Theranos Case Study

Introduction

Founding and Seed Stage (2003–2004)

Series A: Proof of Concept (2005)

• Investors: Rupert Murdoch’s involvement at this early stage is striking – he led the Series Anews.crunchbase.com. Having a prominent figure like Murdoch on board lent Theranos prestige, even though he was not a typical biotech VC. Other participants likely included early venture firms or angels aligned with DFJ. This mix of investors shows how social proof played a role: Holmes leveraged family connections and high-profile names to endorse the company, attracting others to followbdo.ca.

• Pitch & Milestones: By Series A, Theranos claimed to have prototypes capable of running several common blood assays on tiny samples. The pitch emphasized replacing venous draws with finger pricks, faster results, and broad test menus at low cost. Holmes positioned Theranos as a pharmaceutical research partner initially – offering to use its devices in drug trials for real-time monitoringmedcitynews.com. The idea was that pharma companies could accelerate trials by quickly checking patients’ blood data. This gave a plausible early market. Internally, Theranos was still developing its first-generation device (later dubbed the “Edison”). No product was commercially deployed yet, but Holmes’s concept and the huge TAM (total addressable market for blood testing) were the selling points.

• Key Figures: With fresh funding, Holmes hired more technical staff and formed a board of directors that, even at this stage, included influential individuals. An early chairman was venture capitalist Donald Lucas, known for backing Oracle – he became an advisor and helped introduce Holmes to other wealthy investors. Holmes’s youth and narrative continued to be central: investors were effectively funding potential, given minimal data. This Series A exemplifies high-risk early-stage VC: betting on a breakthrough idea before product-market fit, with valuation driven by the story and perceived upside rather than revenue (Theranos had zero revenue in 2005). Murdoch’s involvement also shows how non-traditional tech investors can enter early rounds when captivated by a compelling pitch.

Series B and C: Stealth Growth (2006)

• Series B (Feb 2006): Theranos secured $9.1 million in Series B fundingmddionline.com. This round was led by ATA Ventures, a Silicon Valley VC firm, with DFJ likely contributing pro ratamedcitynews.commddionline.com. The post-money valuation was not disclosed, but by the end of 2006 Theranos was reportedly valued around $150–$200 millionmddionline.com. The pitch to Series B investors highlighted technical progress: Theranos now claimed its device (now named the Theranos Edison) could run “up to 30 lab tests on a single drop of blood” – a breakthrough touted in press profiles at the timemedcitynews.com. The company positioned itself as operating in the diagnostics and therapeutics (“theranos”) space, hinting at vast possibilities from personalized medicine to routine lab testing. Investors were told that Theranos’s technology would match the accuracy of gold-standard lab equipment with far less bloodalexanderjarvis.com. This round’s funds went to refining the microfluidic cartridge and reader device, as well as expanding the patent portfolio.

• Series C (Nov 2006): Later that year, Theranos raised $28.5 million in a Series C roundmddionline.com, bringing total equity funding to about $45 million. ATA Ventures joined again, and other private investors came inmddionline.com. (SEC filings list Continental Ventures and Tako Ventures as new investorsmedcitynews.com – likely family investment vehicles of wealthy individuals). Pitch at Series C: Theranos was still in “stealth mode,” but likely demonstrated prototypes to investors under NDA. Holmes framed this as a “pre-IPO” round – indeed, Theranos internally called the Series C a “pre-IPO transaction”alexanderjarvis.com, suggesting they anticipated a public offering in a couple of years. Key claims included improved device accuracy “comparable to gold standards” (clinical lab analyzers)alexanderjarvis.com and an expanding test menu. The company also hinted at initial business deals in progress, though details were scant due to secrecy. Key figures associated with Theranos by 2006 included board member Channing Robertson (a Stanford professor who endorsed Holmes early) and influential backers like Victor Palmieri and B.J. Cassin (who would appear in later rounds). These names, plus steady VC funding, gave the startup an aura of credibility even though it had not published scientific data.

