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Elizabeth Holmes’ conviction is a wakeup call for startups and investors

Posted by Grace Townsley

January 26, 2022 | 4-minute read (672 words)

Theranos founder Elizabeth Holmes in her signature black turtleneck

For one Silicon Valley CEO, it was all fun and games until auditors and The Wall Street Journal uncovered some suspicious numbers. Over the course of 15 years, Theranos founder Elizabeth Holmes raised millions of dollars by inflating numbers, misleading investors and hiding the truth about her startup’s star product.

Theranos showed great promise, at first

At 19 years old, Holmes dropped out of Stanford University to launch her startup. The company had supposedly created highly advanced blood tests and small testing devices that could detect many different diseases and conditions by using only a few drops of blood. That technology would have been revolutionary, significantly reducing the blood required from patients and the costs associated with diagnostic testing.

Within a few years, Theranos landed major, multimillion-dollar contracts with clinics at Walgreens, Safeway and the Cleveland Clinic. Theranos’ blood tests were even used by GlaxoSmithKline and Pfizer at one time. As a result of the company’s apparent success, Holmes was able to raise $945 million in capital from investors.

The truth about Theranos soon came out

By 2015, the whole operation fell apart. Researchers began demanding more concrete evidence that the devices produced accurate test results, as Holmes claimed. When then U.S. Vice President Joe Biden came to tour the facility that year, Holmes and her team even created a fake medical lab to cover up the poor condition of their real facility. By the end of the year, The Wall Street Journal reported that Theranos was actually using traditional blood test machines and attaching those results to tests run by their medical devices.

In April 2016, Theranos and Holmes came under criminal investigation for misleading their investors, government officials and the general public about the efficacy of their devices. It quickly became clear that Holmes would be made an example to other startups.

Holmes’ fall is a lesson to other startups and investors

On January 3, 2022, Elizabeth Holmes was found guilty on four charges of fraud. Her conviction was considered surprising by many. Deceptive fraud cases like this, especially against Silicon Valley CEOs, are rare. Her sentencing in March will determine if she must serve the maximum sentence of 20 years for each count.

In just a few years, Holmes tumbled from media and med-tech sensation to criminal. And she’s not the only CEO guilty of fudging the numbers. If there’s a lesson to be learned in this story, it’s that the “fake it until you make it” culture prevalent among Silicon Valley startups won’t be tolerated anymore. Agencies are demanding greater transparency and improving their due diligence practices. Meanwhile, investigative journalists are on the lookout for suspicious activity.

The Securities and Exchange Commission is increasing its scrutiny of startups and mature businesses just like Theranos. Her story is a message to other CEOs and fundraisers tempted to inflate their company’s performance. While these wild exaggerations and predictions have become the norm, misleading investors is a serious crime and government officials are increasingly looking for signs of fraud.

There’s a lesson in this story for investors too. The investors that poured millions into Holmes’ company did shockingly little research. She found several investors who had no experience in the medical field and were easy to convince. Over time, investors began to take the promising words of other investors as truth, without doing their own due diligence. While Holmes misled the investors, the investors also made it easy for her to paint a positive (and lucrative) picture.

Key takeaway

Elizabeth Holmes’ story is one that should cause other founders to check themselves. If she can face decades of jail time for her role in the Theranos scheme, governing bodies clearly aren’t giving Silicon Valley a free pass. Greater scrutiny is coming as regulators and investors alike are expecting more transparency and accountability from businesses. An inflated number or two now may help bring in greater capital in fundraising rounds, but the true valuation of your company will eventually come to light.

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