The condemnation of Theranos founder Elizabeth Holmes separates Silicon Valley


In some respects, Elizabeth Holmes looked like a typical Silicon Valley businesswoman: she advertised a mysterious product, gave Ted speeches, and adopted Steve Jobs ’signature.

But in other ways, it has worked outside of normal Silicon Valley canals, relying on a wide range of wealthy investors to catapult its Theranos blood-testing start-up to an estimated $ 9 billion at its peak, before the spectacular 2018 collapse.

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 significance of the ruling.

Tim Draper, a venture capitalist and Holmes’ family friend who provided early funding for Theranos, said the outcome forced him to “worry that the entrepreneurial spirit in America is under threat”.

“I still believe in what she was trying to do,” Draper said. “If this control happened to every entrepreneur while trying to make this world better, we wouldn’t have a car, a smartphone, antibiotics and automation, and our world would be less for it.”

But Bill Gurley, the Benchmark venture capitalist best known for supporting Uber, has taken the view that has become commonplace among technology investors since Theranos melted away: that startups have little to do with Silicon Valley culture.

He said the media was reluctant to point out how far it has operated far beyond traditional Silicon Valley, before adding: “I hope the fraud is curbed.”

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

“Every industry has its share of horrible people and traders who are heating up,” said Michael Moritz, a longtime investor in Sequoia Capital, pointing to fraudsters on Wall Street and elsewhere. “I am more optimistic about the valley. Those who were deceived by Holmes became victims because they did not seek answers to obvious questions. “

The verdicts handed down by the California jury, however, represented a significant decision in Silicon Valley, where few startup founders have faced such public legal reckonings.

The jurors found Holmes guilty on four counts of investor fraud in Theranos. Holmes could face decades in prison, although she is likely to receive a much milder sentence and appeal.

Lawyers said the verdicts could make startup founders and their advisers more cautious about promotional statements, while pointing out that Holmes seemed to be clearly crossing borders.

The verdict against Holmes tells startup founders that they should be careful not to “cross the line from enthusiastic optimism to false misrepresentation,” said Amanda Kramer, a partner at Covington & Burling and a former federal prosecutor.

“It’s not such a hard line to see and stay on the right,” Kramer said. But the norms of start-up culture “make it difficult to be conservative on this issue”, and it does not seem that “it is not confident enough in its endeavor”, she added.

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

Initially, Theranos relied on connections that Holmes established at Stanford University and raised money from several prominent venture capitalists. Later, Holmes will charm investors such as Australian media mogul Rupert Murdoch and Mexican tycoon Carlos Slim, while her board has filled senior statesmen such as Henry Kissinger.

In the end, jurors found Holmes guilty of conspiracy to defraud investors and committed a 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 conducted an extensive analysis of Theranos and was impressed with the company’s alleged work with the military and the ability to perform a full range of blood tests.

Prosecutors pointed out during the trial that Theranos never had meaningful dealings with the military, and his proprietary devices could not perform all the tests Holmes told investors.

But jurors also found Holmes not guilty on four counts of conspiracy to defraud and defraud Theranos patients. They also remained deadlocked in a three-count wire fraud indictment against investors, including Alan Eisenman, a Houston money manager who testified about the company’s evasion of communication.

Anne Kopf-Sill, a retired executive director of biotechnology who attended the proceedings, said she was surprised that the jury did not unanimously decide on all points of investor fraud “because the evidence is similar for all of them”.

“I don’t see much broader significance because Theranos and Elizabeth Holmes were individual cases,” Kopf-Sill said, distinguishing between the founders’ decision to “lie about events in the present and the past” and the usual 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, greatly raising the appraisal of some startups despite their uncertain prospects for the future.

Lawyers advising startups said investors have even begun to skip past checks and other routine checks to get hot deals, in some cases relying on analysis done by previous sponsors.

Holmes was accompanied by former US President Bill Clinton and Alibababa Executive President Jack Ma

Holmes with former US President Bill Clinton and Alibaba CEO Jack Ma at the 2015 conference © JP Yim / Getty Images

There are likely to be more cases of fraud. In March, federal prosecutors accused the founders of the biotech startup Ubiome of conspiracy to commit securities and health fraud, saying they “closed their eyes to compliance and followed the path designed at all costs to bring the biggest investment in their company.” .

The founder’s lawyers, Zachary Apte and Jessica Richman, did not immediately respond to a request for comment. State attorneys have claimed that the founders, who persuaded investors to set aside more than $ 76 million during two rounds of fundraising in 2016 and 2018, are hiding in Germany to avoid prosecution.

“What’s wrong is raising capital based on claims that a product works even when it doesn’t,” said Eric Goldman, a law professor at the University of Santa Clara. “These types of false claims are not unique to Silicon Valley. Fraudsters around the world are familiar with this method. ”



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