Following Holmes’ conviction, venture capitalists are distancing themselves from Teranos

In their lawsuit against Elizabeth Holmes, the plaintiffs convinced the jury that the behavior of the founder of the Thranos company in leading the company before its collapse exceeded the accepted limit in the “bluff until you succeed” culture that characterizes Silicon Valley.

Silicon Valley investors are also happy to define Holmes as exceptional.

“Ambition, drive, vision and optimism are all part of the Silicon Valley ethos,” venture capitalist Greg Gretsch tweeted after the sentencing. “Blatant lies and deception are not part of it. Deception is deception.”

Some others see the lawsuit – and the verdict – as a warning story about Silicon Valley exaggerations and risks to investors and customers as a startup rushes forward without balances and brakes, especially as founders gain more and more control.

Holmes was fraudulently convicted against some of the biggest investors in the blood test startup she set up, in federal court in San Jose on Monday. The trial has been one of the biggest in white-collar crime for several years now. The sentence was mixed: Holmes was found guilty of four charges involving investors, including conspiracy to investor levels, but innocent of four charges involving patients, including conspiracy to charge patient levels. The jury was divided over three other charges of fraud against investors.

“Every investor thinks he’s smarter”

Many venture capitalists said Holmes was exceptional as a founder because she failed to raise capital from venture capital firms at the highest level and was never part of Silicon Valley’s inner circle. They say the confidentiality in which she ran the company was not easily tolerated by most investors.

“While it’s tempting to see the Holmes trial sentence as a Rorschach test for startup and venture capital, the reality is that Elizabeth Holmes ‘lawsuit speaks of Elizabeth Holmes’ guilt or innocence – no more and no less,” said Wonkey Ganson, a partner at Menlo Ventures.

Theranus grew up almost twenty years ago from an idea Holmes dreamed of when she was a 19-year-old student at Stanford University, and she retired to found the company – a path many startup founders followed. Thranos was based in Palo Alto, California, a city saturated with startups and venture capitalists, and Holmes attracted board members and mentors from Stanford.

Theranus has made a 15-year journey from a state of secrecy through a high-value biotechnology company to a complete collapse – controlled by Holmes as CEO. The company lost most of the $ 945 million it raised from investors during its liquidation in 2018, when it was subject to regulatory sanctions and in the midst of criminal and civil investigations into the company’s conduct.

Brian Roberts, a veteran venture capitalist at Venrock, said the sentence would have “zero impact” on startups. “Every founder thinks he is very different and every investor thinks he is smarter and therefore will be able to discern such matters when necessary.”

Venture capitalists have tried to distance themselves from Teranos by saying that some Silicon Valley investors have given up an opportunity to invest in the company, casting doubt on its claims. Many other venture capitalists, however, invested in the company repeatedly from about 2006 to 2013.

“I still believe in what she was trying to do”

The venture capitalists who supported Holmes, court records read, included Draper Fisher Yorbetson (the company’s founder Tim Draper was a member of the family); Donald Lucas, a veteran investor in Silicon Valley, as well as his son’s venture capital firm; Black Diamond Ventures, a Southern California company managed by Lucas’ nephew, Chris Lucas; Oracle Corp., the venture capital fund of co-founder Larry Allison; Reid Dennis, founder of Institutional Venture Partners and venture capitalist since the 1950s; The company that no longer exists from Silicon Valley ATA Ventures; And Peer Venture Partners, which currently invests in crypto startups.

ATA Ventures co-founder Hatch Graham declined to comment. Other venture capitalists did not respond to a request for comment. Donald Lucas and his son passed away.

In a Tuesday email, Draper continued to side with Holmes, writing that the sentence endangers the ability of entrepreneurs like Holmes to keep trying and inventing until they find a product that works.

“I still believe in what she was trying to do, and if every entrepreneur was criticized while they were trying to make the world a better place, we would not have cars, we would not have smartphones, we would not have antibiotics, and nothing automatic, and the world would be a place. Less good because of it, “Draper said.

Venture capitalists have invested alongside wealthy families and business tycoons, medical organizations, real estate investors, a U.S. Army-decorated general and a hedge fund focused on health.

Because Holmes had such a diverse group of investors, “she did not fall for any of them,” said Steve Blank, a serial investor in startups and a professor at Stanford, where he teaches startups and innovation. It makes it easier for investors to distance themselves from Holmes, he said.

In an interview with the Stock Exchange and Securities and Exchange Commission (SEC) in 2017, as part of an investigation the SEC conducted against Holmes, she said she was looking for wealthy families with companies under their control as investors because she thought they would support her desire to keep Theranus private for an indefinite period.

Startups that have more traditional venture capital support were not immune to accusations of fraud. When startups in the last few years have chosen to stay in private hands longer, the problems have multiplied, according to a study by Matthew Wensley, an assistant law professor at Cardozzo School of Law in New York City. Private companies are exempt from most disclosure requirements pertaining to public companies, according to a research paper published by Wensley in March.

“Some of the most highly regarded unicorn companies have operated in inappropriate ways and have not been discovered for years,” he wrote.

Venture capitalists are sometimes complicit in the offense, according to Wensley’s study, in part because they want to look founder-friendly and maintain a reputation as having wisely chosen investments and therefore have no incentive to report misconduct. Venture capitalists are also accustomed to unsuccessful investments and from their perspective, the difference between a loss from a “startup that crashes outrageously and the many startups that fail to develop a product or find a customer market is insignificant,” Wonsley wrote.

Initially as a result of the criticism that began to be leveled at Terranus, some investors became nervous. Startups CEOs who have also been working on new blood sampling tools said they have faced a longer capital raising process because of the Teranus problems, and investors have examined them with a tougher standard of scientific integrity and data sharing, eager to avoid supporting another Thananos-style failure.

“But that was five years ago and most investors have forgotten it,” said Skip Fleshman, a health and technology investor at Asset Management Ventures. Still, he said, Holmes’ fall “will serve as a reminder to do due diligence.”

The verdict comes as an increased rate of investment has led many venture capitalists who want to remain competitive to skip or cut back on the screening process ahead of a potential investment, a process that traditionally takes many weeks. The epidemic caused Silicon Valley deals to close at a rapid pace, and Zoom capital raisings alongside large returns to investors have led to a situation where deals are sometimes closed within a few hours, or less.

Roberts of Venrock said Holmes “is not a new lesson but a reminder – and a necessary reminder while markets are too hot and rounds of funding are coming to an end quickly – that judging who the people are is very, very difficult.”

 

By Editor

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