Holmes not alone! Why Elizabeth’s Theranos may not be the only start-up with a questionable character – Technology News, Firstpost



On January 3, a jury in San Jose, California, found Elizabeth Holmes, the founder of health technology company Theranos, guilty of four counts of criminal fraud, for which she could face several decades in prison. Holmes’s spectacular rise and rapid fall is an objective lesson about the dark side of the breathless tech start-up culture where the tiger you conjured up to drive to riches could eventually devour you.

Holmes embodied the dream of a tech start-up. A 19-year-old Stanford University dropout (“Stanford” and “dropout” are key PowerPoint guarantees for venture capitalists) who envisioned a revolution in diagnostic testing. She claimed she was about to develop self-service devices for home use that could run a battery of tests based on a few drops of blood.

In 2014, Theranos was valued at $9 billion, and Holmes, just 30 years old, was on the Forbes billionaire list. The company’s investors included Rupert Murdoch. Oracle founder Larry Ellison and the Walton family of Walmart. The board boasted two former US secretaries of state, George Schultz and Henry Kissinger.

And Holmes claimed that Theranos technology could soon detect cancer with a single drop of blood.

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How did American billionaire Elizabeth Holmes go from $4.5 billion to nothing in a year?

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In October 2015, The Wall Street Journal (coincidentally owned by Murdoch) reported that Theranos’s claims were dubious. The building collapsed within months. US authorities found that the company was using unapproved devices for testing, that at least one of its facilities “posed a risk to patient health and safety” with minimal quality control standards, including not properly calibrating equipment.

The U.S. Securities and Exchange Commission accused Theranos and Holmes of securities fraud, and Holmes was stripped of its interest in and control of the company. In June 2018, she was charged with criminal fraud and the company was dissolved three months later.

But what is the deeper message of the Theranos story? It seems to be one of extreme greed up and down the value chain and the despair it leads to. By ‘value’ I mean here expectations of meta-supernormal gains – a 50X exit in five years.

Holmes certainly had an idea and full commitment when she founded Real-Time Cures, the company that would become Theranos, in 2003. She was able to sell her vision to investors. But the most important prerequisites for convincing investors in a tech start-up are extraordinary promises to “disrupt” the world and “change the world”.

Very few potential disruptors get the money. And then the relentless expectations and obsession with sky-high valuations come into play. These valuations come from setting ever-higher goals for yourself and increasingly wild Excel spreadsheets about what you claim you can accomplish if you get more money.

In many cases, the process becomes a hallucination voluntarily shared between the founders and the venture capital firms, who also have investors to answer to. The consensual tiger is getting bigger and brighter with each round of funding and no one is willing or able to get off their back – just give it another six months, and maybe we can pass the can on to someone else and cash out. The ultimate goal is an IPO in which the bilge in the can (if it is bilge) can be distributed to thousands of private investors with a nice profit. Or be taken over by a large company.

But often the tiger takes its toll and you succumb to making unholy choices. As the chief prosecutor in the Holmes trial put it, “she chose fraud over corporate failure. She chose to be dishonest with her investors and patients.”

It would have been only a matter of time before Holmes was caught. On the other hand, she might have bet that if enough money was put into the effort, it would also be a matter of time before Theranos developed the technological marvels she had promised and her lies forgotten.

That shouldn’t be. And her lies could easily be spotted because she promised something very concrete, built through research that can be rigorously verified and requires approval from a number of regulatory bodies.

Much of the current boom in tech startups we’re seeing now doesn’t fall into this category.

In 2021, 44 unicorns – privately held startups with valuations of over $1 billion – were minted in India. That’s almost four a month. But what exactly do these companies do? Most of them are “platforms”, which in many cases means “intermediary”, which in many cases is a fancy term for “broker”. Except some of them don’t charge you brokerage fees and even pay you to become a subscriber.

Most of these players — and their backers — are essentially betting on the Facebook model, that if they can collect massive amounts of data about vast numbers of people and develop massive software structures that can process that data and predict behavior, they can sell to you. stuff. The word ‘big’ is key here, at every stage. The business model fails if the expanse is not reached, to the extent of a quasi-monopoly – or at least a duopoly – in the market. And until that scale is reached, the model often consists of huge expenses and meager income streams.

While it lasts, the system is a sweet, self-perpetuating cycle. The start-up raises venture capital and spends it on customer acquisition – advertising and direct payments to gain subscribers. The venture capitalists are happy to see the company’s name flashing every half hour during a cricket match. Their money is well spent.

There is a new financing round every six or eight months. With each round, the rating increases. Founders and financiers can then pass some of the risk on to a few additional investors and make some profit as well. With each round, the goals and promises get steeper and more expensive. This cycle can continue for many years until a company manages to master its market and then focus on generating revenue. But the vast majority fade or flare up.

The pressure on founders and employees to grow is unrelenting. So the foot soldiers of hotel platform unicorns make reckless promises to register small guest houses and then fail to keep them, and online education company sellers are peddling half-truths to low-income families and making sure they take out loans they may never be able to repay. Meanwhile, the hype is constantly being cranked up.

Some founders are starting to believe in their fantasies – they no longer deliberately lie when they project numbers into the media interviews they give and the presentations they give at forward-looking gabfests. A few smarter ones, like Adam Newmann of WeWork, make sure they stash enough for themselves. Newmann, through cleverly inserted terms into his contracts, had acquired so much personal wealth that he may have been the only one laughing when WeWork’s planned IPO spectacularly imploded in late 2019 and he shut down.

Holmes was no Newmann. Still, she must have had extraordinary flair to get so many super rich and powerful people into her story. But in the end, at her trial, her defense team produced only one witness — Holmes herself, a mother with a four-month-old child, but her tearful testimony failed to move the jury.

As I said before, she promised a concrete product – it either existed or it didn’t exist, it worked or it didn’t work. And her lies were easily traced. Most budding tech entrepreneurs around the world whose unicorns are basically pure vaporware will never have to face the problems Holmes has caused himself.

The writer is a former editor of ‘Financial Express’ and founding editor of the magazines ‘Open’ and ‘Swarajya’. Opinions expressed are personal.

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