Written by: Umer Altaf, Peak Associate
There was something irresistible about Theranos, the now-disreputed Silicon Valley startup, and its scheming founder Elizabeth Holmes. The possibility of revolutionizing the blood test, the cornerstone of a medical care technology industry worth over US$40-45 billion globally, created an itch in investors that was hard to ignore. So strong was the company’s allure that several prominent public figures, ranging from Rupert Murdoch to the Walton Family, invested large sums in the company.
Some major factors contributed to the successful duping of countless investors to the tune of over $700 million. A Machiavellian combination of major corporate secrecy, zero external validation or peer review, and lack of medical expertise among investors allowed Theranos to pull off its long run. In addition, the company exploited a regulatory grey area to avoid the scrutiny of external actors. Usually, diagnostic companies buy testing machines from external companies, and thus, the machines they use have to be FDA approved. Theranos built its own testing equipment and were allowed to bypass FDA inspection.
Elizabeth Holmes herself has been described as having “sociopathic tendencies” by John Carreyrou, the Wall Street Journal investigative journalist who initially uncovered the company’s misdeeds. He revealed that Holmes lied about numerous things, including the types of tests Therano’s machines could do, a contract with the Department of Defense that didn’t exist, her schooling, and how much annual profit Theranos made. Holmes lied with no remorse, knowing full well that her technology could put the lives of millions in danger. Carreyrou wrote Bad Blood: Secrets and Lies in a Silicon Valley Startup about Holmes’s embellishment and deception regarding Theranos.
But no matter how many justifications one throws out for the mistake investors made in financing Theranos, the truth is that at no point did any of them try to verify the capabilities that startup’s technology purported to have.
Had they done as such, they would not be where they are now. Even if Theranos were to resisted attempts at verification, that resistance itself would be a sufficient warning sign for investors to withdraw from the company. Yet nothing of the sort happened. A major cause of this occurrence is the culture of over-evaluation that has become commonplace in Silicon Valley.
Companies such as Snapchat and Pinterest have been given billion-dollar evaluations despite having never made any revenue, and few raise eyebrows over this. FOMO — “the fear of missing out” — seems to be a huge part of this culture. One never knows when the next billion-dollar evaluation will be assigned, and it might very well be given to the company in which you currently have a chance to invest big while it’s still small.
Suddenly, it makes a lot of sense to put money in a company that hasn’t been properly vetted, so long as those around you seem to be doing the same.
All it takes is a few people to start the chain reaction, and the next thing you know, suddenly everyone is doing it — all of them ignoring the signs of catastrophe and premature investment. They share the assumption that surely someone in the crowd must have a good reason for doing what they’re doing, and so they all follow the example of this hypothetical person.
Well, it turns out that sometimes, it’s the blind leading the blind, where in fact none of the investors have done their diligence. But forget the investors for a moment — what’s worse is the potential impact that this company might have made already on the poor, unsuspecting people who relied on the assumed accuracy of the blood tests completed by Theranos technology.
Say you had invested in Snapchat, and it turned out to be a sham. Having that happen with a company that allows its apps’ users to send pictures to their friends has far smaller consequences than having it happen with a bogus medical technology company. This is a fact that needs to be recognized by the venture capitalists and private investors of Silicon Valley.
Imagine a person with mild irritation goes to a doctor to see if their pain is something to worry about. This person is later told that they have nothing to be concerned over, as all of the blood tests have come back negative. Think of all the ways this could go wrong for them. Even the possibility of death is not out of the question.
Now, imagine this happening to thousands of people.
This is exactly what an investor needs to think about before backing a medical company that they know hasn’t been vetted. Investing in a company is what allows it to continue to operate, and if its operations are dangerous or harmful, then your contribution facilitates that harm. This isn’t to say that Theranos’s investors bear moral culpability for the company’s wrongdoing, but when money is thrown without careful scrutiny, the impacts of the decision can be hard to anticipate.
The companies of Silicon Valley have created some of the most innovative and groundbreaking technology products and services the world has ever seen. It can be hard not to become blinded by the prospect of getting involved in the next supposed game changer. Yet more must be expected by those involved in facilitating these companies.
Premature investment in an unverified technology might make sense statistically speaking, when the industry you’re funding reliably creates revolutionary products. Even if you get the occasional Theranos, it is worth it, so long as you’re not missing out on the next Uber. But this assumes that the shortfall of investing in a fraudulent company lies solely in the loss of capital. It doesn’t.
Financial contribution is a form of implied trust for many others watching, and when the rich and powerful put their faith in something, those around them assume that it is something trustworthy. If Silicon Valley and other investors do not learn from this whole debacle, more victims of the next duplicitous company lie just around the corner. This next time, the moral responsibility might stand with the investors as well.
