The jury is in, literally, on Elizabeth Holmes, the one-time siren of Silicon Valley who raised close to $1 billion in capital to fund a phlebotomy and venipuncture technology startup that ended a fake. Holmes was found guilty on two counts of wire fraud and two counts of conspiracy to commit fraud, scandalizing some of the nation’s most respected figures in the process.
Commenting on the case, The Wall Street Journal reported that “The U.S. government, in a rare fraud prosecution of a technology executive, essentially put on trial Silicon Valley’s fake-it-until-you-make-it culture. In Theranos’s case, prosecutors said Ms. Holmes’s hype and hubris went far beyond norms, exposing patients and investors to harm by peddling faulty technology.”
Assistant U.S. Attorney Jeff Schenk said Holmes “chose to be dishonest with her investors and with patients. That choice was not only callous, it was criminal.”
There will certainly be an appeal, and as Holmes was acquitted of certain charges, any eventual sentence may fall well short of potential maximums. What’s occupying minds now that Holmes has been found guilty is how it all could’ve happened, and can it happen again?
The short answer. Yes, it can.
The Empress’s New Clothes
There were obvious problems with Theranos. Despite the trial, questions remain unanswered.
In 2015 when irregularities first came to light, PYMNTS’ Karen Webster published a timely treatise on the topic of groupthink in investing in startups, which leads to bad moves by smart people.
Webster wrote of the would-be hematology hero: “Despite being a company with a mission to both innovate and disrupt science and laboratory procedures, how many scientists or lab experts do you think Theranos has on its board or employed as advisors? That would be zero. And how many articles do you think Theranos has published in scientific and/or academic journals? That would be zero, too” — despite the company being 10 years old at the time.
Ironically, 2021 — when Holmes finally went to trial — was one of the biggest years on record for initial public offerings (IPOs), with several done via little-known Special Purpose Acquisition Companies (SPACs) which provide fundraising hopefuls with ready-made public companies.
As Pitchbook.com recently reported, in 2021 “Early-stage mega-deals [were] more common than ever, and have pushed average valuation step-up multiples to a record 5.1 times through the third quarter. Around 104 such mega-deals were completed by Q3—a significant jump from the previous full-year record of 61 in 2020.”
The National Venture Capital Association (NVCA) stated late last year that “U.S. Venture Exits Surpass $500 Billion For First Time, Doubling Previous Annual Record.”
In the NVCA statement, PitchBook founder and CEO John Gabbert noted that, “The pace of activity across all facets of the U.S. VC ecosystem in 2021 has been astounding, with many annual records already shattered before the fourth quarter even started. Existing companies and a healthy pipeline of new startups have found investors – especially nontraditional investors – are eager to deploy the record dry powder and write ever larger checks.”
That’s a good thing — until it’s not.
Groupthink Won’t End With Theranos
The clincher is that nothing’s really changed. Regardless of Holmes’ fate, the bigger question goes back to the groupthink that made Theranos an almost cultlike investment.
Try to put yourself in a pitch meeting with the highly intelligent and charismatic Holmes back in, say, 2013. As that room looked on admiringly, would you want to be the lone naysayer?
As Webster wrote three years before Holmes was indicted, “Think of groupthink as consensus gone awry — when people in a cohesive group value conformity above all else. Members of the group then agree to get along only because being part of the group is more important and more valued than disagreeing with the group’s collective opinions or actions.”
Groupthink. It’s a proven method for raising millions — even if the widget doesn’t work — and something to which VCs and startups should give serious thought in the wake of this verdict.
Read also: The Dangers Of Groupthink
We’re always on the lookout for opportunities to partner with innovators and disruptors.
Learn More