Brooke Masters: Theranos Verdict is a warning story for failed entrepreneurs

“Fake ’til you succeed” may work in Silicon Valley, but the slogan doesn’t catch on in federal court.

A California jury found Theranos founder Elizabeth Holmes guilty of fraud on Monday in a conspiracy to deceive investors in her blood testing startup, and on three counts of electronic fraud. The former Stanford University student lured investors with promises to revolutionize healthcare by running multiple tests with a single drop of blood. But the company’s $9 billion ($51.1 billion) valuation collapsed after doubts were raised about its technology in 2015.

This verdict will resonate in the technology and investment communities, as it should. New listings raised a record $316 billion ($1.8 trillion at current prices) last year in the United States, but many of the companies are already struggling to live up to stratospheric expectations. Holmes’ trial offers a hard lesson in what not to do.

While entrepreneurs routinely promise investors the moon and fail to deliver, Theranos has practiced total deception. Holmes admitted in the dock that she had manipulated documents to place pharmaceutical logos and that her “Edison” machine could only perform 12 types of tests, despite publicly claiming that it did more than 200.

Fraud trials of American executives have been few and far between in recent years. Some attribute this to the Sarbanes-Oxley corporate accounting reform, adopted after a series of scandals in the early 2000s, for improving the accuracy of publicly traded reporting. Others say the Justice Department has stopped paying attention to white-collar crimes, which President Joe Biden has vowed to reverse.

In any case, tech companies, especially those that have yet to sell shares to the public, have historically enjoyed more leeway in their promises, even when their valuations ran into billions. Now some of these superstars have fallen to earth and doomsday is coming. Nikola Trevor Milton’s former chief executive is due to be tried for criminal fraud and pleaded not guilty to claims he lied to investors about the company’s electric truck technology.

As a rare female founder, and someone who deliberately courted comparisons with Apple’s Steve Jobs, Holmes won a star-studded board and attracted massive press coverage for her meteoric rise and dramatic fall.

But that result was not the product of a hasty trial: the guilty verdicts came after a 15-week trial and more than 50 hours of deliberation. Theranos employees testified about the gap between her claims and reality, while investors described her hypnotic grant requests.

The jury was unconvinced by Holmes’ efforts to shift the blame to others in the company, including former president Ramesh Balwani, whom she accused in court of mental and physical abuse.
Holmes is expected to appeal, a process that could take years. But the split verdict will make it harder for her to claim she was wrongfully accused as a scapegoat. Jurors generally refused attempts to hold her responsible for patients who received erroneous blood test results.

They appear to have taken seriously the judge’s instruction that patient charges would require them to conclude that Holmes had convinced clients to use their tests instead of a traditional laboratory. Jurors also failed to reach a verdict on three counts involving investors who put up money even after Holmes turned down their requests for further information.

Some are already saying that Holmes should be spared prison because she has been punished enough. This is ridiculous. Privileged people who use their connections and credentials to steal do as much damage to our society as those who employ cruder methods.

There’s also a school of thought that tough sentences for corporate fraud will deter other entrepreneurs or make it too difficult for talented people to reinvent themselves after failure. This is an exaggeration.

Investors easily trust the people they believe. Take WeWork co-founder Adam Neumann, who was forced to step down as chief executive when the co-working community’s OPI failed. He was accused of arrogance and fashion, but not malfeasance. This week it became known that he is reinventing himself as an apartment landlord, with plans to shake up rental housing.

Thousands of tech startups have impressed investors to contribute their money in recent years, and some of these companies will inevitably disappoint. Holmes’s condemnation is a timely warning that there is a crucial difference between rosy optimism and outright fraud.

Translated by Luiz Roberto M. Gonçalves