On January 3, a jury in San Jose, California found Elizabeth Holmes, the founder of health technology company Theranos, guilty of four criminal fraud cases that could potentially face decades of imprisonment. Holmes’ spectacular rise and meteoric fall is a take on the dark side of the breathless tech start-up culture where the tiger you conjured up to ride to riches can end up devouring you.
Holmes embodied the tech start-up dream. A 19-year-old Stanford University dropout (“Stanford” and “Dropouts” are major PowerPoint assurances for venture capitalists) who envisioned a revolution in diagnostic testing. She claimed she was on the verge of developing self-service devices for home use that could run a series of tests based on a few drops of blood.
In 2014, Theranos was valued at $ 9 billion, and Holmes, only 30 years old, was on the Forbes billionaires list. Rupert Murdoch was one of the company’s investors. Oracle founder Larry Ellison and the Walton family from Walmart. The board boasted of two former US foreign ministers, George Schultz and Henry Kissinger.
And Holmes claimed that Theranos technology would soon be able to detect cancer from a single drop of blood.
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In October 2015, The Wall Street Journal (happened to be owned by Murdoch) reported that Theranos’ claims were in doubt. The building crumbled within months. US authorities determined that the company used unapproved equipment for testing and that at least one of its facilities with minimal quality control standards, including improperly calibrated equipment, was “putting patient health and safety at risk.”
The US Securities and Exchange Commission charged Theranos and Holmes with securities fraud, and Holmes was stripped of their ownership and control of the company. She was charged with fraud in June 2018, and the company was wound up three months later.
But what is the deeper message of the Theranos story? There seems to be an extreme greed down the value chain and the desperation it leads to. By “value” I mean the expectations of meta-above normal profits – a 50-fold exit in five years.
Holmes certainly had an idea and full commitment when she founded Real-Time Cures in 2003, the company that would become Theranos. She was able to sell her vision to investors. But the most important prerequisites for convincing investors in a tech start-up are extraordinary promises to “disrupt the world” and “change the world”.
Very few would-be disruptors get the money. And then the unscrupulous expectations and obsession with skyrocketing reviews set in. These ratings come as you set yourself higher and higher goals and wilder and wilder Excel spreadsheets about what you claim you can do with more money.
In many cases, the process becomes a hallucination that is willingly shared between the founders and the venture capital firms, who also have investors to answer for. The amicably created tiger gets bigger and wilder with each round of funding, and no one is either willing or able to part with it – just give it another six months and maybe we can give the can to someone else and cash it out. The ultimate goal is an IPO where the canned bilge (if it’s bilge) can be distributed to thousands of retail investors at a handsome profit. Or be bought up by a large corporation.
But often the tiger takes its toll and you succumb to unholy choices. As the senior prosecutor at the Holmes trial put it, “she selected fraud over failure. She chose to be dishonest with her investors and patients. “
It would only have been a matter of time before Holmes got caught. On the other hand, she could have bet that it would also be a matter of time before Theranos developed the promised technological marvels and forgot her lies if enough money was invested in the effort.
That should not be. And her lies were easy to spot because she had promised something very specific, based on research that could be scrutinized and approved by a number of regulatory agencies.
Much of the current tech start-up boom we’re experiencing right now doesn’t fall into this category.
In 2021, 44 unicorns – privately owned startups valued at over $ 1 billion – were minted in India. That’s almost four a month. But what exactly do these companies do? Most of them are “platforms”, which in many cases means “intermediaries”, which in many cases is a nifty term for “brokers”. Apart from the fact that some of you don’t charge a brokerage fee and you even pay to become a subscriber.
Most of these players – and their supporters – are essentially betting on the Facebook model that if they can collect huge amounts of data on large numbers of people and develop huge software structures that can process that data and predict behavior, then you can sell Things. The word “expansive” is key here at every stage. The business model fails if the breadth is not achieved to the extent of a quasi-monopoly – or at least a duopoly – in the market. And until that order of magnitude is reached, the model often consists of huge expenses and meager sources of income.
As long as it lasts, the system is a sweet self-sustaining cycle. The start-up raises venture capital and spends it on customer acquisition – advertising and direct payments to attract subscribers. The venture capitalists are happy that the company name flashes every half hour at a cricket match. Your money will be well spent.
There is a new financing round every six to eight months. The rating increases with each round. Founders and financiers can then pass on part of the risk to a few other investors and also book profits. With each round, the goals and promises become steeper and more expensive. This cycle can go on for many years until a company manages to take control of its market and then focus on generating revenue. But the vast majority either fade or go out.
The pressure to grow on founders and employees is unbroken. So the hotel platform unicorns foot soldiers make ruthless promises to get small guest houses to sign up and then fail to deliver, and online education company sellers are selling half-truths to low-income families, forcing them to take out loans they may never have can repay. Meanwhile, the hype is constantly ramping up.
Some founders believe in their fantasies – they no longer consciously lie when they project numbers in media interviews and presentations on future-oriented gabfests. However, a few smarter ones, like WeWork’s Adam Newmann, make sure they stash enough for themselves. Newmann had garnered so much personal wealth through cleverly inserted terms in his contracts that he was perhaps the only one who laughed when WeWork’s planned IPO spectacularly imploded in late 2019 and he resigned.
Holmes was not a Newmann. Still, she must have had an exceptional flair to get so many super rich and powerful people interested in her story. But in the end, in their trial, their defense team produced only one witness – Holmes himself, a mother with a four month old child, but her tearful testimony failed to move the jury.
As I said, it promised a specific product – either it existed or it didn’t, it worked or it didn’t. And their lies could easily be nailed down. Most of the aspiring tech entrepreneurs around the world, whose unicorns may be pure vape, will never face the problems Holmes has gone through.
The author is the former editor of “Financial Express” and founder-editor of the magazines “Open” and “Swarajya”. Views expressed are personal.
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