• Stealth Operations: Throughout these 2005–2006 rounds, Theranos operated in stealth, avoiding press except for a few glowing profiles. The company’s culture mandated secrecy over transparency. Investors accepted this (unusually) as part of the deal – Theranos raised capital on the condition that it would not have to reveal in detail how its technology workedbdo.ca. This is an extreme case of information asymmetry in VC: funders were betting on trust and Holmes’s persona. The outcome was escalating valuations without external technical validation, illustrating how hype can drive investment in early-stage biotech.

Becoming a Unicorn: Series D and Strategic Partnerships (2010–2013)

• Series D (July 2010): Theranos raised $45 million in a Series D round, from a single unnamed investor, which pushed its valuation to $1 billionmedcitynews.com. This made Theranos a “unicorn” (a privately held startup worth $1B+) remarkably early – a rare feat at that time. The identity of this sole Series D investor remains confidential in public sources, but speculation has included ultra-wealthy tech figures. (Theranos did attract Oracle founder Larry Ellison as an investor at some pointnews.crunchbase.com, though it’s not confirmed if he was the 2010 investor.) Having one large investor write a $45M check indicates immense trust; it might have been structured as a private placement or strategic investment rather than a typical VC syndicate.

• Pitch & Progress by 2010: By this stage, Theranos had spent ~6 years in R&D with no commercial launch. For Series D, Holmes likely pitched that the technology was finally ready for deployment. The device (Edison) had supposedly evolved: a small analyzer machine using Theranos’s proprietary “nanotainer” blood vials and cartridge system. She claimed it could run dozens of tests per drop of blood rapidly and cheaply. Importantly, Theranos had begun courting strategic partners in the retail health space to validate its model. Holmes was in talks with Walgreens (the US pharmacy chain) and Safeway (a grocery chain with pharmacies) around this time. Indeed, Walgreens first partnered with Theranos in 2010 for a pilot, and Safeway’s CEO invested significant time and money preparing in-store clinics for Theranos devices (Safeway spent ~$350M building wellness centers in its supermarkets) – even though Theranos’s tech had not yet been provenmedcitynews.com. The fear of missing out (FOMO) was powerful: Walgreens executives later admitted they pressed forward despite doubts because they feared Theranos might partner with a competitor if they didn’t actmedcitynews.com. This context likely influenced the Series D investor: seeing major corporations interested gave an impression of traction.

• Key Investors and Terms: With the $45M Series D, total funding reached about $90M. The round’s terms were not public, but presumably the investor received preferred shares with significant rights given the high valuation. Notably, Sunny Balwani (Holmes’s secret boyfriend who joined as COO) had also financially supported Theranos around this time – in 2009, Balwani gave a $13 million personal loan to Theranos to bridge fundingnews.crunchbase.com. He then formally came on board in 2009–2010. Balwani’s capital was converted into equity (making him a significant shareholder)news.crunchbase.com. This insider financing and the big Series D meant Theranos had ample cash to begin commercialization. By 2010, Holmes had also assembled a star-studded Board of Directors, including former U.S. cabinet officials (e.g. Henry Kissinger, George Shultz, James Mattis) and ex-industry leadersnews.crunchbase.com. While these board members were not typical biotech experts, their presence impressed investors and partners, reinforcing Theranos’s legitimacy. This illustrates how high-profile endorsements and relationships can fuel investor confidencebdo.ca – a venture concept of social proof, albeit one that in Theranos’s case papered over the lack of technical proof.

