Elizabeth Holmes, the American founder of biotech company Theranos, was sentenced Friday by a court in San Jose (California) to 11 years in prison and three years probation for defrauding investors. The sentence marks the end of one of the most high profile fraud cases in recent US history.
Between 2013 and 2015, Holmes, 38, persuaded a group of prominent investors to invest more than $700 million in Theranos. Holmes claimed to have developed a device (‘Edison’) that could perform dozens of health tests on patients using just a few drops of blood from a fingertip. The judge considered it proven that investors had suffered at least $ 121 million in damage due to Holmes’ actions.
The Theranos device – a coffee maker-sized box – actually didn’t work. Holmes and her business partner Ramesh Balwani – also convicted of fraud in July – falsified test results to make investors believe that a new medical revolution was on the way with Theranos. Holmes and Balwani intimidated employees and journalists who tried to expose the lies. The duo also lied about contracts they supposedly signed with customers.
Elizabeth Holmes founded Theranos in 2003, as a 19-year-old student at Stanford University in San Francisco. She ended up on the covers of business magazines as ‘the new Steve Jobs’ Fortune and Forbes. She also managed to convince a number of celebrities, such as former US Secretary of State Henry Kissinger and media magnate Rupert Murdoch, to invest money in her company. At its peak, Theranos was worth $9 billion and Holmes passed Forbes crowned the world’s youngest self-made billionaire. Once The Wall Street Journal exposed the abuses within the company in 2015, Theranos went bankrupt in 2017.
Holmes had mainly hoped to buy time with her lies to get her device working, as it turned out during the trial. As a young entrepreneur, Holmes had become “blinded by ambition,” the prosecutor said. In court Friday, Holmes said she regretted her mistakes “with every cell in my body.” It is still unclear whether Holmes will appeal the sentence.
Fake it till you make it
Holmes’ conviction is a direct warning to Silicon Valley and the fake it till you make itculture at start-up tech companies. In addition, young entrepreneurs looking for growth money present their company with a hefty dose of bluff as the new Google or Facebook. The dividing line between beautifully portraying the truth and deliberately lying to investors is thin, as it turns out.
Her lawsuit has made Elizabeth Holmes a symbol of the start-up craze, which has seen billions of dollars poured over the years to charismatic founders with companies that had barely shown anything. That period is over. Now that interest rates are rising and stock prices are falling, investors are looking much more critically at the revenue models of start-ups. Burning money to grow has given way to cutting costs and working towards profitability.
What has been the impact of the Theranos case? According to Oliver Brinkhorst, who advises start-ups in San Francisco with his organization DutchTechSF, the case does not really show the failure of Silicon Valley. “Although this is bad publicity for the region,” he says. “We prefer to see attention for the genius inventions that are being made here.”
Brinkhorst points to the blunders of the individuals who entrusted Holmes with a lot of money based on her story alone. At Theranos, former politicians such as Betsy DeVos (former US Secretary of Education – she lost $ 100 million to Theranos) and James Mattis (former Secretary of Defense) became involved with Theranos, without doing proper due diligence. “If Elizabeth had been controlled by Silicon Valley biotech funds, she would not have survived,” says Brinkhorst.
In her defense, Elizabeth Holmes herself also always pointed to the responsibility of investors, who, according to Holmes, should have protected her from her mistakes. The lawsuit showed that investors hoped so much that Holmes could become a female role model in a male tech world that critical voices were ignored.
What went wrong with Elizabeth Holmes? Read also ‘The fall of a start-up superstar’
Elizabeth Holmes syndrome
As a former female role model, Elizabeth Holmes has done considerable damage to women in the tech world. “The Holmes case has influenced investors and certainly not for the better,” says Eva de Mol of the Dutch investment fund CapitalT, which also invests in start-ups in Silicon Valley. “There is even talk of the Elizabeth Holmes syndrome when judging women entrepreneurs.”
Opposite The New York Times Last year, a group of female American entrepreneurs with start-ups in medical technology said they were greatly affected by “the shadow of Elizabeth Holmes”. It ranged from inappropriate jokes to questions from investors about how their company differed from Holmes’s – questions that male entrepreneurs didn’t get. In the article, two of them even considered changing their hair color (blonde) to distinguish themselves more from Holmes.
At the same time, it is clear that in the aftermath of the Holmes case, other entrepreneurs no longer seem to be able to get away with such practices. Sam Bankman-Fried, the founder of the recently declared bankrupt crypto marketplace FTX, which saw 32 billion book value evaporate in a few days, is currently under investigation by the Justice Department for possible violations of the law.
And last month, Trevor Milton – founder of the hydrogen truck maker Nikola – was convicted of defrauding investors. Milton had, among other things a video used a prototype of his truck, driving at a brisk pace through the desert on a two-lane road. It turned out afterwards that during the video the truck rolled down a hill.