The Fall of Theranos: Yup, It Was Fraud, Not Failure
First they think you’re crazy, then they fight you, then… they find you guilty of committing wire fraud to the tune of billions of dollars.
With news this week that Elizabeth Holmes will begin serving her 11-year sentence next month, I thought I’d share a piece I wrote on the trial and what lessons Silicon Valley could learn from it — if only it were willing to take its medicine.
We only need to look at the past year and every blockchain/web3/crypto/A.I. startup that’s sucked up millions of VC money to realize that chances of real change are virtually zero.
First, they think you’re crazy, then they fight you, then… they find you guilty of committing wire fraud to the tune of billions of dollars.
One of the most enthralling business sagas of all time drew to a close last year when Elizabeth Holmes, founder of the now-defunct blood-testing startup Theranos and one-time “next Steve Jobs,” was found guilty on four counts of wire fraud against investors. The other seven charges, including further counts of wire fraud against investors and patients, returned not guilty or deadlocked verdicts. The decision arrived after 50 hours of jury deliberation across 7 days, on the back of a grueling trial that lasted over 3 months. Although she faced up to 20 years of prison time for each count, she was sentenced to 11 years.
At the heart of the case was the question - was Holmes guilty of failure or fraud? More so, even if fraud was at play, was it committed with intent?
The prosecution called twenty-nine witnesses and produced a mountain of evidence in the form of text messages, emails and misleading company documents to show that Holmes knew her company’s devices could not perform to the capacity she was selling to potential investors. Former employees spoke of faked product demos and burying problems under the rug. Holmes’ own transcript from an SEC deposition in 2017 worked against her, showing she had overstated — or straight-up lied — about contracts with pharmaceutical companies and the military, going so far as to place those company’s logos on investor documents. The evidence was undeniable, but the jury still had to decide whether it was done with intent.
The defense called three witnesses, including the biggest bombshell moment of the trial: calling Holmes to testify. In a move to appear more emotive and human to the jury, she dropped her deeper voice and turtle neck. Her strategy appeared to be to blame everyone and everything but herself. She pointed at incompetent lab directors for the poor performance of the devices or for failing to bring issues to her attention. She accused her former business partner and former boyfriend, “Sunny” Balwani, of being abusive and controlling. (He was later found guilty on all 12 charges brought against him for defrauding Theranos investors and patients and was sentenced to 13 years in prison.) But most of all, she and her defense team tried to portray the Theranos debacle as an entrepreneur who was willing to do anything to make it work and came up short. It was a failure, not fraud because Holmes was 100% convinced the statements and promises would one day be realized.
Ultimately, this attempt to play Holmes as an entrepreneur, not driven by money but by her burning ambition to change the world, who may have taken a few missteps along the way, didn’t pay off.
While the heralded ‘fake it till you make it’ strategy has proved wildly successful in the past, the trial’s result shows there is a line in the sand. Should budding entrepreneurs knowingly and intentionally cross that line, they now do so with the risk of the government stepping in. And, with a landmark result in the bag, in what many deemed the “Silicon Valley trial of the century,” they will be confident of winning more of these cases in the future.
On the flip side, many believe the lure of money and reward is just too strong a pull for both founder and investor. For every Elizabeth Holmes, there will be ten founders who pull it off. Whether this trial will have any real impact on the 'success at all costs' culture of startups remains to be seen. Even the most optimistic will likely be doubtful of real, meaningful change. As Ellen Kreitzberg, a University law professor who attended the trial, said, “investors are still going to want to make more money on a promising idea. They will always go in for the golden ring.” When the dust settles, the landscape will be the same. There will always be founders with a dream and a gift for selling that dream, and for now, there’s an endless fountain of investors ready to buy it.
Elizabeth Holmes sold Theranos and its devices as the future of healthcare. However, the trial has exposed the company for what it really was — fake devices giving fake tests and offering fake results to real people.