On January 3, a San Jose, California, jury found Elizabeth Holmes, the founder of health-technology company Theranos, guilty of four charges of criminal fraud, for which she potentially faces decades in prison. Holmes’ spectacular rise and meteoric fall is an object lesson on the dark side of the breathless tech start-up culture where the tiger that you conjured up to ride to riches may end up devouring you.
Holmes embodied the tech-start-up dream. A 19-year-old Stanford University dropout (“Stanford” and “dropout” are key PowerPoint assurances for venture capitalists) who envisioned a revolution in diagnostic testing. She claimed to be on the verge of developing self-service home-use devices that could run an array of tests based on a few drops of blood.
By 2014, Theranos was valued at $9 billion, and Holmes, only 30 years old, was on the Forbes billionaire list. The firm’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 was claiming that Theranos technology would soon be able to detect cancer from a single drop of blood.
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In October 2015, The Wall Street Journal (coincidentally owned by Murdoch) reported that Theranos’ claims were dubious. The edifice crumbled within months. US authorities discovered that the company used unapproved devices for tests, that at least one of its facilities presented “jeopardy to patient health and safety” with minimal quality-control standards, including not properly calibrating equipment.
The US Securities and Exchange Commission charged Theranos and Holmes with securities fraud, and Holmes was stripped of her stake in and control of the company. In June 2018, she was indicted on criminal fraud charges, and three months later, the company was dissolved.
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 desperation it leads to. By “value” here, I mean the expectations of meta-supernormal profits — a 50X exit in five years’ time.
Holmes certainly had an idea and full commitment when, in 2003, she set up Real-Time Cures, the company that would become Theranos. She was able to sell her vision to investors. But the key conditions to convincing investors in a tech start-up are extraordinary promises to “disrupt” and “change the world”.
Very few would-be disruptors get the money. And then the ruthless expectations and the obsession with rocketing valuations kick in. These valuations come from setting higher and higher targets for yourself and wilder and wilder Excel spreadsheets about what you assert you can achieve, given more money.
In many cases, the process becomes a hallucination willingly shared between the founders and the venture capital firms, who too have investors to answer to. The consensually created tiger becomes bigger and fiercer with every round of financing and no one is either willing or able to get off its back — just give it another six months, and maybe we can pass on the can to someone else and cash out. The final aim is an IPO where the bilge in the can (if it’s bilge) can be distributed at a handsome profit to thousands of retail investors. Or be bought over by a large corporation.
But often the tiger takes its toll and you succumb to making unholy choices. As the lead prosecutor in the Holmes trial put it, she “chose fraud over business failure. She chose to be dishonest with her investors and patients”.
It would have been only a matter of time that Holmes got caught. On the other hand, she may have been betting that if enough money was poured into the effort, it would also be a matter of time before Theranos actually developed the technological miracles she had been promising and her lies would be forgotten.
That was not to be. And her lies could be easily spotted because she had been promising something very concrete, built through research that can be rigorously audited and required approval from a number of regulatory agencies.
Much of the current tech start-up boom that we are seeing right now does not fall into this category.
In 2021, 44 unicorns — privately held start-ups with valuations above $1 billion — were minted in India. That’s nearly four per month. But what exactly do these firms do? Most of them are “platforms”, which, in many cases, means “intermediary”, which, in many cases, is a fancy term for “broker”. Except that some of them don’t charge you a brokerage fee 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 gather vast amounts of data on vast numbers of people, and can develop vast software structures that can process that data and predict behaviour, they can sell you stuff. The word “vast” is key here, at every stage. The business model fails if the vastness is not achieved, to the extent of a quasi-monopoly — or at least duopoly — in the market. And till that scale is attained, the model often consists of huge expenses and meagre revenue streams.
As long as 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 get subscribers. The venture capitalists are happy to see the firm’s name being flashed every half an hour during a cricket match. Their money is being spent well.
There is a new round of funding every six or eight months. At each round, the valuation soars. Founders and funders can then pass on some of the risk to a few more investors and also book some profits. At each round, the targets and promises get steeper and more expensive. This cycle can go on for many years till a firm does manage to achieve control of its market and then focus on generating revenues. But the vast majority either fades away or flames out.
Throughout, the pressure on the founders and employees for growth is unrelenting. So the foot soldiers of hotel platform unicorns make reckless promises to get little guest houses to sign up and then fail to deliver, and salespersons of online education firms peddle half-truths to low-income families and make them take on loans that they may never be able to repay. Meanwhile, the hype is constantly cranked up.
Some founders begin to believe in their fantasies — they are no longer consciously lying when they project numbers in the media interviews they give and the presentations they make at future-focused gabfests. A few smarter ones though, such as Adam Newmann of WeWork, make sure they stash away enough for themselves. Newmann, through cleverly inserted terms in his contracts, had acquired so much personal wealth that he may have been the only person laughing when WeWork’s planned IPO imploded in spectacular fashion in late 2019 and he quit.
Holmes was no Newmann. Yet, she must have had extraordinary flair to get so many super-rich and powerful people to buy into her story. But in the end, at her trial, her defence 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 did not, it either worked or did not. And her lies could be pinned down easily. Most upstart tech entrepreneurs across the world whose unicorns may actually be sheer vapourware will never have to face the troubles that Holmes brought upon herself.
The writer is a former editor of Financial Express, and founder-editor of Open and Swarajya magazines. The views expressed in this article are those of the author and do not represent the stand of the publication.
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