• Strategic Partnership Funding (2012–2013): In the next couple of years, Theranos transitioned from pure R&D to initial market deployment via partnerships:
• Walgreens Alliance (2013): Theranos’s most important partner was Walgreens. In September 2013, Theranos received $50 million from Walgreens in a financing roundmddionline.com, coinciding with a multi-year partnership. This was essentially a strategic investment by Walgreens to secure Theranos’s services for its stores. Theranos Wellness Centers (blood collection sites) began opening inside Walgreens pharmacies in late 2013medcitynews.com. By 2014–2015, they had over 40 Theranos blood-testing centers inside Walgreens stores in Arizona and Californiamedcitynews.commedcitynews.com. Walgreens not only invested equity but also committed significant resources (training pharmacists to use Theranos kits, marketing, etc.). The pitch to Walgreens: Theranos promised to draw in customers with convenient, affordable lab tests and share revenue. Walgreens hoped this innovation would give it an edge in retail health. However, Theranos never allowed Walgreens to fully validate the Edison devices – they did not reveal much of how it worked, again invoking confidentialitymedcitynews.com. Walgreens proceeded largely on faith (and Holmes’s personal assurances), an example of how corporate investors can be swayed by a startup’s potential market impact.
• Safeway (2012–2013): Although Safeway did not directly invest equity, it formed a partnership around 2012 to put Theranos clinics in hundreds of supermarkets. Safeway’s then-CEO invested heavily in renovating stores for Theranos. This in-kind investment (infrastructure worth hundreds of millions) signaled strong belief in Theranos’s tech. By 2013, however, repeated delays and lack of live demos caused Safeway to stall the rollout; eventually the Safeway deal quietly fell apart by 2015. The Safeway saga underscores issues of traction: Theranos appeared to have big clients, but was struggling behind the scenes to deliver.

Late-Stage Fundraising and Peak Valuation (2014–2015)

• Feb 2014 – Private Equity Round: Theranos raised $198.9 million in a private equity round in early 2014mddionline.com. This round reportedly brought the company’s valuation to about $9 billionmedcitynews.com. At $9B, 30-year-old Elizabeth Holmes (with ~50% ownership) was lauded as the youngest self-made billionaire on paper. The round was not a typical venture-led Series E; instead it was financed largely by large private investors and family offices. By now, many traditional VC firms (especially those with medical device expertise) had passed on Theranos, wary of its secrecy and lack of published data. Holmes instead courted investors who were drawn to the vision and fear of missing out:
• Notable participants in 2014 included the family of Betsy DeVos (Amway fortune), who invested $100 millionfiercehealthcare.com; the Walton family (heirs to Walmart) with $150 millionfiercehealthcare.com; and Mexican billionaire *Carlos Slim’s fund (though unconfirmed, there were rumors of his involvement). Tech mogul Larry Ellison also put in a substantial amount around this timenews.crunchbase.com. These are atypical tech investors, indicating Holmes targeted ultra-high-net-worth individuals who might be less technically diligential but excited by Theranos’s potential to upend a $60B lab test industry.
• The pitch in 2014 was extraordinarily optimistic. Holmes touted that Theranos technology was successfully serving patients in Walgreens stores, that it could run “over 240 tests” ranging from cholesterol to cancer markersrefinery29.com, all at a fraction of traditional costs. She claimed tests were 50–90% cheaper than Medicare rates, and pointed to Theranos’s published menu of tests (one could get a cholesterol test for $2.99, etc.). Internally, Theranos projected aggressive revenue growth to investors – reportedly forecasting $100 million in revenues in 2014 and ~$1 billion in 2015, based on expanding Walgreens and other deals. In reality, actual 2014 revenue was minimal (only a few hundred thousand dollars from the limited Walgreens pilot), but investors weren’t shown actual financials in detail. Instead, Holmes focused on storytelling: personal patient anecdotes, the grand mission of “accessible, preventive healthcare for all”, and endorsements from powerful people.
• Key figures & governance: Theranos’s board by 2014 was filled with luminaries (Henry Kissinger, George Shultz, General James Mattis, former Wells Fargo CEO Dick Kovacevich, etc.), which Holmes highlighted to investors as a sign of strong oversight and connections. However, notably absent were any independent venture investors on the board – by this stage, the board was largely Theranos-friendly and lacked medical device experts. This meant investors in 2014 relied almost entirely on Holmes’s narrative and the imprimatur of her prestigious board, rather than independent technical due diligence. The $9B valuation – a decacorn status – was thus driven by market buzz and Holmes’s persona as much as by any fundamentals. It exemplified how in frothy times, valuations can outrun verification.

