The $700 Million Question: How Did So Many Smart People Get Theranos So Wrong?

At a Glance

• According to the SEC, Theranos raised more than $700 million from investors through a years-long fraud.
• At its peak, the company was valued at approximately $9 billion.
• The SEC reported just over $100,000 in 2014 operating revenue against representations of more than $100 million.
• Michael Travin's question, prompted by A24's You Can See Everything: who independently verified that the technology worked?

Who actually verified that the technology worked? I recently watched You Can See Everything, the fascinating new documentary about Elizabeth Holmes, and walked away with two very different reactions. The first was personal: Holmes's psychology, and her apparent inability to acknowledge failure. The second was entirely business. How did so many extraordinarily successful people invest hundreds of millions of dollars in a company whose central technology had never been independently proven to perform as promised?

I've spent much of my professional life building businesses, evaluating opportunities, and making investment decisions. And I kept returning to one thought throughout the film. Elizabeth Holmes wouldn't have convinced me based on the explanations I was watching. Not because I possess some unusual understanding of medical technology. I don't. But because if someone is asking me to invest substantial money in a product I don't understand, my first responsibility is to find someone qualified who does. That's basic due diligence. And that is what makes the Theranos story so extraordinary.

At its peak, Theranos was valued at approximately $9 billion. Holmes became one of Silicon Valley's most celebrated entrepreneurs, with a compelling vision of transforming healthcare through a device capable of performing numerous laboratory tests using just a small amount of blood.

It was an extraordinary proposition. Imagine replacing conventional blood draws and expensive laboratory procedures with a compact machine that could deliver accurate results quickly, conveniently, and affordably. The commercial opportunity would be enormous. Patients would benefit. Healthcare providers would benefit. Pharmacies could become diagnostic centers. The implications for preventive medicine could be revolutionary. I understand why investors would be interested. But interest and investment are two completely different things.

According to the Securities and Exchange Commission, Theranos raised more than $700 million from investors through a years-long fraud involving misleading statements about its technology, business relationships, and financial performance. That figure represents capital raised, not a finding that every dollar was ultimately lost. Still, it's an astonishing amount of money. And it raises a question that every investor should ask. At what point did enthusiasm for the opportunity replace independent verification of the product?

There are businesses where investors can reasonably make decisions based on management experience, market demand, execution capability, and financial performance. But Theranos was different. Its entire proposition depended on one fundamental claim: that its proprietary technology could perform blood tests more effectively using dramatically smaller samples. Without that capability, the extraordinary valuation became difficult to justify. Which brings me to the part of the documentary that troubled me most.

Holmes never seemed to provide a sufficiently clear explanation of precisely how her technology worked. Perhaps she provided considerably more technical detail in meetings that the documentary did not show. Perhaps engineers and scientists presented detailed research, demonstrations, and supporting materials. In fact, the historical record confirms that Theranos provided demonstrations and technical representations to investors and business partners. But the essential question remains. Who independently verified those claims?

If I were considering a major investment in Theranos, I wouldn't need to become an expert in clinical chemistry. I would need independent experts who could evaluate the technology and tell me whether it performed as advertised. I would want to examine the machine's accuracy, reliability, limitations, regulatory compliance, and ability to produce repeatable results. And I would want those conclusions from people who had no financial incentive to tell me what I wanted to hear.

One of the most interesting aspects of Theranos was the collection of influential individuals surrounding the company. Former secretaries of state, prominent political figures, accomplished business leaders, and wealthy investors became associated with its story. Their involvement created an extraordinary impression of credibility. After all, when people with those kinds of résumés support a company, it's natural to assume that someone has done the necessary homework. But that's a dangerous assumption. A distinguished career in government, finance, or international affairs does not automatically qualify someone to evaluate advanced laboratory technology.

And that's not a criticism of those careers. It's simply a recognition that expertise in one field doesn't necessarily translate into another. The psychological effect can be powerful. One prominent person supports the company. Another assumes the first person has examined the technology. A third sees both names and becomes more comfortable. Before long, the company's reputation begins reinforcing itself. Yet the original technical question may still be unanswered.

It reminds me of an important investing principle. The number of influential people who believe in an investment does not determine whether the investment is sound. Facts do.

