Theranos and the Continuing Allure of the Ivy League Dropout
How Stanford dropout Elizabeth Holmes pulled off a billion-dollar scam.
From Mark Zuckerberg to Bill Gates, there’s no shortage of Ivy League dropouts who went on to become Silicon Valley icons. There was no reason to doubt that another Ivy-League dropout with a dream to revolutionize the healthcare field wouldn’t end up building a billion-dollar tech company. And in a way, she did. But it was also a billion-dollar scam.
Elizabeth Holmes founded Theranos at the age of 19 after dropping out of Stanford University, where she was studying to become a Chemical Engineer. The idea of Theranos was to create a blood-testing device that would perform up to 200 different blood tests with just a pinprick of blood. Of course, if you are a person who is deathly afraid of needles and hates getting your blood drawn, this is a wonderful idea. No pain, less blood, and more enthusiasm towards doing frequent health checkups. This was the big selling point of Theranos.
And throughout the existence of the company, Elizabeth gave talk after talk, speech after speech that echoed the same selling point of Theranos.
The only catch: for the 15 years Theranos existed, the device never worked.
The most fascinating aspect of the Theranos story was its mere ability to rise to the level it did. Theranos raised well over 700 million dollars from investors and venture capitalists and was valued at 9 billion dollars in 2014.
How is it possible to achieve so much success based nothing else but a lie. Why was everyone so easily fooled by Elizabeth Holmes?
The unicorn startup founder
Since the mid-2000s there has been a steady rise in the number of unicorn start-ups. They are private companies that are able to reach a valuation of 1 billion dollars. An overwhelming number of them can be found in Silicon Valley.
Notable examples include Apple, Alphabet, Microsoft, and Facebook. As the number of these companies rises, so does the general public’s obsession with them. Every start-up founder wants to be a unicorn and every venture capitalist and investor wants to fund one.
The obsession with these rare start-ups mainly revolves around the compelling people behind them. There’s a growing curiosity to understand the profile of the rare geniuses that found these companies. So, we are always ready to spot patterns—one of which is having dropped out of a prestigious Ivy-League university.
Gates, Zuckerberg, Musk, and Speigel all dropped out of prestigious universities. This has created a certain level of idealization in the eyes of the media and potential investors. Elizabeth Holmes benefitted from this existing unicorn narrative.
Venture capitalists are constantly in pursuit of outstanding young geniuses that come up with crazy disruptive business ideas that could potentially be unicorns. This obsession with the unicorn has led to some of these VCs making decisions based on intuition rather than evidence.
According to the familiar heuristic, people are more likely to make decisions based on something that feels familiar than something novel, even if it conflicts with their knowledge. All Holmes had to do was replicate the pattern of unicorn founders and the VCs were ready to drop hundreds of millions of dollars.
Some are even aware of this bias, which explains why Y-combinator founder Paul Graham once joked:
I can be tricked by anyone who looks like Mark Zuckerberg. There was a guy once who we funded who was terrible. I said: “How could he be bad? He looks like Zuckerberg!”
Then, the venture bearding
When venture capitalists say — and they do say — “We think it’s young white men, ideally Ivy League dropouts, who are the safest bets,” then invest only in young white men with Ivy League backgrounds, of course young white men with Ivy League backgrounds are the only ones who make money for them. They’re also the only ones who lose money for them
One of the more peculiar aspects of the Theranos story was the claim that Elizabeth Holmes faked her voice. After the Theranos story broke, everyone was obsessed with Holmes and her unusually deep baritone voice.
Why would she fake her voice?
Some believed that it was a strategy to be taken more seriously. This idea is not completely foreign and ridiculous. Elizabeth was nearly a perfect fit for the unicorn founder that VCs obsessed over—the young, white Ivy-League drop-outs. The only criterion she didn’t fit was: she was a female. This is where Venture bearding comes in.
Venture bearding, describes behaviors that persons with contextually stigmatized identities adopt to access social status and capital. In some instances, women, who are stigmatized in this context, may employ men as front persons to conceal that the venture is an exclusively womenowned business.- Edwards & McGinley
Elizabeth’s strategy was not to present a male front but to be the male front. Or rather present as masculine as possible. She faked a deep baritone voice and dressed like Steve Jobs, the unicorn founder, she idolized. She wore the famous black turtle neck and rarely wore anything else. In an interview, Elizabeth was asked where her favorite place to be was and she said “My office.” She presented herself to care about her work and nothing else. She was the young hardworking ivy-league dropout with a baritone voice that just happens to be a woman.
Combined with FOMO
I personally missed out, for example, on a great company called Yotpo. I loved the team but not the product and I was wrong. I said no and, other than losing a potentially amazing financial outcome, I also missed out on being part of a phenomenal journey. And this was not my only big loss…- Gigi Levy-Weiss
The fear of missing out is one of the key psychological drivers for decisions by venture capitalists and investors. There is no fool-proof way of determining whether a company would succeed or not. There is however a fear that you could potentially miss out on the next Apple. It is more satisfying to boast of being a part of a unicorn than missing out on it.
Walgreens, one of Theranos’ biggest partners fell victim to this. Before partnering with the company, Walgreens took necessary precautions by sending one of their employees to validate the legitimacy of Theranos. However, when the Walgreens employee reported the secrecy and sketchiness of Theranos to his superiors, it all fell on deaf ears, and they went through with the partnership. Walgreens was too scared to pass up Theranos.
The fear of missing out on the opportunity to partner with the next big thing was enough for Walgreens to not just ignore the red flags but throw them in the garbage. And they lost 140 million dollars as a result.
Final thoughts
The rise of Theranos is a perfect example of how strongly we follow our intuition—for better or worse. If something looks familiar enough, people will ignore all red flags and forge ahead anyway. Enough Ivy-League dropouts have become unicorn founders to feel us comfortable making them safe bets.
However, Theranos has shown that you need to dig a little deeper. Some things are not as they seem.
