More than two years after a Wall Street Journal investigation exposed potential fraud at blood-testing startup Theranos, many of us have forgotten about the company. The Securities and Exchange Commission has not.
Wednesday, the regulatory agency charged CEO Elizabeth Holmes and former President Ramesh Balwani with an “elaborate, years-long fraud in which they exaggerated or made false statements about the company’s technology, business, and financial performance.” As a result of the SEC’s charges, Holmes has agreed to reduce her equity stake and voting control in the company. She’s also agreed to a 10-year ban on working at public companies.
More significant than the news is the message it’s meant to send to all Silicon Valley startups—not just those whose photogenic CEOs land on magazine covers.
“The Theranos story is an important lesson for Silicon Valley,” said Jina Choi, director of the SEC’s San Francisco Regional Office, in a statement. “Innovators who seek to revolutionize and disrupt an industry must tell investors the truth about what their technology can do today, not just what they hope it might do someday.”
The scale of Theranos’ alleged fraud is unusual, but the forces behind it are not. Startup culture venerates the kind of “fake it till you make it” hustling that Holmes deployed. When Theranos was first exposed, tech industry leaders defended the company. As more reporting about its wrongdoing emerged, industry leaders characterized Theranos as an outlier, not indicative of the broader startup culture. A music video made by a venture firm even included the line, “Theranos doesn’t represent us, we are better.”
But scores of minor scandals and lawsuits, combined with 2017’s series of scandals at the country’s most valuable private startup, Uber (former motto: “Always be hustlin’”), make it clear that faking it is more common than just Theranos. In October the SEC fined Zenefits, an employee-benefits startup, for misleading investors about its compliance with insurance laws.
Historically, the startup world’s “fake it till you make it” culture wasn’t a much of a problem; venture investors encouraged startup founders to think big and a high percentage of them fail anyway. So what if someone stretches the truth a little in pursuit of world domination? The nature of technology requires a degree of magical thinking to function. As I wrote in 2016, even the most well-intentioned startup founders have to persuade investors, engineers, and customers to believe in a future where their totally made-up idea will be real:
“That’s not ‘My cola tastes better than yours.’ That’s ‘Let me explain to you how the world’s going to be.’ ” says Chris Bulger, managing director at Bulger Partners, an investment bank that advises technology companies on acquisitions. “Is that person lying when they turn out to be wrong?”
But now, in the so-called “age of unicorns,” startups can raise large sums of capital from private investors and become sizable businesses without the scrutiny, onerous disclosures, and strict regulatory compliance of being a public company. But when a private company grows to be Uber-sized, all those puffed up pitch decks, blustery product demos, unethical business practices, and slightly exaggerated claims can affect a broader range of investors, employees, and customers. The Theranos investigation shows that companies don’t need to be publicly traded to garner regulatory attention. The SEC is already watching.
- Catch up on Theranos’s many misdeeds here.
- Uber is the world’s most richly valued startup, but has a sordid history of spying on customers and drivers, deceiving regulators, and permitting widespread harassment.
- Many entrepreneurs and venture capitalists seem unaware of the rising distrust of tech companies.
This article was syndicated from wired.com