Health

Silicon Valley can’t escape Elizabeth Holmes

Over
the next few years, several columnists wrote that Silicon Valley shouldn’t be
blamed for Theranos.

Last
month, Keith Rabois, a venture capitalist, said on Twitter that articles
connecting Theranos with Silicon Valley culture contained “more fabrication
than anything ever uttered by Trump.”

The
technorati in Silicon Valley and beyond have long tried to separate themselves
from Theranos, the blood testing startup in Palo Alto, California, that was
exposed for lying about its abilities. But the fraud trial of the company’s
founder, Elizabeth Holmes, has shown that just as Bernard Madoff was a creature
of Wall Street and Enron represented the get-rich-quick excesses of the 1990s,
Theranos and its leader were very much products of Silicon Valley.

The
usual refrain went like this: Theranos was more a health care company than a
tech company. It raised money from wealthy families and people outside the tech
industry, while insiders saw through the hype.

But
testimony and court exhibits in Holmes’ nearly four-month trial, which was
capped Monday when a jury found the entrepreneur guilty of four of 11 counts of
fraud, starkly underlined her participation in Silicon Valley’s culture.

Holmes,
37, used the mentorship and credibility of tech industry big shots like Larry
Ellison, a co-founder of Oracle, and Don Lucas, a Silicon Valley venture
capitalist, to raise money from others. She lived in Atherton, California, amid
Silicon Valley’s elite and was welcomed into their circles.

She
also used the startup playbook of hype, exclusivity and a “fear of missing out”
to win over later investors. She embodied startup hustle culture by optimising
her life for the maximum amount of work. She dismissed the “haters” and
anything that interfered with her vision of a better world. She parroted
mission-driven technobabble. She even dressed like Steve Jobs.

No
industry wants to be judged only by its worst actors. And many venture
capitalists who heard Holmes’ impossibly lofty claims didn’t fall for them. But
if anyone in Silicon Valley was suspicious of her proclamations, none spoke
publicly about it until after things went south.

Immediately
after The Wall Street Journal exposed Holmes’ alleged fraud at Theranos in
2015, some prominent tech investors even rushed to defend her in a bit of
kneejerk tribalism.

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Even
the judge who oversaw Holmes’ case, Edward J Davila of US District Court in San
Jose agreed that Silicon Valley culture was an essential piece of her trial. He
allowed her lawyers to discuss the tech industry’s overly optimistic puffery as
part of her defense.

“It’s
common in Silicon Valley for promoters to engage in that type of conduct,”
Davila said in a hearing in May before the trial began.

At
its best, Silicon Valley is optimistic. At its worst, it is so naïve it
believes its own hogwash. Throughout her trial, Holmes’ lawyers argued she was
simply a wide-eyed believer. Any statements that weren’t entirely truthful,
they said, were about the future. It was what investors wanted to hear, they
said.

“They
weren’t interested in today or tomorrow or next month,” Holmes testified. “They
were interested in what kind of change we could make.”

Soon
after Theranos got started in 2003, Holmes used her vision of the future to win
over investors and advisers like Ellison and Lucas. Lucas, who was chair of
Theranos’ board until 2013, was involved with more than 20 investment vehicles
that backed Theranos. Those included his son’s venture firm, Lucas Venture
Group; another vehicle, PEER Venture Partners; and trusts and foundations
associated with members of his family.

Lucas
introduced Hall Group, a real estate firm that put $4.9 million into Theranos,
to Holmes. His nephew’s firm, Black Diamond Ventures, invested $5.4 million.
Other Silicon Valley investors included ATA Ventures and Beta Bayview, a fund
operated by Crosslink Capital.

Lucas
and his son have since died. The Lucas Venture Group didn’t respond to a
request for comment.

Dixon
Doll, founder of the Silicon Valley investment firm DCM, also invested, as did
Reid Dennis, founder of the venture firm IVP, which has backed tech companies
such as Slack, Twitter and Snap. Draper Associates, founded by venture
capitalist Tim Draper, also invested in Theranos, as did two funds operated by
his other firm, Draper Fisher Jurvetson.

