Elizabeth Holmes: The ‘Culture of Pretense’ That Favors Silicon Valley Scandals

For years, Elizabeth Holmes was the darling of Silicon Valley and a person above suspicion.

Theranos, the startup she founded, has attracted hundreds of millions of dollars in investment.

But the company was based on a fantasy science. The technology produced by Theranos – of supposedly testing hundreds of diseases from a drop of blood – seemed unbelievable. And was.

Millions of dollars were wasted in the process, and users of the blood tests, including a cancer patient, said they had been misdiagnosed.

Now, years after Theranos collapsed, Holmes has been convicted by the California Court of wire fraud and conspiracy to commit fraud.

Looking at Silicon Valley from the outside in, Holmes’ story seems to make no sense. How is it possible that so many people have been deluded?

In Silicon Valley, many believe that Theranos is far from an aberration and poses systemic problems with startup culture.

‘Fake it till you get there’

In Silicon Valley, generating interest around your product — or exaggerating promises — is not uncommon, and Holmes was particularly good at it.

A former Stanford University student (a college she never finished), she was articulate, confident, and effective in presenting her vision — or mission, as she called it — to revolutionize medical diagnostics.

More skeptical experts said his idea was just that – an idea – and it wouldn’t work.

But she projected an unshakable confidence that her technology would change the world.

“It’s something embedded in the culture,” says Margaret O’Mara, author of The Code: Silicon Valley and the Remaking of America.

“If you’re a developing startup – with a product that barely exists – a certain amount of swaying and hustle is expected and encouraged,” he explains.

Particularly in the early stages of a startup, investors are often looking at people and their ideas rather than the technology itself. Conventional wisdom is that the technology will eventually arrive with the right concept — and the right people.

Holmes was brilliant at selling his dream, exercising a common practice in Silicon Valley: “fake it until you make it”.

The problem is, she couldn’t make the technology work. Her lawyers argue that Holmes was a mere businesswoman who failed, but not a fraudster.

But in Silicon Valley, there is a fine line between fraud and a mere culture of pretending.

“Theranos was a warning sign of a cultural shift in Silicon Valley that allowed crooks and promoters to thrive,” said investor Roger McNamee, who has not invested in the company and is a critic of big tech companies.

He believes the culture of secrecy and lies in Silicon Valley, which has allowed Theranos to move forward without scrutiny, is “totally endemic.”

Ambition can be positive: promising a prosperous future and trying to realize that vision is what led to the creation of items like computers and smartphones.

But for investors, trying to distinguish between charlatans and revolutionaries is a constant challenge, which can mean either enrichment or loss of money.

In August 2021, Manish Lachwani, president and founder of the telephony startup HeadSpin, was arrested on charges of defrauding investors.

secrets

Intellectual property is highly protected in Silicon Valley. A company’s “recipe for success” is often what gives it value, and young tech companies are especially sensitive to having their ideas stolen or copied.

Secrecy is important for these companies to succeed — but the culture around it can also be used as a smokescreen, particularly when employees and investors don’t understand (or don’t have access to) the technology involved.

That’s what happened at Theranos. Journalists, investors, politicians or anyone else heard from the company that the science behind the medical tests existed. However, when the company was asked about the ins and outs of its technology, it said it was a secret that could not be fully explained, analyzed or tested.

The pharmaceutical chain Walgreens, a major Theranos customer, was exasperated by the company’s lack of information about how its tests worked.

There are many companies in Silicon Valley that do not accurately explain their technology, claiming that their systems cannot be revealed or reviewed by outside scientists.

The system is based on trust, which creates the perfect environment for scandals like the one at Theranos.

‘CIA tactics’

A system that places so much emphasis on secrecy requires lawyers, many of them. After all, companies don’t want their employees to take ideas away. Nondisclosure agreements (NDAs) are endemic in the startup world, even in non-tech companies.

This makes it difficult for any informants to act, who can tell the ins and outs of the business in case they have irregularities.

In the case of Theranos, after the company collapsed, employees reported experiencing intense pressure to back down from negative public comments or to shut up. The company hired aggressive, expensive, and active lawyers to protect its reputation.

It’s not uncommon in Silicon Valley, says Cori Crider of Foxglove, a group that helps informants go public.

“I’ve spent more than a decade working on national security (in the US), and I often see these Silicon Valley folks use tactics from the CIA playbook on these issues,” she says.

“They frighten people and make them think they have no right to bring up legitimate issues.”

In the event that founders or chief executives are being dishonest about their product, employees need to be able to sound the alarm. And they often don’t feel comfortable doing that.

Ingredients for a scandal

It seems easy to forget that many investors looked at Theranos and put the idea of ​​investing in the company aside – especially investors with a knowledge of healthcare.

Among the company’s best-known investors are people and groups from outside the field, such as media mogul Rupert Murdoch.

Equity investors commonly decide to put their money in on the assumption that early investors have done their homework when evaluating the technology of the startup in question.

“They kind of take into account the validation of these third parties,” says O’Mara.

Again, it’s a trust-based system—investors who come in later trust that the initial investors knew what they were doing. The problem is, with so much money circulating, that’s not a guarantee.

Ultimately, Theranos got caught. In 2015, an investigation by The Wall Street Journal found that Theranos only used its proprietary technology in a minority of the diagnostic tests it performed — and that the company’s diagnostic machine had inconsistent results, according to former employees.

At the time, the company was valued at $9 billion, promised diagnostic tests for 240 types – from cholesterol to cancer – and Elizabeth Holmes was compared to Apple founder Steve Jobs.

With so many companies in Silicon Valley offering supposedly new and revolutionary ideas in fields less regulated than healthcare, scrutiny is less than in the case of Theranos.

Today, the “fake it until you get there” culture remains alive and well — and the same can be said for the culture of secrecy and aggressive use of nondisclosure agreements for employees.

It is a model that has advantages in helping to foster extremely valuable and innovative companies. But it also has all the ingredients to lead to new Theranos-like scandals.