• Mar 2015 – Final Mega-Round: In 2015, Theranos raised an additional $348.5 million in what turned out to be its final equity roundmddionline.com. This brought total equity funding to about $724 million by 2015investopedia.com (and over $1.3 billion including debt laternews.crunchbase.com). The 2015 raise was essentially an extension of the previous round, at the same lofty ~$9 billion valuation. It included new investors and some reinvestment:
• The round was led by a private investor group organized by B.J. Cassin (a veteran tech investor) alongside seven other investorsmddionline.com. Noteworthy, Rupert Murdoch (who had participated way back in 2005) invested heavily in this 2014–2015 fundraise – about $125 million personallyfiercehealthcare.com. Also joining was the Cox family (owners of Cox Enterprises), who put in $100 millionbusinessinsider.com. Riley Bechtel, of the Bechtel construction dynasty, was another investorbusinessinsider.com. Many of these individuals invested due to personal connections or the buzz surrounding Theranos’s media coverage. (Ironically, Murdoch’s investment made headlines later, as he owned The Wall Street Journal which would soon break Theranos’s scandal – Murdoch reportedly lost his entire $125M but allowed the exposé to proceedbusinessinsider.com.)
• Use of Funds & Strategy: The huge influx of cash was ostensibly to fuel Theranos’s expansion. The company was planning to roll out Theranos Wellness Centers nationwide, not only in Walgreens but possibly Safeway stores and abroad. Holmes spoke of developing a next-generation device (a larger high-throughput machine called the miniLab for hospitals) and of pursuing FDA approvals for tests (Theranos submitted its first test for FDA clearance in 2015, for herpes – which was cleared, one of the only validations it gottheverge.comtheverge.com). The narrative to investors was that Theranos would soon be in “hundreds or thousands” of stores, generating significant revenue, and positioning for an IPO. Indeed, by mid-2015 Theranos was often mentioned as a hot IPO candidate once it had a year or two of Walgreens growth numbers to show.
• Continued Secrecy: Despite raising over $600M in 2014-15, Theranos still guarded its technology closely. Investors in these rounds reportedly were not allowed to closely inspect the labs or devices; Holmes maintained that protecting trade secrets was paramount. Many investors acquiesced, swayed by the fear of being left out of the next big thing. In hindsight, this illustrates a breakdown in normal venture due diligence – basic questions were never answered. For example, Theranos did not publish peer-reviewed studies of its Edison device’s accuracy, nor did it allow independent lab experts to audit the technology. The investor frenzy and FOMO at the time helped gloss over these red flags. This environment is a stark lesson in the importance of due diligence: as later came out, Theranos’s device could only reliably perform a handful of tests, and the company was diluting samples and using commercial analyzers for most tests unbeknownst to investorsabcnews.go.comrefinery29.com.

Crisis, Final Funding, and Collapse (2015–2018)

• Regulatory & Customer Fallout: After the 2015 WSJ exposé, Theranos went from stealth to full scrutiny. Regulators (FDA, CMS) inspected Theranos’s labs, finding serious deficiencies and essentially banning its Edison device by 2016theverge.com. Walgreens suspended and then terminated its partnership by mid-2016, shuttering all 40 Theranos wellness centers and suing Theranos for breach of contractmedcitynews.commedcitynews.com. Safeway had already pulled out. With its business imploding, Theranos voided two years of blood test results and offered refunds to tens of thousands of patients. Revenue dried up. In venture terms, the company had zero traction and a tainted product – a stark reversal from the rosy story told to investors.

• No More Equity Financing: Unsurprisingly, after 2015 Theranos could not raise any new equity at its prior valuation. Any attempt would have required a massive “down round,” wiping out existing shareholders’ value – and even then, investor appetite was gone. Instead, Theranos went into survival mode. By 2016, it was burning cash on legal fees and desperately trying to develop a new product (the “miniLab”) to pivot. Holmes had to cut employees (eventually ~80% of staff were laid off by 2017) and seek emergency funds.

