There is no doubt in my mind that former Theranos CEO Elizabeth Holmes will appeal the four charges she was convicted of: conspiracy to defraud investors and wire fraud. She still has the Silicon Valley mindset, after all: reality can be bent to your will. But what have we learned from the Theranos trial? Almost nothing.
Holmes was found guilty on four of 11 counts after about 50 hours of deliberation. Those counts could be grouped, roughly, into defrauding patients and defrauding investors. The jury found her not guilty of defrauding patients or conspiracy to defraud patients.
This is the result of decisions made by prosecutors who want to win. Patients testified for far less time than investors and spent a little more than an hour total on the stand. Prosecutors also didn’t clearly tie the patients’ Theranos tests to Holmes. In a way, this made sense: there were more intermediaries between Holmes and the individual patients. Besides the patients’ individual doctors, there were also the personnel in the clinical lab, the lab directors, and so on. For the charges to stick, jurors had to believe Holmes had intended to defraud patients, not merely give them bad results.
When it came to the investors, prosecutors had Holmes dead to rights. Unlike with the patients, she was in the room. There were emails and recordings. Holmes’ ties were clearer, and what she knew was clearer, too. The easiest part of this case to prove was about money, and that was where the prosecution spent the bulk of its time. Did Holmes lie to investors? The jury thought so on three counts, which represented a total of about $142 million from PFM Healthcare Master Fund, the DeVos family’s Lakeshore Capital Management, and Daniel Mosley’s Mosley Family Holdings. On three more investor counts, there was no verdict; a mistrial has been declared on those counts.
It has been curious to see Silicon Valley’s reaction to the verdict: claiming Holmes wasn’t really part of Silicon Valley at all, trial in San Jose notwithstanding. Theranos investors included Silicon Valley celebrities: Larry Ellison’s Tako Ventures, Tim Draper’s Draper Jurvetson Fischer, and Don Lucas, known for his early Oracle investment. ATA Ventures, a now-defunct fund that invested primarily in health software, and Crosslink Capital’s Beta Bayview were also among the investors. Two founders of Silicon Valley investment firms also got in: Dixon Doll of DCM and Reid Dennis of IVP.
There are the cultural ties, too. Holmes appeared at TechCrunch Disrupt in 2014. While Andreessen Horowitz didn’t invest, Marc Andreessen was a vocal cheerleader for Holmes — even calling her the next Steve Jobs. From the extra-voting shares to the black turtlenecks, from Holmes’ claims of sleeping at work to employees sleeping in their cars, the connection was there.
But the delusional optimism that Holmes’ rise represented isn’t limited to Silicon Valley — at least, not anymore. It’s spread widely. Elon Musk’s success with Tesla kicked off a frenzy of electric vehicle SPACs, followed by a wave of fraud allegations. There’s Nikola, whose founder Trevor Milton was indicted for fraud. Lordstown Motors is being frisked by the SEC for possibly misleading investors about preorders. Canoo, another recent SPAC, is also under investigation. So’s Lucid Motors.
There’s been a lot of talk about “fake it til you make it” as a founder credo, particularly in Alex Gibney’s Theranos doc, The Inventor. You’d 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 told The Wall Street Journal early this year that they were spending less time on due diligence before investing — the hot market makes it hard to compete.
That rush isn’t just venture capital. Hedge funds and others have also moved into startups. One of the major sources of Thearnos’ funding was family offices for notables such as Rupert Murdoch, Betsy DeVos, and the Walton family, of Walmart fame. In 2018, The Economist speculated that family offices controlled $3 trillion to $4 trillion in capital. Likely, that number is higher now.
Those investors received information packets that included Holmes’ press appearances. Investors frequently testified about a 2013 article in The Wall Street Journal’s opinion section that touted Theranos’ tech as “faster, cheaper and more accurate than the conventional methods.” That wasn’t true. Investors also pointed to a 2014 Forbes article that said Theranos “does not buy any analyzers from third parties,” which wasn’t true, either.
After Theranos, the tenor of Silicon Valley coverage changed, becoming more skeptical. Tech companies have at times objected to the increased scrutiny — well, everyone is entitled to their opinions — but in some ways, it makes sense. Investors aren’t exactly motivated to expose wrongdoing, as it can tank their investment. Plus, it’s embarrassing.
Nothing about the result of this trial is going to prevent the next Theranos from bilking investors because no one is punished when investors don’t engage in due diligence. The onus is instead on the legal system — and thus, the average taxpayer — to get a guilty verdict in court. And because that’s easier to prove than the behavior that’s more likely to harm average people, that’s where prosecutors will focus.
Because if we’ve learned anything, it’s this: The startup founders exaggerating what their companies are capable of are the one who takes the fall, but only if they get caught red-handed, like Holmes did. Thankfully for investors — and the startup hype cycle — you don’t go to jail for being a sucker.
