I also have not followed the Theranos case as closely as Arnold or others. Nonetheless, my understanding is that Holmes went far beyond the garden variety rosy projections and exaggerations in which many founders engage. She claimed that her company had a technology that could assay small samples of blood to provide a wide variety of diagnostic tests. Theranos had no such technology (from what I understand) and manually jerry rigged the output of blood tests using other companies' and/or more standard technology to make it appear as if the output were based on this fictitious technology. This subterfuge was more along the lines of monthly account statements from Madoff Securities, LLC than mere exaggeration or optimistic projections. There was no "there" there.
Just about every business owner commits many crimes and torts of varying severity on an hourly basis. Founders routinely come up with ideas that seem brilliant and strangely underutilized because the ideas are in fact illegal, but the founder doesn't realize it yet. It's just that the overwhelming majority (99.999999999%) of those violations are never pursued in any court. The American left has traditionally regarded the discrepancy between how white collar crimes are treated and how street crimes are treated as a great injustice. But the fundamentally gray nature of some of those crimes of excessive puffery makes them rather different from more traditional street crimes. If Instagram exaggerated its user numbers a bit, but made most of its investors very rich, none of those investors are going to be terribly excited about calling executives to the carpet.
The Holmes case is an example of the broad power of prosecutorial discretion working glove-on-hand with the press. The press identifies a scapegoat, and the prosecutor uses their discretion to cut the goat's throat. Anyone can be the goat. Holmes' real crime was in being a disappointment compared to the flamboyant news stories about her. The other stuff was more or less par for the course in biotech.
The not defrauding patients is more of a technical decision- she wasn't personally involved at the individual patient level, which is perhaps why the jury deadlocked.
For me the interesting part is how so many investors invested without a technology review (technical due diligence). They simply assumed because some well known people were involved, that those other groups had done the due diligence. This is really common. None of the big name Silicon Valley firms invested because she wouldn't let them analyze the technology. The family offices that invested were less sophisticated and fooled by the association with famous people. The funds that invested were at risk of being sued by their limited partners, but now they can claim they were defrauded.
Angel investing is really hard. I invested in a company where the principals didn't quit their day jobs, and hardly spent any time on the business. It is just sort of drifting along and I can't get investors to join in because one of the founders was so convinced of the extreme value of her idea that she won't accept any reasonable valuation.
I think founders often exaggerate their vision of the future. Witness how many electric car companies project that they will reach $10 billion in revenue in a few years. Where you get into trouble is misstating the present condition. That is not a projection, but a fact. Either you do or do not have a particular customer. Either you do or do not have a certain amount of historical revenue. It seems like the takeaway from this trial is that you can say what you want about what you think / hope is going to happen. She got into trouble for misstating the present.
I did not follow this as closely as Arnold did, but I was hoping she would be exonerated on the investment side of things for precisely the reasons Arnold advances. It seems like unequal treatment of her vs. other founders. While not bearing on her innocence or guilt, the fact that she's a woman makes it seem to me a worse result.
Matt Levine's piece on the Holmes trial is worth reading. He suggests that raising a lot of money from investors who don't do much due diligence is the new normal and that it may actually be optimal practice for investors to rush into such opportunities:
"If the lesson you learned from Theranos’s fall in 2015, or 2018, was “I am not going to invest in any tech companies with charismatic founders and vague promises unless I’ve done thorough rigorous diligence, and if those founders object to that then they are not getting my money,” then you have missed a lot of good deals and the founders have not missed your money. Betsy DeVos is still rich despite blowing $100 million on Theranos, and lots of people who have casually rushed into fundraising rounds or SPACs or crypto Ponzis or NFT drops or whatever in the last few years have done quite well. In a generally rising market where lots of fortunes are being made quickly, rushing to back popular projects without a lot of due diligence seems to work, and if you back enough of them you’ll be fine even if a few are frauds. The ones that work make you rich; the ones that are frauds give you an entertaining story."
Oy. I don't think that ends well.
