There is no doubt in my mind that former Theranos CEO Elizabeth Holmes will appeal the four counts she was convicted of: conspiracy to defraud investors and wire fraud. After all, she still has the Silicon Valley mindset: reality can be bent at your will. But what have we learned from the Theranos trial? Almost nothing.
Holmes was found guilty on four of the 11 counts after about 50 hours of deliberation. These charges could be lumped together, roughly speaking, as patient scam and investor scam. The jury found her not guilty of defrauding patients or of conspiring to defraud patients.
It is the result of decisions made by prosecutors who want to to earn. Patients testified for much less time than investors and spent just over an hour in total at the stand. Prosecutors also did not clearly link the Theranos tests of patients to Holmes. In a way, it made sense: there were more intermediaries between Holmes and individual patients. Besides the individual doctors of the patients, there were also the clinical laboratory staff, laboratory directors, etc. For the charges to stand, the jurors had to believe that Holmes had destined to defraud patients, not just give them bad results.
As for investors, prosecutors made sure Holmes was dead. Unlike the patients, she was in the room. There were emails and tapes. Holmes’ connections were clearer, and what she knew was clearer too. The easiest part of this case to prove was about the money, and this is where the prosecution spent most of its time. Did Holmes lie to investors? The jury estimated him on three points, which represented a total of around $ 142 million from the PFM Healthcare Master Fund, DeVos family’s Lakeshore Capital Management, and Daniel Mosley’s Mosley Family Holdings. On three other investor accounts, there was no verdict; an annulment of the trial was declared on these counts.
He was curious to see Silicon Valley’s reaction to the verdict: pretending Holmes was not really part of Silicon Valley, despite the trial in San Jose. Theranos investors included celebrities from Silicon Valley: Tako Ventures of Larry Ellison, Draper Jurvetson Fischer of Tim Draper and Don Lucas, known for his early investments in Oracle. ATA Ventures, a now defunct fund that invested primarily in healthcare software, and Crosslink Capital’s Beta Bayview were also among the investors. Two founders of Silicon Valley investment firms also attended: Dixon Doll from DCM and Reid Dennis from IVP.
There are also the cultural links. Holmes appeared on TechCrunch Disrupt in 2014. While Andreessen Horowitz did not invest, Marc Andreessen was a vocal cheerleader for Holmes – even calling him the next Steve Jobs. From extra-voting stocks to black turtlenecks, Holmes’ claims of sleeping on the job to employees sleeping in their cars, the connection was there.
But the delusional optimism that Holmes’ rise to power represented wasn’t confined to Silicon Valley – at least, not anymore. It is widely spread. Elon Musk’s success with Tesla sparked a SPAC frenzy for electric vehicles, followed by a wave of fraud allegations. There’s Nikola, whose founder Trevor Milton has been charged with fraud. Lordstown Motors is being searched by the SEC for possibly misleading investors about pre-orders. Canoo, another recent PSPC, is also under investigation. The same goes for Lucid Motors.
There’s been a lot of talk about “pretending until you do” as a founding creed, especially in Alex Gibney’s doc Theranos, The inventor. You would think this would make investors more likely to do their own technical due diligence, rather than relying on someone else’s. But some venture capitalists have said The Wall Street Journal at the beginning of this year they were spending less time on due diligence before investing – the hot market makes it hard to compete.
This rush is not just venture capital. Hedge funds and others have also moved into startups. One of Thearnos’ main sources of funding was the family offices of notables such as Rupert Murdoch, Betsy DeVos and the Walton family, known from Walmart. In 2018, The Economist speculated that family offices controlled between $ 3 trillion and $ 4 trillion in capital. Probably that number is higher now.
These investors received information packets that included press appearances from Holmes. Investors have often testified about a 2013 article in The Wall Street Journal opinion section that presented Theranos’ technology as “faster, cheaper and more accurate than conventional methods.” That was not true. Investors also highlighted a 2014 Forbes article that Theranos “does not buy any analyzers from third parties”, which was also not true.
After Theranos, the tenor of Silicon Valley coverage changed, becoming more skeptical. Tech companies have sometimes objected to increased control – well, everyone is entitled to their opinions – but in some ways it makes sense. Investors are not exactly motivated to report wrongdoing because it can block their investment. Besides, it’s embarrassing.
Nothing in the outcome of this lawsuit will stop the next Theranos from deceiving investors because no one is punished when investors fail to do their due diligence. Rather, the onus is on the legal system – and therefore the average taxpayer – to secure a guilty verdict in court. And because it’s easier to prove than behavior that’s more likely to harm ordinary people, that’s what prosecutors will focus on.
Because if we’ve learned anything, this is it: Startup founders who exaggerate what their companies are capable of are the ones who take the downfall, but only if they get caught red-handed, like Holmes did. . Lucky for investors – and the startup hype cycle – you don’t go to jail for being a sucker.