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Theranos verdict sends a chill through startups: Analysts

Former Theranos CEO Elizabeth Holmes
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FILE PHOTO: Elizabeth Holmes, the former CEO of Theranos, steps into federal court in San Jose for her trial. Despite the company’s collapse, more tech startups followed their funding strategy.
Image Credit: AP

SAN FRANCISCO: This week’s counterfeiting convictions of Theranos Elizabeth Holmes will send a chill through Silicon Valley entrepreneurs, insiders say, who now know there’s a threat of jail time over airy promises that don’t come to fruition.

But with billions of dollars roaming throughout the tech industry in search of the next big thing, the ethos of counterfeiting until you make it is here to stay.

“Any startup founder thought their technology didn’t exist yet, but thought it would be very nervous in the end,” said Aaron Solomon, chief legal analyst at Esquire Digital, a marketing firm for attorneys.

“I bet there were a lot of the founders out there…now they watched the trial and thought they might have done some of the same things that Elizabeth Holmes did,” he said.

The 37-year-old was convicted on four counts of fraud for lying to investors about a blood-testing device that she claimed would disrupt the medical testing industry — and make it stunningly rich in the process.

She claimed to have a machine that analyzes a few drops of blood for a whole gamut of diseases, allowing doctors to swoop in early enough to save their patients from cancer or HIV.

Its tests were supposed to be fast and cheap, replacing the expensive and slow lab tests offered by the well-known names.

And hundreds of millions of dollars poured into names who were sure they might be the next Apple or Google.

Holmes’ months-long trial has highlighted the blurred line between insolence and cheating that some say represents modern Silicon Valley.

Soliman said startup founders should sell their wild success visions to get support.

They often talk in the present tense about things that are really in the hopeful future – only if they have enough time and money.

“You always fake it,” he said, “You just try to make your product better through constant iteration.”

Holmes witnessed in her experience that a new generation of her blood test machine was about to expire and would have performed as promised.

The problem with the model, says analyst Patrick Moorhead, is, as in Holmes’ case, that the promised success is an illusion.

“There is a difference between setting a bold vision and lying to investors,” he said. “That’s what I think we’re seeing here.”

good ideas

Silicon Valley has a long history of making billionaires from college dropouts with a good idea.

The titans of modern-day capitalism, from Microsoft’s Bill Gates, to Amazon’s Jeff Bezos to Google’s Larry Page, and perhaps the most famous of all, Apple’s Steve Jobs, have all turned a mind wave into untold fortunes.

But for every job, there are hundreds whose moment of light fades into darkness.

Venture capitalists looking for a way to turn a million dollars into a billion dollars listen to dozens of offers from these people.

The past year has been marked by mega funds, mega deals, and a growing interest in supporting young startups, according to venture capital market tracker Pitchbook.

With so much money at stake, scaling the truth is a way of life for many in the startup sector.

Everything will likely remain the same,” said Wesley Chan of Felicis Ventures.

“Everyone regards Elizabeth Holmes as the exception rather than the rule; but in fact this behavior is more prevalent in our business.”

Paddy Cosgriff, founder and CEO of Web Summit, agreed that there will always be pushing the limits, but insisted it was the exception rather than the rule.

“You have to assume, with so many companies raising so much money, that some people are going to steer clear of the wrong side of the law,” he told AFP at the Consumer Electronics Show in Las Vegas.

“But I don’t think it’s a cultural issue. I don’t think there’s a deep rot inside the technology.”

Kristen Curry of the startup Extended Reality Group said she expects young startups will have to answer more questions from investors as a result of Holmes’ experience.

But she cautioned that this isn’t necessarily a good thing.

I suggested, perhaps, what they need is the freedom to engage with their idea.

“If some of the founders from today’s companies that did this had been scrutinized, would they be here?”

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