• Debt Financing – Fortress Loan (Dec 2017): The last funding Theranos obtained was a $100 million debt financing in late 2017 from Fortress Investment Groupnews.crunchbase.commddionline.com. Fortress, a private equity firm, offered this loan reportedly on very tough terms: Theranos’s intellectual property and assets were pledged as collateral, and Theranos received the $100M in tranches as it met certain milestones (which it struggled to do). This debt came at a time when Theranos was on the brink of bankruptcy – it allowed the company to stay afloat a few more months. From a venture finance perspective, this move was highly unusual: startups rarely take on large debt at the end of their life, but Theranos had no other option since equity was uninvestable. The Fortress loan had senior claim on any remaining assets, meaning in any liquidation, Fortress would be paid before any equity holders. Indeed, when Theranos later dissolved, Fortress presumably took whatever IP was left (though it likely had little value). This exemplifies the hierarchy of claims: by the end, common and preferred shareholders were completely wiped out, whereas the last-in lender had priority to salvage value from Theranos’s remains.

• Investor Losses and Legal Actions: The collapse meant that Theranos’s earlier investors lost essentially all their money. More than $600 million in equity investments evaporatedfiercehealthcare.com. High-profile backers like the DeVos family (losing $100M), Rupert Murdoch ($125M), and the Walton family ($150M) suffered huge lossesfiercehealthcare.com. A hedge fund, Partner Fund Management (PFM), which had put in ~$96 million in 2014, sued Theranos for securities fraud in 2016medcitynews.com. (Theranos settled that lawsuit in 2017 by offering PFM additional shares – effectively a futile gesture since the shares were by then nearly worthlessen.wikipedia.org.) Walgreens and some patients also filed suits. In 2018, the SEC charged Holmes and Balwani with massive fraud, accusing them of lying to investors about every aspect of the company’s tech and financesbdo.cabdo.ca. Holmes settled with the SEC (paying a $500k fine and agreeing to a 10-year ban on being an officer of a public company)news.crunchbase.com, while also fighting criminal charges. Theranos formally dissolved in September 2018, ending the saganews.crunchbase.com.

• Downward Valuation Spiral: In the aftermath, Theranos’s valuation was marked down from $9 billion to effectively $0. Forbes revised Holmes’s personal net worth from $4.5B to zero by June 2016investopedia.com. This dramatic correction demonstrates the concept of “paper valuation”: the $9B valuation existed only on paper in the private market and was not tested by any liquidity event. Once revelations hit, any notional value vanished – a lesson that private valuations can be very fragile and are not guaranteed or realized until an exit (IPO/acquisition) occurs. It also underscores why later-stage investors demand preferred shares with liquidation preferences – however, in Theranos’s case even preferred shareholders got nothing, because the company’s assets couldn’t cover any meaningful payout.

Legacy and Lessons for Venture Capital

• Importance of Due Diligence: Perhaps the clearest lesson is the need for rigorous vetting, especially for science-driven startups. Theranos showed that even sophisticated investors can be seduced by a charismatic founder and a grand vision. Many backers ignored or rationalized away the lack of transparency. Today, VCs cite Theranos as a reason to “trust, but verify” – requiring evidence of technology claims (e.g. peer-reviewed studies, prototype demonstrations) before investing, and bringing in domain experts to evaluate bold scientific assertions. The case has likely made investors more cautious about healthcare startups that operate in black boxes. For example, some VCs now insist on observing a startup’s product in action or talking to reference customers before writing large checks, rather than relying solely on glossy pitch decks.

• Governance and Oversight: Theranos’s board was filled with esteemed individuals, yet none had deep blood diagnostics expertise, and they largely deferred to Holmes. The venture community took note: a strong board for a biotech startup should include independent experts who can ask tough questions. In venture finance classes, Theranos is often cited when discussing corporate governance in startups – it’s a cautionary tale of a board that provided credibility externally but little actual oversight. Additionally, Holmes’s supervoting shares and tight control meant investors had limited insight or power; this imbalance is something many VCs are now more wary of when structuring deals (ensuring at least information rights and board seats are in place).

