: namely that they would take a commitment to their well-being seriously. Optimizing your company’s processes might not land you many headlines, but failing to do so certainly will—just for all the wrong reasons.