I also have not followed the Theranos case as closely as Arnold or others. Nonetheless, my understanding is that Holmes went far beyond the garden variety rosy projections and exaggerations in which many founders engage. She claimed that her company had a technology that could assay small samples of blood to provide a wide variety of diagnostic tests. Theranos had no such technology (from what I understand) and manually jerry rigged the output of blood tests using other companies' and/or more standard technology to make it appear as if the output were based on this fictitious technology. This subterfuge was more along the lines of monthly account statements from Madoff Securities, LLC than mere exaggeration or optimistic projections. There was no "there" there.
I though Matt Levine had a good riff on this in one of his columns last week: https://www.bloomberg.com/opinion/articles/2022-01-04/slaying-the-blood-unicorn
Just about every business owner commits many crimes and torts of varying severity on an hourly basis. Founders routinely come up with ideas that seem brilliant and strangely underutilized because the ideas are in fact illegal, but the founder doesn't realize it yet. It's just that the overwhelming majority (99.999999999%) of those violations are never pursued in any court. The American left has traditionally regarded the discrepancy between how white collar crimes are treated and how street crimes are treated as a great injustice. But the fundamentally gray nature of some of those crimes of excessive puffery makes them rather different from more traditional street crimes. If Instagram exaggerated its user numbers a bit, but made most of its investors very rich, none of those investors are going to be terribly excited about calling executives to the carpet.
The Holmes case is an example of the broad power of prosecutorial discretion working glove-on-hand with the press. The press identifies a scapegoat, and the prosecutor uses their discretion to cut the goat's throat. Anyone can be the goat. Holmes' real crime was in being a disappointment compared to the flamboyant news stories about her. The other stuff was more or less par for the course in biotech.
The not defrauding patients is more of a technical decision- she wasn't personally involved at the individual patient level, which is perhaps why the jury deadlocked.
For me the interesting part is how so many investors invested without a technology review (technical due diligence). They simply assumed because some well known people were involved, that those other groups had done the due diligence. This is really common. None of the big name Silicon Valley firms invested because she wouldn't let them analyze the technology. The family offices that invested were less sophisticated and fooled by the association with famous people. The funds that invested were at risk of being sued by their limited partners, but now they can claim they were defrauded.
Angel investing is really hard. I invested in a company where the principals didn't quit their day jobs, and hardly spent any time on the business. It is just sort of drifting along and I can't get investors to join in because one of the founders was so convinced of the extreme value of her idea that she won't accept any reasonable valuation.
I think founders often exaggerate their vision of the future. Witness how many electric car companies project that they will reach $10 billion in revenue in a few years. Where you get into trouble is misstating the present condition. That is not a projection, but a fact. Either you do or do not have a particular customer. Either you do or do not have a certain amount of historical revenue. It seems like the takeaway from this trial is that you can say what you want about what you think / hope is going to happen. She got into trouble for misstating the present.
“Behind every great fortune there is a crime.”
― Honoré de Balzac
What do people think of this quote? Is it relevant to Theranos?
Interesting to know how much dishonesty makes the business world go round
I did not follow this as closely as Arnold did, but I was hoping she would be exonerated on the investment side of things for precisely the reasons Arnold advances. It seems like unequal treatment of her vs. other founders. While not bearing on her innocence or guilt, the fact that she's a woman makes it seem to me a worse result.
Matt Levine's piece on the Holmes trial is worth reading. He suggests that raising a lot of money from investors who don't do much due diligence is the new normal and that it may actually be optimal practice for investors to rush into such opportunities:
"If the lesson you learned from Theranos’s fall in 2015, or 2018, was “I am not going to invest in any tech companies with charismatic founders and vague promises unless I’ve done thorough rigorous diligence, and if those founders object to that then they are not getting my money,” then you have missed a lot of good deals and the founders have not missed your money. Betsy DeVos is still rich despite blowing $100 million on Theranos, and lots of people who have casually rushed into fundraising rounds or SPACs or crypto Ponzis or NFT drops or whatever in the last few years have done quite well. In a generally rising market where lots of fortunes are being made quickly, rushing to back popular projects without a lot of due diligence seems to work, and if you back enough of them you’ll be fine even if a few are frauds. The ones that work make you rich; the ones that are frauds give you an entertaining story."
https://www.bloomberg.com/opinion/articles/2022-01-04/slaying-the-blood-unicorn