• FOMO and Investor Psychology: Theranos exemplified the fear of missing out that can drive investment mania. Walgreens rushed in out of fear a competitor would steal Theranosmedcitynews.com; wealthy families invested because other famous names were in. The herd mentality overrode normal skepticism. Venture investors now more openly discuss guarding against FOMO and confirmation bias – emphasizing the need to independently validate a startup’s claims, even if other big names are already investors. The case also highlights that social proof can be misleading: just because a former Secretary of State or a billionaire backs a company doesn’t guarantee it’s sound.

• Valuation vs. Traction: Theranos is a stark example of a sky-high valuation unmoored from actual business fundamentals. By traditional metrics (revenue, user growth, etc.), Theranos’s valuation was absurd – it was valued like a successful tech company while still essentially in R&D mode. This illustrates concepts of valuation bubbles and how in private markets, prices are set by narrative and supply/demand for the shares, not by public-market style analysis. In venture finance education, Theranos prompts discussion on how to assess traction: Theranos appeared to have traction (major partnerships, lots of press, a large test menu) but those were not genuine proxies for sustainable success. The case teaches that quality of traction matters – e.g. a pilot program is not the same as proven unit economics or scalability, and customer adoption means little if the product doesn’t actually work.

• Securities Law and Ethics: Unusually for a private startup, Theranos’s deceit led to criminal and SEC action. This underlines that private companies and their officers can be liable for securities fraud if they knowingly mislead investors. Venture financings are not an anything-goes zone; basic antifraud laws still apply. The Holmes and Balwani trials (both ultimately convicted of fraud) have put founders on notice that there are legal limits to exaggerated claims. In practice, many VCs now perform more background checks and even technical audits for startups in sensitive domains, to protect themselves from investing in a potential fraud. The ethical lesson is clear: maintaining honesty and transparency with investors is crucial – the short-term gain of over-hyping can lead to long-term disaster.

• Impact on Health Tech Investment: In the health-tech and medtech sectors, Theranos’s fallout initially made investors more skittish. It became harder for some legitimate blood-testing startups to raise money in the years immediately after, as the shadow of Theranos loomed (“the Theranos effect”). However, strong startups with solid data did continue to get funded – arguably the case sharpened the focus on those that could demonstrate validity. It also encouraged more collaboration with regulatory bodies early (Theranos had tried to avoid FDA oversight by using a loophole for lab-developed tests). Now, investors often view a startup’s willingness to undergo third-party validation or regulatory approval as a positive sign rather than a hindrance.

• The Role of Narrative: Lastly, Theranos underscores the power and peril of founder narrative in venture fundraising. Holmes crafted a compelling origin story (young genius founder, bold mission to democratize healthcare) which became a huge asset in fundraising – essentially a form of story equity. Many VCs seek out strong storytellers, as they can inspire employees, customers, and investors. But Theranos shows the dark side: a narrative ungrounded in truth can become a vehicle for massive misallocation of capital. Venture finance students analyzing Theranos learn to balance excitement with skepticism: a great story should always be corroborated by data and execution.

• Carreyrou, John. Bad Blood: Secrets and Lies in a Silicon Valley Startup (background reference, not directly cited above).

• Crunchbase News – Closer Look at Theranos’ Big-Name Investors, Partners, and Boardnews.crunchbase.comnews.crunchbase.comnews.crunchbase.comnews.crunchbase.com.

• MedCity News – Theranos Doomsday Clock: Timeline of Its Rise and Fallmedcitynews.commedcitynews.commedcitynews.com.

• MD+DI (Medical Device & Diagnostic Industry) – Theranos Valuation/Funding Timelinemddionline.commddionline.commddionline.commddionline.commddionline.commddionline.com.

• Investopedia – Theranos: A Fallen Unicorninvestopedia.cominvestopedia.combdo.ca.

• FierceHealthcare – report on investor lossesfiercehealthcare.comfiercehealthcare.com.

• Refinery29 – What Was the Theranos Edison Supposed to Do? (on Holmes’s elevator pitch and device claims)refinery29.comrefinery29.com.

• BDO Analysis – Dissecting the Theranos Fraud (overview of funds raised, peak valuation, and methods of deception)bdo.cabdo.cabdo.ca.