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How Could Silicon Valley Have Fallen for the Theranos Fraud?

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Elizabeth Holmes, founder and chief executive officer of Theranos Inc., speaks during the 2015 Fortune Global Forum in San Francisco, California, U.S., on Monday, Nov. 2, 2015.
Elizabeth Holmes, founder and CEO of TheranosCredit: Bloomberg

The biggest news in the world of high-tech this week wasn’t the launch of another iPhone or a new advance in self-driving cars, but a legal settlement between the U.S. Securities and Exchange Commission and Elizabeth Holmes, founder and CEO of Theranos, who was accused of massive fraud.

Theranos is a startup that claimed to have developed a revolutionary way of doing blood tests. Until it all came crashing down following a Wall Street Journal investigation three years ago, Holmes was being hailed as the “next Steve Jobs.”

 Her company was supposed to be able to diagnose conditions like diabetes and cancer through a simple blood test that could be done at a drug store. Walgreens even signed a deal to offer the service.

Next Steve Jobs?Credit: Twitter

Theranos raised $700 million from some of Silicon Valley’s biggest names, and at its peak was valued at $9 billion. Henry Kissinger, George Schultz and Jim Mattis joined its board.

As it turns out the technology apparently doesn’t work, and Theranos today is struggling to stay in business.

In the settlement, Holmes didn’t admit or deny the charges of “massive fraud” but agreed to step down as CEO, pay a $500,000 penalty and be barred from serving as an officer of a public company for the next decade.

How did Holmes succeed in pulling the wool over so many bright eyes for so long?

As Bryan Roberts, a partner at Venrock who invests in health startups, explains it:  “There are a handful of people who, whether through vision or communication skills or both, can rally employees and investors and the ecosystem to try and do something big. Arguably she was one of those people.”

In other words Holmes was a hype-meister of the first order. She had a compelling personal and technology story and told it well.

The perfect incarnation

Most of the talk about women in Silicon Valley these days is about harassment and sexism, but to be young, sexy, smart and a Stanford dropout makes you the perfect incarnation of every venture capitalist’s fantasies (not to mention, it seems, those of ex-secretaries of state).

High-tech likes to think of itself as being all about intellectual genius, entrepreneurial daring and innovative engineering, but it’s also a lot about hype, which often strays into hucksterism and often enough into outright fraud. The lines can be fuzzy.  

Better times: Elizabeth Holmes at the White House, 2015Credit: Bloomberg

How many startups promise to “disrupt” whatever industry they are in?  If it were the case for even a fraction of the companies that make such claims, we would all be in a perpetually catatonic state as our jobs, homes, schools and leisure time constantly underwent undergoing revolutionary change

The reality is that most tech is doing something more prosaic –making incremental advances but not exactly changing the world. A lot of the biggest names in the tech world are just copycatting something that has already worked, say Alibaba, mimicking Amazon, or Didi Chuxing, aping Uber.

“Is the $40 Billion Laundry Industry Ready for Reinvention? This Startup Is Betting on It,” Inc. trumpeted in a recent profile of a startup called Rinse that will (take a deep breath) collect your dirty laundry from home, wash it and return it. Rinse has raised $23 million in startup capital.

A few companies do disrupt things, which is why you know them -- Microsoft in its day, Facebook, Apple, Uber, Airbnb, Google and Amazon, to name most of them. And even these companies suffer from a lot of hubris about their ability to fundamentally alter the human condition.  

“My goal was never to just create a company. It was to build something that actually makes a really big change in the world,” Mark Zuckerberg once said of his creation.

In a more candid moment, however, he also said, “I mean, the real story is actually pretty boring, right? I mean, we just sat at our computers for six years and coded.”

Evasive fileless what?

The fact is almost no one understands what the great majority of startups are up to. Take this recent announcement from a startup (the names have been changed to protect the innocent):

“YawnTech provides a crucial memory-defense layer that easily deploys into a company's existing security infrastructure to form a simple, effective, cost-efficient prevention stack. It protects endpoints from emerging and as-yet-unknown advanced threats, including APTs, zero-days, ransomware and evasive fileless attacks . Another plus is that it requires virtually zero maintenance and produces no system latency or conflicts.”

It could well be that the product does do all these things, but almost no one is in a position to judge, including a lot of investors and business executives that have to approve their  IT manager’s request to purchase it.

Thus, the temptation is overwhelming to say your product is going to disrupt the industry or that it employs the latest industry buzz technology, like artificial intelligence and machine-learning.

For high-tech, over-the-top claims and salesmanship are in its DNA. They probably go a long way to explaining why an industry that’s supposed to be built hard-headed engineering is prone to financial bubbles and massive corporate crashes. Theranos, it seems, took the industry’s natural-born hucksterism outside the boundaries of the law, but you can see how it had such an easy time doing it.