Wed. Jan 26th, 2022


In some ways, Elizabeth Holmes looked like a typical Silicon Valley entrepreneur: she sharpened a mysterious product, gave Ted speeches, and adopted the distinctive Steve Jobs tortneck.

But in other ways, she operated outside normal Silicon Valley channels, relying on a wide range of wealthy investors to push her blood test start-up Theranos to a $ 9 billion valuation at its peak, ahead of its spectacular collapse in 2018.

So after a federal jury found Holmes guilty of investor fraud on Monday, Silicon Valley investors and other industry observers remained divided over how to read the meaning of the ruling.

Tim Draper, a venture capitalist and family friend of Holmes who provided early funding to Theranos, said the outcome “worried him that the spirit of entrepreneurship in America was at stake”.

“I still believe in what she tried to do,” Draper said. “If this investigation happened to every entrepreneur while they were trying to make this world a better place, we would have no car, no smartphone, no antibiotics and no automation, and our world would be less for it.”

But Bill Gurley, the venture capitalist best known for supporting Uber, has taken a stand that has become widespread among technology investors since Theranos’ merger: that the new venture has little to do with Silicon Valley’s culture.

He said media outlets were “reluctant to stress how far outside traditional Silicon Valley its operations are”, before adding: “I hope fraud is kept in check.”

Other veteran investors have also tried to draw a clear line between Holmes’ fraud and normal practice in Silicon Valley.

“Every industry has its share of terrible people and hype traders,” says Michael Moritz, a longtime investor at Sequoia Capital, pointing to fraudsters on Wall Street and elsewhere. “I am more gifted about the Valley. “Those who were deceived by Holmes became the victims because they did not demand answers to obvious questions.”

The verdicts handed down by the jury in California nonetheless represented a landmark decision in Silicon Valley, where few novice founders faced such public legal calculations.

Jurors found Holmes guilty on four charges of fraud by investors in Theranos. Holmes could face decades in prison, though she is likely to receive a much lighter sentence and to appeal.

Lawyers said the rulings could make novice founders and their lawyers more cautious about promotional statements, while emphasizing that Holmes appears to be crossing boundaries.

The Holmes ruling says beginners should be careful not to “cross the line from enthusiastic optimism to fraudulent misrepresentation,” said Amanda Kramer, a partner at Covington & Burling and a former federal prosecutor.

“It’s not that hard to see and to stay on the right,” Kramer said. But the norms of start-up culture “make it difficult to be conservative on this issue” without appearing to be “not sure enough about your business,” she added.

Holmes leaves court after a jury found her guilty of wire fraud and conspiracy to defraud investors

Holmes leaves court after a jury found her guilty of wire fraud and conspiracy to defraud investors © David Odisho / Getty Images

Early on, Theranos relied on connections Holmes made at Stanford University and raised money from several prominent venture capitalists. Later, Holmes would captivate investors as diverse as Australian media mogul Rupert Murdoch and Mexican tycoon Carlos Slim, while filling her board with older statesmen like Henry Kissinger.

Eventually, jurors found Holmes guilty of conspiracy to defraud investors and commit fraud against three different shareholders, including the DeVos family and hedge fund Partner Fund Management.

Brian Grossman, who oversaw PFM’s investment, testified that his firm conducted extensive due diligence on Theranos and was impressed by the company’s alleged work with the military and ability to conduct a full range of blood tests.

Prosecutors stressed during the trial that Theranos had never done meaningful business with the military, and that his own devices could not perform all the tests Holmes presented to investors.

But jurors also found Holmes not guilty on four charges of conspiracy to defraud and fraud against Theranos patients. They also got caught on three charges of wire fraud against investors, including Alan Eisenman, a money manager in Houston who testified about the company’s evasive communications.

Anne Kopf-Sill, a retired biotechnology manager who attended the proceedings, said she was surprised that the jury did not unanimously rule on all charges of investor fraud “as the evidence feels similar to everyone”.

“I do not see much greater significance as Theranos and Elizabeth Holmes were simple cases,” Kopf-Sill said, distinguishing between the founder’s decision to “lie about events in the present and in the past” and the everyday exaggeration of “future achievements”.

Meanwhile, since Holmes was indicted, Silicon Valley has experienced a record boom that has led venture capitalists to significantly accelerate the pace of their investments, significantly inflating the valuations of some start-ups despite their uncertain future prospects.

Lawyers advising start-ups say investors have even begun skipping background checks and other routine precautions to win hot deals, in some cases relying on the analysis done by previous supporters.

Holmes flanked by former US President Bill Clinton and Alibabab's executive chairman Jack Ma

Holmes flanked by former US President Bill Clinton and Alibaba executive Jack Ma at a conference in 2015 © JP Yim / Getty Images

More fraud cases are likely to emerge. In March, federal prosecutors charged the founders of biotechnology start-up Ubiome with conspiracy to commit securities and healthcare fraud, claiming they “turned a blind eye to compliance and at all costs followed a path designed” to bring the biggest investment in their company. ” .

Attorneys for the founders, Zachary Apte and Jessica Richman, did not immediately respond to a request for comment. Government prosecutors have claimed that the founders, who persuaded investors to share more than $ 76 million during two rounds of fundraising in 2016 and 2018, are hiding in Germany to avoid prosecution.

“What’s never right is to raise capital on the basis of claims that the product works while it does not work,” says Eric Goldman, a law professor at the University of Santa Clara. “Those types of fraudulent claims are not unique to Silicon Valley. Fraudsters around the world are familiar with this method. ”



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