Conviction of Elizabeth Holmes is an indictment of a startup culture that rewards deceit

Elizabeth Holmes founded Theranos - a blood-testing technology company - in 2003, when she was 19.

Theranos founder Elizabeth Holmes, once the poster child of Silicon Valley and a role model for entrepreneurs across the world, has been found guilty of four counts of fraud.

At her peak she shared the stage with presidents and corporate honchos, and was dubbed the next Steve Jobs by a system which is equally complicit in her crimes though it will never be charged. Her rise and fall is a perfect metaphor for all the sand castles that Silicon Valley, and its many imitations across the world, including in India, keep building. Such castles, constructed with the silica of avarice and lies, crumble with the first wave of scrutiny.

The rogue’s gallery is rich and resplendent with names that were once the ‘next big thing’. Last August, the US Department of Justice and the Securities and Exchange Commission charged Manish Lachwani, co-founder of mobile app testing company HeadSpin, with defrauding investors out of $80 million by falsely claiming that the startup had “achieved strong and consistent growth in acquiring customers and generating revenue”. Almost at the same time electric vehicle startup Nikola’s founder Trevor Milton was also charged by the SEC with misleading investors.

There are many more such examples, but in May 2019 when CBInsights did a listing of 16 of the biggest alleged startup frauds, the surprise really was the marquee names such as Goldman Sachs Investment Partners, BlackRock, Norwest Venture Partners, Khosla Ventures ,and Lightspeed Venture Partners that appear as their initial backers.

How could such distinguished and discerning financial powerhouses be so easily fooled? The story of Holmes offers some pointers.

Holmes set up Theranos with all the right ideas. Just 19-years-old when she dropped out of Stanford to set up her business, Holmes initially wanted to produce drug delivery patches, but soon pivoted to making handy automated devices that could carry out tests that could look for up to 70 different markers in a single drop of blood. It was a revolutionary idea, and was instantly rewarded with $6.9 million in early funding.

Thereon, momentum took over, and millions of dollars in funding flowed in on the back of promising deals with big healthcare companies. In July 2015, the company’s herpes test was cleared by the Food and Drug Administration (FDA), then seen as a sign of approval for its underlying ‘finger stick’ technology.

Things started going south following a Wall Street Journal investigation which exposed the shortcomings and flaws in Theranos’s core blood-testing technology.

By 2016 various federal agencies were looking into the company, and in 2018, US prosecutors finally charged Holmes with 11 felonies of wire fraud and conspiracy. On the stand, Holmes admitted to mistakes and poor decisions, but claimed she had never lied to investors and many of her problems were because of the manipulations by her ex-lover, Sunny Balwani who faces similar charges and a trial in February.

Yet there can be no doubts that Holmes was guilty of defrauding investors, and eventually customers who believed in her hype. Buoyed by storied investors like Rupert Murdoch, Tim Draper, and Larry Ellson, and boasting a board of directors with names like Henry Kissinger, former US Secretary of State George Shultz, Richard Kovacevich (former CEO of Wells Fargo), and William Foege (former director of the Centers for Disease Control and Prevention), Theranos is what happens when collective greed leads to a culture of systemic lying.

Equally under the scanner is the media, which built Holmes into a star without doing due diligence. A 2014 Fortune magazine cover story titled ‘This CEO is Out for Blood’by Roger Parloff, stated that the company offered more than 200 diagnostic tests using its proprietary technology and “is ramping up to offer more than 1000—of the most commonly ordered blood diagnostic tests, all without the need of a syringe.” As it turned out, the statement was wrong, and Holmes accepted that during her cross-questioning. A year-and-a-half later, Parloff wrote a protracted retraction of his earlier story titled ‘How Theranos Misled Me’.

Fortune wasn’t the only publication that was guilty of buying into the hype. Bloomberg, Forbes, Vanity Fair, CNBC, CNN, The Economist, The New Yorker and Time were just some of the outlets that were happy to cheer her on.

Investor scrutiny too was sparse with funders comfortable accepting the unlikely numbers it put out. In 2015, the company projected billion dollars in revenue for the year ahead when its internal estimates pegged it at a tenth of that figure. Theranos was lying but no one cared because they were playing the greater fool game.

Great companies are built around cultural values. So are entire industries and societies. The debasement of Holmes may seem distant and irrelevant to us in India. Instead it should prod us into examining the cultural moorings of our booming startup ecosystem, and whether there are enough checks and balances in place to weed out the Theranos lookalikes lurking amidst their inflated valuations.