Note: Updated July 8, 2016, to include a statement from Theranos.

Not long ago, Elizabeth Holmes, CEO of blood-testing startup Theranos, was the poster child for Silicon Valley success. Now, following severe federal sanctions announced on Thursday, she's being held up by her peers as the ultimate cautionary tale. 

Holmes has been banned by the U.S. Centers for Medicare and Medicaid Services (CMS) from operating a lab for two years. That's a major problem for her and for Theranos, whose potential was based on the promise to deliver a multitude of test results based on just a few drops of blood. 

Theranos on Friday said it plans to keep Holmes as its CEO and focus on working with CMS to resolve the issues involving its Newark, California, lab. The company has 60 days before the sanctions go into effect, and though Theranos is working with CMS, the company is considering all options, which include appealing the agency's decision. Should the CMS sanctions hold up, Theranos will be forced to shut down all of its lab operations.

"While we are disappointed by CMS' decision, we take these matters very seriously and are committed to fully resolving all outstanding issues with CMS and to demonstrating our dedication to the highest standards of quality and compliance," the company said.

The sanctions also include monetary penalties, the revocation of the company's California lab license, and the suspension of Medicare and Medicaid payments for its services. These penalties come in part as a result of a series of blistering reports inThe Wall Street Journal that called Theranos' technology and practices into question. The company has largely failed to address the scrutiny that's followed.

"I think it's a cautionary lesson in hubris, humility, and why the cult of the brilliant co-founder is fundamentally flawed," said Leslie Miley, the director of engineering for Slack's growth team and a longtime Silicon Valley veteran. "I would not be surprised if it comes out that many at Theranos were trying to reel in Holmes and she did not heed their advice."

For Theranos, which was valued at $9 billion in 2014, the sanctions are just the latest development in a catastrophic fall from grace. Most notably, the company reportedly is now under criminal investigation, and in June, it lost its major partnership with Walgreens, which had been using some of Theranos' tests in its pharmacies.

"When it comes to health care we have to set very high standards for effectiveness of the products," said Bonnie Crater, CEO of Full Circle Insights, a marketing solutions provider in San Mateo, California. "It's up to the company to set those high standards. Sadly it appears that someone at the company decided to not [do so]."

The ramifications have been particularly severe for Holmes personally. Her once-sterling reputation--which landed her on the October 2015 cover of Inc. Magazine--is now in ruins, and her net worth has fallen from $4.5 billion to nothing, according to Forbes. 

"Hopefully, [Theranos] will serve as a learning experience for others working in the health, biotech, and hard science startups on the need to focus on making sure the technology is sound before making pronouncements to the world about their breakthroughs," said Austin Walne, a venture partner at Artis Ventures, which has invested in biotech firms. 

Silicon Valley has a reputation for bristling at criticism from outsiders, but few in the tech industry have come to the defense of the Theranos or its leader. Even among her own  scientific advisers, Holmes has found little support over the past few months. 

However, some, albeit few, in tech have questioned whether the amount of criticism leveled at Holmes has been just. She is not the only tech executive to face legal sanctions, but she is one of only a relatively small number of women at high-profile companies in the industry to reach C-suite heights. Another tech unicorn, Zenefits, for example, also found itself embroiled in a legal scandal last year, and yet former CEO Parker Conrad was able to escape and has already moved on to his next venture without having his reputation completely destroyed.

"The question becomes, is Elizabeth Holmes paying the 'woman tax' on her success and subsequent downfall?" said Sarah Kunst, a Silicon Valley entrepreneur and the founder of Proday, the maker of a fitness app.

Published on: Jul 8, 2016