The Theranos case becomes even more troubling when examining what investors were actually shown. Government findings describe demonstrations in which investors were led to believe that Theranos's proprietary machine was analyzing their blood. In certain demonstrations, the machine was allegedly placed into what was called a null protocol, making it appear to be operating without actually conducting the promised test. According to evidence presented in the federal case, the company also relied heavily on conventional laboratory equipment manufactured by other companies, rather than exclusively using its revolutionary proprietary analyzer.

That distinction is enormous. There's nothing inherently wrong with a startup using existing equipment while developing new technology. But there is something fundamentally different about presenting an unfinished technology as though it already performs the functions being promised. One situation represents research and development. The other, when accompanied by knowing misrepresentations, can constitute fraud. And Theranos wasn't simply selling a software application or a consumer gadget.

It was making claims about medical testing. In healthcare, inaccurate results can create consequences far beyond financial losses. The stakes demanded an even higher level of scrutiny.

Another extraordinary part of the Theranos case involved financial projections. Investors were given expectations of tremendous commercial growth. A federal jury convicted Holmes of defrauding investors, and the government's case included misleading representations about the company's existing revenue and future prospects. The SEC reported that Theranos generated only a little more than $100,000 in operating revenue in 2014 despite representations that it would generate more than $100 million that year.

Consider the difference. That's not a minor forecasting error. It's the difference between a company with relatively limited commercial revenue and one being presented as a rapidly expanding enterprise.

In business, I've always believed that projections deserve attention, but actual operating performance deserves much more. Revenue is not profit. Signed agreements are not collected revenue. A prospective customer is not an existing customer. And a technology demonstration is not the same thing as a commercially reliable product. These distinctions seem obvious. Yet in an environment where investors are competing to participate in the next revolutionary company, obvious distinctions can become surprisingly easy to overlook.

I kept thinking about what I would have wanted to know before writing a significant check.

First, could an independent laboratory reproduce the company's results using the actual Theranos equipment?

Second, would the company allow qualified technical experts to inspect its testing process, including identifying which machines performed which tests?

Third, could management provide independently verifiable revenue figures rather than ambitious projections?

Fourth, what exactly was the status of its relationships with Walgreens, pharmaceutical companies, and government agencies?

Fifth, if the technology was truly revolutionary, why was it so difficult to obtain independent confirmation of its capabilities?

None of these questions requires extraordinary business brilliance. They require discipline. Of course, investors were not all given identical information, and the extent of their diligence varied. Some were actively misled through false representations and demonstrations. That matters. Fraud can defeat even thoughtful due diligence. But it doesn't eliminate the broader lesson: investors must separate independent evidence from information controlled by the company seeking their money.

The documentary left me with the impression that Holmes may still believe she was prevented from completing something extraordinary. I explored that possibility in my companion commentary about her apparent refusal to acknowledge failure. But the business lesson is different. It doesn't ultimately matter whether an entrepreneur passionately believes that a technology will work someday. Investors need to know what works today.

Every entrepreneur has a dream. Some dreams become Apple, Amazon, or extraordinary breakthroughs in medical science. Others never progress beyond the original idea. Failure by itself is not fraud. Technology development involves uncertainty. Companies spend years solving problems. Products are delayed, redesigned, or abandoned. Investors who fund early-stage companies understand those risks.

But they must be told the truth about what has been accomplished and what remains unproven. A founder's conviction can inspire investment. It cannot replace evidence.

I don't believe the Theranos scandal demonstrates that wealthy or successful investors are unintelligent. Some were misled by deliberate falsehoods. Others may have placed excessive confidence in the company's leadership, prestigious associations, or promised commercial potential. The more important lesson is that intelligence and success do not provide immunity from poor investment decisions.

In fact, experience can sometimes create its own weakness. People who have built fortunes by recognizing opportunities early may become particularly attracted to the next revolutionary idea. They know what it means to believe in something before the rest of the world understands it. And that's exactly why they must be careful. There's a fine line between seeing an opportunity others have missed and accepting claims that nobody has adequately verified.

A compelling founder is not a substitute for an independently verified product.

For me, that's the enduring business lesson of Elizabeth Holmes and Theranos. I left the documentary fascinated by Holmes as a person. But I left equally fascinated by the people who invested in her company. Because behind the extraordinary personality, the powerful board members, the enormous valuation, and the promise of revolutionizing healthcare was a remarkably simple question. Did the machine actually work? And if nobody could independently establish that it did, why did the money keep coming? That's the $700 million question.

Michael Travin is the founder and CEO of Resident Media. His business commentary examines entrepreneurship, investment, leadership, and the decisions that shape successful companies.