Theranos verdict a cautionary tale for failing entrepreneurs

"Fake it until you make it" may work in Silicon Valley, but that slogan doesn't fly in federal court. A San Francisco jury found Theranos founder Elizabeth Holmes guilty on Monday of conspiracy to defraud investors in her blood-testing start-up, and of three counts of wire fraud.

The Stanford University dropout wooed investors with promises to revolutionise healthcare by running multiple blood tests from a single drop of blood. But the company's $9 billion valuation collapsed after questions were raised about its technology in 2015 and 2016.

This verdict will reverberate around the technology and investment communities, as well it should.

While entrepreneurs routinely promise investors the moon and fall short, Theranos engaged in outright deception. Holmes admitted on the stand that she had doctored documents to affix drug company logos and that her Edison machine could perform only 12 kinds of tests, despite her public claims of more than 200.

Fraud trials of US corporate executives have been few and far between in recent years. Some credit the Sarbanes-Oxley corporate accounting reforms, adopted in the wake of a series of scandals in the early 2000s, with improving the accuracy of public company reports.

Others argue that the department of justice took its eye off the ball on white-collar crime, something President Joe Biden has promised to reverse.

Reckoning

Either way, technology companies, particularly those that have not yet sold shares to the public, have historically enjoyed more leeway on their promises even as valuations soared into the billions. Now some of those superstars have fallen to earth, and a reckoning is coming.

Former Nikola chief executive Trevor Milton is scheduled to go on trial for criminal fraud in April over claims he lied to investors about the electric truck company's technology.

As a rare female founder, and one who deliberately courted comparisons with Apple's Steve Jobs, Holmes won over a star-studded board and drew breathless media coverage of both her meteoric rise and dramatic fall.

But this result was not the product of a hasty rush to judgment: 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 pitches for finance.

The jury was unpersuaded by Holmes's efforts to deflect blame on to others at the company, including former president Ramesh Balwani, whom she accused on the stand 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 argue that she was unfairly scapegoated. Jurors comprehensively rejected efforts to hold her responsible for erroneous blood test results that were reported to patients.

They appear to have taken seriously the judge’s instruction that the patient charges would require them to find that Holmes had persuaded customers to use her tests instead of a traditional lab.

The jurors also failed to reach a verdict on three counts involving investors who put money in even after Holmes rebuffed their requests for additional information.

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

Investors have thrown cash at thousands of technology start-ups in recent years and some of those companies will inevitably disappoint. Holmes's conviction is a timely warning that there is a crucial difference between rosy optimism and outright fraud. – Copyright The Financial Times Limited 2022