The crucial lesson of Theranos’ downfall to startup hopefuls.
In 2018, the U.S. Securities and Exchange Commission charged Theranos CEO Elizabeth Holmes and former Chief Operating Officer Sunny Balwani with an “elaborate, years-long fraud in which they exaggerated or made false statements about the company’s technology, business, and financial performance.” In January 2022, Holmes was found guilty of four counts of fraud. This verdict sends a message that there is a limit to how far you can “fake it till you make it.”
The principle of “fake it till you make it” originates from positive thinking. It suggests that by emulating a guise of confidence and competence, a person can realize those qualities in reality and achieve the results they are looking for.
It is also a practice widely used in Silicon Valley, which encourages founders to make big, attractive claims and promises to prospective investors, but often with little substantiated proof. For example, it is commonplace for tech startups in Silicon Valley to write names of blue chip companies (established, reliable corporations) on the reference lists on their websites, even though they are not actually their customers. They do that to make potential customers and investors feel comfortable and accept the product they’re pushing.
Many startup founders have flocked to the hub of technological innovation with the hopes of changing the world by creating another Google or Apple. However, it happens that some founders are overly confident and fail to deliver on their promises.
John Ioannidis, professor of biomedical data science from Stanford University, said: “I suspect that there are many other companies that don’t really have the ideas that they propose that they do that they have. They’re still working on them, but they haven’t tested them out. They are probably overoptimistic, and maybe most of these ideas would fail.”
Elizabeth Holmes was one of them.
Holmes’ Theranos sold a promise to investors that her key products—a blood collection vessel called the “nanotainer” and its accompanying analysis machine, the “Edison”—could conduct comprehensive blood tests from finger drops of blood. However, this was all a lie.
Theranos’ employees have claimed that the company staged fake demonstrations for investors who visited the company’s headquarters. Former Theranos lab associate turned key whistleblower Erika Cheung said: “All they would see was their blood getting collected. They didn’t see what was going on behind closed doors, about how it was processed.” In fact, the blood was not analyzed and processed by the Edison machine, which Holmes claimed to have developed. The testing was instead done by scientists by hand in a laboratory.
In another investor document, Holmes claimed that Theranos technology was validated by the Food and Drug Administration and pharmaceutical companies and was utilized by the U.S. military during the Afghanistan War. However, all these claims were fabricated. Similarly, in one public appearance, Holmes claimed that she had “done some work with people at Hopkins who have developed and demonstrated in blood you can see the onset of pancreatic cancer 17 years before a tumor forms.” Johns Hopkins Medicine said that they never worked with Theranos.
Despite this, Theranos raised more than US$700 million from venture capitalists and private investors, resulting in a US$10 billion valuation at its peak in 2013 and 2014. Holmes at one point even became the world’s youngest self-made female billionaire, while not actually possessing viable single-drop blood testing technology, which she continually touted in her interviews.
During her trial, prosecutors portrayed Holmes as a liar who defrauded investors and put patients at risk by providing faulty blood tests. But Holmes’ defense lawyers told the court that she genuinely “believed she was building a technology that would change the world.”
This jury did not fall for it, and Holmes was convicted of fraud. She could face up to 20 years in prison.
By holding Theranos accountable, the court is telling startups that it can tell the difference between over-enthusiastic marketing and outright lies. The verdict should serve as a warning for startups and a reminder for them to tread carefully in the future. As well-known Silicon Valley investor Jason Calacanis wrote in a Tweet, “Never lie, never bend the truth, always be honest about where you are at with your traction… especially when raising money.”
Lying or making misleading, unproven claims makes investors, employees and customers uncertain and distrustful. Once you have said a mistruth, it is very tempting for you to build on top of it rather than to defuse it. Elizabeth Holmes and Theranos are perfect examples of how wrong the “fake it till you make it” philosophy can go.
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