Implications of the Elizabeth Holmes Trial on High-Risk Fundraising in Silicon Valley
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The ongoing fraud trial of Elizabeth Holmes, the founder and chief executive officer of the now-shuttered Theranos is causing a stir among industry watchers who question why the entrepreneur has been singled out for failing to deliver what she promised while other tech executives are given a pass.
Holmes, alongside her former partner Ramesh “Sunny” Balwani, who served as president of the medtech company, has been charged with multiple counts of fraud for exaggerating or lying about the efficacy of the company’s proprietary technology they said could test individuals for a myriad of health conditions using a single drop of blood. During presentations to investors, the company also made false claims about its relationship with the Department of Defense, as well as its regulatory status with the U.S. Food and Drug Administration (FDA), according to the indictments.
However, industry watchers have noted on multiple occasions that, in many ways, Holmes mimicked the behavior of other executives in Silicon Valley who can talk a big game to persuade investors. Some have suggested sexism is at the root of the charges brought against her, while others are given a pass, such as Ellen Pao, the former CEO of Reddit, according to an interview with NPR. Pao noted many scandals in Silicon Valley and the tech world have brought down multiple male CEOs, but few have faced criminal charges.
Pao told NPR that Holmes was “encouraged by the high-risk, high-reward culture of venture capital.” An encouragement that is common to Silicon Valley, she said.
But legal professionals have a slightly different take on the issue. In the interview with NPR, former prosecutors pointed to the egregious claims Holmes made regarding her company’s blood-testing technology. Plain and simple, the prosecutors said that not only did the tech rarely work as it was billed, the fact that it involved health diagnoses raised the stakes. Recent testimony from whistleblower Erika Cheung, a former lab worker at Theranos, claimed there was significant data manipulation conducted at the company in order to make the tech look good to investors. Prosecution in the trial showed that approximately 25% of tests conducted on the Theranos technology failed quality control. In comparison, commercially available blood-testing devices that had been cleared by the U.S. Food and Drug Administration were far more accurate and rarely failed.
Mark MacDougall, a former prosecutor with the U.S. Department of Justice who focused on fraud cases, told NPR that because Theranos was a biotech company, it “raised the stakes.” He said that the prosecution can contend that the health of private individuals was put at risk due to the fraudulent nature of the Theranos model. In fact, the company was hit with multiple lawsuits after it invalidated thousands of tests conducted over a two-year period due to quality control issues at one of Theranos’ labs in California. Theranos shut down that site and further investigations also led to Theranos shuttering its lab facilities across the country.
Prosecutors also suggested that Holmes’ actions were intentional, meaning she knew her technology could not perform what she claimed, yet still went after venture capital investors with a vengeance. According to NPR, they noted that proving intent in a court of law will be the key for the prosecution,