The Elizabeth Holmes Jury, 1/10

I question the verdict

The WSJ reports,

jurors in the trial of Elizabeth Holmes seized on what one juror described as two “smoking guns” that sealed the fate of the Theranos Inc. founder.

…a report Theranos gave investors that Ms. Holmes altered to make it look like it was an endorsement from Pfizer Inc. For Ms. Stefanek, the second was a document of financial projections. . .

The 2014 document projected $40 million in annual revenue from drug companies, though jurors had heard from government witnesses that Theranos had no such contracts at the time.

I’ve invested in some start-ups as an angel investor. I was told much worse lies than those.

I can’t think of a single founder who could not have been convicted of fraud by this jury’s standards. Founders always make outlandish financial projections. They always exaggerate intangible assets, such as having an “inside track” with a major potential customer.

I recall lending to one founder who was going to buy a business to help build his customer base. I said that I would only make the loan if he would insist on holding back most of the purchase money for a year, to make sure that the owner of the business would help transition customers over. A few months later, the founder told me that he had not held back the purchase money, and that all the customers were lost. His business folded, and I lost the entire loan amount.

I’ve read Bad Blood. A major claim in the book, which I accepted when I read it, is that Holmes knowingly foisted on consumers and drug stores a product that did not work. She misled investors in the process. The book led me to believe that Holmes deserved punishment.

But the jury acquitted Ms. Holmes on charges of defrauding patients. If that was the right verdict, then convicting her of defrauding investors seems hard to justify. Certainly not on the basis of what the juror called the “smoking guns.”

If you invest in a start-up, you need to know what the dangers are. I’ve often compared a founder of a struggling start-up to someone who is drowning. It is really dangerous to try to save a drowning person unless you know what you are doing. I recommend taking a safety course to learn how to approach a drowning person correctly. And I recommend learning how to carry out due diligence before you become an angel investor.

I wish that founders did not lie. I also wish that university administrators did not lie. I wish that politicians did not lie. But at least founders have skin in the game. And at least the market eventually makes them have to face the truth.