A
DCM representative said Doll had left the firm more than eight years ago, and a
spokesperson for DFJ declined to comment.

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In a
statement, Draper said Holmes’ verdict concerned him because it suggested that
America’s spirit of entrepreneurship was in jeopardy. “A willingness to bet on
these entrepreneurs and their visions has made Silicon Valley the innovation
engine of the world,” he said.

Not
everyone who heard Holmes’ pitch was wowed. Bijan Salehizadeh, an investor at
Highland Capital Partners, said he did not invest in Theranos in 2006 because
Holmes was unwilling or unable to answer most of his questions.

But
as Theranos’ fundraising made headlines, Salehizadeh questioned his judgment.
Venture capitalists who hung out at the Rosewood Hotel on Sand Hill Road, one
of Silicon Valley’s main arteries, in Menlo Park, California, began buzzing
about the company, he said.

“They
were like: ‘This hot Theranos thing — you as a health care guy saw it and
didn’t do it? How could you have possibly passed on a unicorn if it was sitting
in your office at the earliest stages?’” he said.

Holmes
used that hype to reel in bigger checks from wealthy families, including heirs
to the Amway, Walmart and Cox Enterprises fortunes. Industry insiders also
offered their endorsement. Media mogul Rupert Murdoch met Holmes at a Silicon
Valley gala hosted by Yuri Milner, a tech investor. Milner praised Holmes to
Murdoch, according to “Bad Blood,” a book by John Carreyrou, a former Wall
Street Journal reporter.

Brian
Grossman, an investor at heath care-focused hedge fund PFM Health Sciences,
learned about Theranos through Thomas Laffont, a co-founder of Coatue
Management, a prominent investment fund with a San Francisco presence. In an
email that was part of the court filings, Laffont gushed that Theranos had “one
of the most impressive boards I’ve ever seen” and said Grossman’s firm should
let him know “ASAP” if it was interested in an introduction.

Coatue
did not respond to a request for comment and PFM Health Sciences declined to
comment.

As
Theranos brought in more shareholders, Holmes tightened her grip on the
company, ensuring she would control the voting power even if the startup went
public. Chris Lucas, founder of Black Diamond Ventures, explained on a call
with other investors, which was recorded and played in court, that this was
typical for such companies.

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Holmes’
supervoting shares were “just like some of the other highflying companies in
Silicon Valley,” he said.

In
2014, DFJ bragged about its investment in Theranos on Facebook. “Proud to have
backed Elizabeth Holmes and Theranos for over a decade, as her very first
investor,” the firm wrote.

The
next year, when Carreyrou was investigating Theranos’ claims for the Journal,
Holmes embraced Silicon Valley’s favorite form of deflection: Label anyone who
asks hard questions a hater. Before Carreyrou published his first exposé about
Theranos, Holmes and her partner at the time, Ramesh Balwani, who was the
startup’s chief operating officer, poked fun at the reporter’s French heritage.

“Proud
cynic,” Holmes wrote in a text message to Balwani.

“Cynicism
and skepticism are diabetes of the human soul,” Balwani responded. “No one
should be proud of diseases.”

After
the Journal article was published, Holmes used a rebuttal embraced by many in
the tech industry. “This is what happens when you work to change things,” she
said in a TV interview. “First they think you’re crazy, then they fight you,
and then all of a sudden you change the world.”

In
the years since Theranos collapsed, more tech startups have followed its
strategy of looking outside the small network of Sand Hill Road venture capital
firms for funding. Startups are raising more money at higher valuations, and
deal-making has accelerated. Mutual funds, hedge funds, family offices, private
equity funds and megafunds like SoftBank’s Vision Fund have rushed to back
them.

Salehizadeh
said Silicon Valley’s shift to a focus on fundraising over all else was one
reason he had left to set up a private equity firm on the East Coast. The big
money brought more glitz to tech startups, he said, but it had little basis in
business fundamentals.

“You’re
always left feeling like either you’re an idiot or you’re brilliant,” he said.
“It’s a tough way to be an investor.”

©2021
The New York Times Company

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