Elizabeth Holmes isn’t the only one to blame for the Theranos scandal

ORIGINAL ARTICLE PUBLISHED BY THE GLOBE AND MAIL — MARCH 8th,22

Elizabeth’s Holmes’s head has been served on a platter, while those who facilitated her fraud seem to be strolling off into the sunset.

I’m not questioning the guilt of Ms. Holmes, who faces 20 years in prison after being convicted in January of fraud after the biotech startup she founded, Theranos, swallowed up close to US$950-million of other people’s cash. She committed the entrepreneur’s cardinal sin: She lied and got caught. She abused the trust of investors and her board while compromising the health of real, vulnerable patients.

But the individual players in the scandal are only part of the issue. As her former partner Sunny Balwani, Theranos’s ex-president and chief operating officer, goes on trial this month, we need to understand that the “fake it till you make it” culture that empowered Theranos will only keep producing fraudsters unless we address that, too.

The solution isn’t more heavy-handed government regulation of the tech industry’s startup ecosystem, however. Regulations are only needed when greed overtakes ethics; every entrepreneur knows that they kill agility and execution freedom, and suffocate innovation. To avoid that, those who fuel the Silicon Valley hype machine — from gullible investors to ego-driven board members — need to take this opportunity to self-correct before they self-destruct.

To learn from this scandal, we have to ask how Ms. Holmes was able to access so much cash to burn in the first place. The answer is that she started with a compelling lie that addressed a huge market, and then used the gravitas of her star-studded board and collection of A-list investors to raise more and more capital. She successfully appealed to the greed of the investors and the egos of statesmen, which included former secretaries of state and bank CEOs.

Those directors failed to do their job: deliver oversight to corporate executives, influence strategy and serve as the eyes and ears of the investors. The board, which included high-profile figures such as Henry Kissinger and George Shultz, may have been impressive, but its members lacked experience in guiding early-stage startups. Worse, they allowed their names to be used and abused by Ms. Holmes as she perpetrated the fraud of the decade.

Venture investors cannot claim ignorance either. Professional investors should know that the beating heart of life-sciences businesses should be peer-reviewed research, and Theranos had none; it was far too easy for Ms. Holmes to be able to wave off concerns by invoking the need to “protect trade secrets.” Any investor worth his or her salt should have seen through this wafer-thin facade.

This saga shows how hype is capable of overriding business fundamentals for those involved in the early-stage investment world. This practice is not new: Consider the privacy scandals faced by Uber founder Travis Kalanick. I invest in promising entrepreneurs and startups all the time; I know that there are lots of smaller abusers and liars that never get noticed. In fact, the current “hype-over-substance” culture only encourages them. When the system is rotten, we shouldn’t be surprised that Ms. Holmes and the Theranos situation get spat out.

The venture capital market, meanwhile, continues to chase its own tail. Innovations have to solve bigger problems while addressing larger markets because the venture capitalists that fund them are expected to drive exaggerated liquidation outcomes quickly, which translates into pressure on the entrepreneurs they invest in to to execute faster, scale bigger and produce the next “unicorn.” But the fact is that no company deserves to explode into a billion-dollar valuation in months or even a couple of years. Unicorns are supposed to be rare. There are lessons here for all participants in the startup economy. If investors and board members want to protect their credibility, then turning up the skepticism while toning down the fear of missing out is a logical place to start.

Those who refuse to see the Theranos scandal as the warning that it was are only exposing themselves to unwanted financial and reputational risk. Board members need to understand that their positions are not ornamental, and they shouldn’t be treated as such; they need to be able to provide actual oversight, and say no to serving if they cannot. Startup-level investors, meanwhile, need to cool their expectations of entrepreneurs, and the drive for valuation increases and ever-larger initial public offerings or sell-offs should not cloud their judgment.

To avoid government intrusion and imposed regulation, the startup ecosystem needs to self-regulate to control the damage from Ms. Holmes’s high-profile disaster. It should not be about the number or size of the deals, but the quality of the investment and the integrity of the founders bound by realistic expectations and tight governance. In essence, Silicon Valley must slow down and sober up in order to protect the future of innovation in America — and its own future, too.