In some respects, Elizabeth Holmes resembled a typical Silicon Valley entrepreneur: she hyped up a secretive product, gave Ted talks and adopted the signature Steve Jobs turtleneck.
But in other ways, she operated outside of normal tech channels, relying on a wide range of wealthy investors to catapult her blood testing start-up Theranos to a $9 billion (€7.9 billion) valuation at its peak before its spectacular collapse in 2018.
So after a federal jury found Holmes guilty of defrauding investors on Monday, Silicon Valley investors and other industry watchers remained divided on how to read the significance of the verdict.
Tim Draper, a venture capitalist and family friend of Holmes who provided early funding to Theranos, said the outcome made him "concerned that the spirit of entrepreneurship in America is in jeopardy".
“I still believe in what she was trying to do,” Draper said. “If this scrutiny happened to every entrepreneur as they tried to make this world a better place, we would have no automobile, no smartphone, no antibiotics and no automation, and our world would be less for it.”
But Bill Gurley, the Benchmark venture capitalist best known for backing Uber, took a view that has become common among tech investors since Theranos melted down: that the start-up had little to do with Silicon Valley's culture.
He said media outlets had been “unwilling to highlight how far outside traditional Silicon Valley she operated”, before adding: “I hope fraud is reined in.”
Other veteran investors tried to draw a clear line between Holmes’s fraud and normal practice in Silicon Valley.
"Every industry has its share of terrible people and hype merchants," said Michael Moritz, a longtime investor at Sequoia Capital, pointing to fraudsters on Wall Street and elsewhere. "I'm more sanguine about the Valley. Those who got duped by Holmes fell victim because they did not demand answers to obvious questions."
The verdicts delivered by the jury in California nevertheless represented a landmark decision in Silicon Valley, where few start-up founders have faced such public legal reckonings.
Four counts
Jurors found Holmes guilty on four counts of defrauding investors in Theranos. Holmes could face decades in prison, though she is likely to receive a much more lenient sentence and to appeal.
Lawyers said the verdicts could make start-up founders and their counsel more cautious about promotional statements while stressing that Holmes appeared to clearly overstep boundaries.
The Holmes verdict tells start-up founders they should be careful to not "cross the line from enthusiastic optimism into fraudulent misrepresentation", said Amanda Kramer, a partner at Covington & Burling and a former federal prosecutor.
“It’s not that hard of a line to see and to stay on the right side of,” said Kramer. But the norms of start-up culture “make it difficult to be conservative on this issue” without appearing to be “not certain enough about your venture”, she added.
Early on, Theranos leaned on connections Holmes had made at Stanford University and raised money from several prominent venture capitalists. She would go on to charm investors as varied as Australian media mogul Rupert Murdoch and Mexican tycoon Carlos Slim while filling her board with elder statesmen such as Henry Kissinger.
In the end, jurors found Holmes guilty of conspiring to defraud investors and committing wire fraud against three different shareholders, including the DeVos family and the hedge fund Partner Fund Management.
Brian Grossman, who oversaw PFM's investment, testified that his firm had performed extensive due diligence on Theranos and come away impressed by the company's purported work with the military and ability to run a full range of blood tests.
Prosecutors stressed during the trial that Theranos never did meaningful business with the military and its proprietary devices could not perform all of the tests Holmes touted to investors.
But jurors also found Holmes not guilty on four counts of conspiring to defraud and wire fraud against Theranos patients. They also remained deadlocked on three counts of wire fraud against investors, including Alan Eisenman, a Houston-based money manager who had testified about the company's evasive communication.
Surprised
Anne Kopf-Sill, a retired biotech executive who attended the proceedings, said she was surprised that the jury did not rule unanimously on all counts of defrauding investors “as the evidence felt similar for all of them”.
“I don’t see much broader significance as Theranos and Elizabeth Holmes were singular cases,” Kopf-Sill said, drawing a distinction between the founder’s decision to “lie about events in the present and in the past” and the commonplace exaggeration of “future accomplishments”.
Meanwhile, since Holmes was indicted, Silicon Valley has experienced a record boom that has led venture capitalists to markedly speed up the pace of their investments, vastly inflating the valuations of some start-ups despite their uncertain prospects.
Lawyers who advise start-ups said investors had even begun skipping background checks and other routine due diligence to win hot deals, in some cases relying on the analysis performed by previous backers.
More fraud cases are likely to emerge. In March, federal prosecutors charged the founders of the biotech start-up uBiome with conspiracy to commit securities and healthcare fraud, alleging they “turned a blind eye to compliance and pursued at all costs a path designed to bring the greatest investment in their company”.
Lawyers for the founders, Zachary Apte and Jessica Richman, did not immediately respond to a request for comment. Government attorneys have alleged that the founders, who persuaded investors to part with more than $76m during two rounds of fundraising in 2016 and 2018, are hiding in Germany to avoid prosecution.
"What's never OK is to raise capital based on claims that the product is working when it isn't," said Eric Goldman, a law professor at Santa Clara University. "Those types of fraudulent claims aren't unique to Silicon Valley. Fraudsters throughout the world are familiar with this method." – Copyright The Financial Times Limited 2022
