Elizabeth Holmes’ unprecedented conviction on four counts of fraud is sounding alarm bells throughout Silicon Valley, signaling a stark warning to other entrepreneurs making overly ambitious promises about their technology.
But is it enough to change the region’s famous “move fast and break things” culture?
The outcome of Holmes’ case this week caps a years-long saga that saw her blood-testing startup soar to fame as a poster child of Silicon Valley innovation only to implode over claims that the company’s machines couldn’t do what Holmes promised. On Monday, a jury found the celebrity founder of Theranos guilty of four counts of defrauding investors, acquitted her of four counts of defrauding patients, and failed to reach a consensus on three additional charges.
Experts say the guilty verdict and the potential prison sentence it carries are sure to send a chill down the spines of entrepreneurs and investors — especially in the health care field — and prompt them to tread carefully. But it may not be the major reckoning that some have been clamoring for in Silicon Valley, where criminal charges remain rare and money continues to flow.
“I think for this generation of health care entrepreneurs, it was a wake-up call,” said Michael Greeley, a health care-focused investor with Flare Capital Partners in Boston. “You can’t be cavalier about this. This isn’t games — these are life or death types of products you’re building.”
Startup founders likely will go over their pitch decks and marketing materials with fine-toothed combs now, making sure there’s nothing in them that could be considered even slightly misleading, he said.
The shift in attitude already can be felt in board rooms and offices throughout Silicon Valley. Entrepreneurs have become more cautious ever since Theranos’ public implosion several years ago, Greeley said. Instead of making grand, sweeping claims about their technology’s capabilities, they’re presenting specific, narrow data.
There also has been a new push from investors and company boards for added oversight, Greeley said. Multiple boards he sits on have launched new compliance committees, and many companies have set up programs to protect whistleblowers and make it easier for them to be heard. Long before Holmes’ trial, whistleblowers played a key role in uncovering Theranos’ failures.
The impact of the case is even more pronounced on the many startups that are doing on a small scale exactly what Holmes attempted — diagnosing illnesses using small amounts of blood, said Sunny Kumar, an investor with Palo Alto-based GSR Ventures specializing in health care technology.
“The underlying core concept of the technology actually does have merit, but as a result of what Theranos has done and some of the biases it’s introduced in the sector, it’s made some people a little bit more cautious,” Kumar said. “But I do think over time that will pass.”
Any startup that works with blood now has to acknowledge Theranos as the elephant in the room — and explain why their technology is different, Kumar said.
“They almost always joke about it very early on in their pitch,” he said.
But William Sahlman, a professor of entrepreneurial management at Harvard Business School, doesn’t expect the Holmes verdict will have any long-term impact on Silicon Valley. Unlike some who believe Holmes and her company embodied the faults of a startup culture that rewarded puffery from founders, he says Theranos was an “anomaly” in a system that regularly churns out successful, groundbreaking technology.
“The fact is, you don’t get the good without the bad,” he said.
Startup expert Steve Blank, an adjunct professor at Stanford who has written books on entrepreneurship, agrees. As long as investors continue to fund ambitious companies, Silicon Valley startups will continue innovating as quickly as ever, he said.
It’s notable that Theranos’ high-profile board members — who were supposed to be providing oversight — were not dragged into court along with Holmes, Blank said. That would have spread fear among those communities and could have dried up funding sources for future ventures, he said.
“The first time they put investors and board members on trial, then you’ll have an effect,” he said. “And that will be terrible for society.”
Holmes’ trial also may influence how society views domestic violence, said Erin Scott, executive director of the Oakland-based Family Violence Law Center. Holmes, who was the chief witness in her own defense, testified that Sunny Balwani, her former romantic partner and ex-president of Theranos, belittled her, controlled what she ate, tried to keep her from her family and forced sex on her. She also told the jury she was raped while studying at Stanford University before founding Theranos.
Scott hopes Holmes’ testimony will help correct the false but commonly held belief that domestic abuse doesn’t happen to smart, powerful, wealthy women.
“I would hope that it does underscore, or for some people expose for the first time, the reality that you can be a Stanford student, a CEO of a company, beautiful, successful, all those things, basically have all the privileges and still experience many forms of gender-based violence,” Scott said.
Attorneys for Balwani, who is expected to face trial next month for his alleged role in defrauding Theranos investors and patients, have declined to comment on Holmes’ on-the-stand allegations of abuse but denied the accusations in a court filing.
But Scott worries Holmes’ testimony could make it more difficult for future victims of domestic violence to be believed. The guilty verdict could cause society to view her domestic abuse allegations as lies — even though her fraud convictions do not mean the alleged abuse didn’t happen.
The trial’s outcome could set the stage for society to doubt women’s statements — about abuse or anything else, Scott said.
“It does, at least for me, raise a question,” she said. “As women, as we gain more and more women CEOs or women in similar positions, will they be under more scrutiny? Will they be more likely to be prosecuted or investigated in the first place?”
Staff writer Ethan Baron contributed to this report.