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Defending Elizabeth Holmes

Defending Elizabeth Holmes

You may be aware of the Elizabeth Holmes case, she was founder and CEO of Theranos which promised to build equipment that would do an array of medical tests on a small amount of blood.

If it had worked it would have been a massive shift in how medicine is practiced. You would be able to get most of a standard physical exam in minutes at your local drug store, sitting down at a self serve machine. It would likely have been 2 orders of magnitude cheaper than the standard testing process.

She dropped out of Stanford University at age 19 to start this business.

Her stuff did not work.

She was just convicted on four charges of defrauding investors. How can I possibly defend her?

If you know anything about venture capital, you know that out of 10 businesses they invest in, they expect 5 to go bust, 4 to break even and maybe (MAYBE!) one to make enough money for the venture firm to make a profit.

That means that for 9 out of 10 companies, the tech didn’t work, or the business model didn’t work, or the management team was incompetent, or the audience didn’t react to the tech the way they predicted or something else is a long list of reasons.

And keep in mind, that venture investors have access to the best people on Earth to advise the companies that they invest in. They are perfectly capable of bringing in researchers and engineers to inspect the technology and/or help in the development, they can bring in management consultants, market psychologists, whatever they need.

And yet the ratios of failure remain very high, and the risk profile is well known.

So in the Holmes case, here you have very large investors putting in close to a billion dollars into Theranos. The first ones are touting to the second wave, the third wave and so on. Everyone believes, everyone is looking forward to obscene profits.

And not one of these investment firms bothers to bring in the expertise to check to see if the equipment works.

Holmes was a 19-year-old kid with an idea, being supported by investor money and the expertise that it brings. She was likely advised that if your equipment/business model/management team has issues, you don’t tell the world, you fix the issues and pretend like they never existed. Of course, there is a risk that the issues cannot be fixed, but if people outside the company find out about an issue before you can work on it, then the investors may pull out and you crash, even if the issue wasn’t that bad.

This likely happens with about 90% of the companies that eventually fail. They hide problems because they think they can fix them. The potential for failure is always there, that’s why it is called “venture” capital.

Holmes very likely knew near the end that the problems were unsolvable with the expertise available (I believe eventually her idea will come to fruition). Obviously, none of her close colleagues wanted her to give up if there was still a chance. But she was not a seasoned CEO and didn’t know when to get out of the way when a house of cards was collapsing. Stupid.

But her investors exhibited the most stupidity in my opinion. Their due diligence was shoddy, they should have known better, they are in the investment business for God’s sake! But then again, their business model, even at the hundred million to a billion-dollar range is to invest in a lot of businesses expecting many to fail.

So Elizabeth Holmes is really just another example of a typical startup failure, albeit at a much higher dollar value. And her resistance to admitting failure in the face of the obvious facts is a mental condition that she shares with a whole lot of venture and entrepreneurial America.

I don’t really feel sorry for her.

But I do believe that the prosecutions here are largely hypocritical.

And I believe the media is covering the story because it is juicy, lots of money, a pretty girl and a massive scandal (heck, that’s why I’M writing about it!). The hypocritical financial media knows this is not unusual, it is, in fact, part of America’s venture capital culture.

Be your own judge.

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6 Comments

  1. Richard Fisher

    I wish I knew more of the details of the case. Is this a kyle rittenhouse deal where you only heard 20% of the story, then when you watch the case in the court room it is the exact opposite of what you were lead to believe. I wish I would be able to hear the facts to make a good decision about the case. Is it the case that she burned the wrong people and this is pay back, or was she someone in over they head.

    Reply
    • Joe Gilbertson

      Remember that the investors that put money into her company are mostly institutional, so they have to explain to their own board and investors why this deal went bad. Holmes is a scapegoat, she is bad and must go to jail. The alternative (if she is not sinister, or if she is merely incompetent) is that the people running this investment for the institutional investors screwed up and lost money because THEY were incompetent. They might get fired for this. So it’s balls to the walls to put Holmes in jail.

      Reply
  2. frank stetson

    That’s what Martha Stewart said……..timing……it’s everything.

    Not to worry Joe, she’s not going to jail yet, she may never serve a day, but at most will suffer a little club Fed followed by the horrors of being on parole. She’s got assets, she will appeal, it will take years, she will be free to go about her business, pretty much unrestrained. IF she ever serves a day, she will be well prepared and will probably profit during her incarceration. Still not fun but more fun that any BLM protestor ever faced from the legal system.

    While there are hung jury charges out there too, they will probably evaporate with the Prosecution content with what they got and free to lick their wounds in private over the fools these prosecutors appear to be.

    So Joe seems to absolve this woman as young, energetic, woman with a dream that fooled smarter, wiser, big time investors so it’s on their watch, not hers. She was just doing the natural thing to start a business. Problem is Joe, she got caught. She lied, she cheated, she fumbled the ball, she lost. Not much different than a Bernie Madoff bubble gone burst.

    She fabricated documents, had lab directors that never visited the lab, made up revenue projections, testing results, refused investors inquiries into the facts, and even gave patients false positive reports. Most important, she got caught.

    Early in the sw development market, there was the concept of try it, buy it. Along comes Frank and he flips it to buy it, try it. In other words, give me your money and I will give you a dream, for a discount….since you buy early….. Problem was that often I could not deliver what I promised, something had to be dropped to make it to market. I confessed, paid it down sometimes, promised the next release or even a dot release, whatever to avoid the lawsuits. Other sw vendors not so Kosher. It was only a few years before the concept was regulated out of existence. My point is people have been selling what they don’t have forever; but in the sw business it got so bad that a regulation was needed to curtail bad behavior.

    That’s what I see as good in these cases. Did Stewart or Holmes deserve it. Probably not, at least not by themselves. Did they get it because they are women? Maybe. Was it bad timing? You betcha. Timing is everything. But the good is the message it sends to the next schmuck that is thinking about crossing the line, fudging the facts a bit, taking a chance with a little white lie or two to keep the dream afloat. I have similar thoughts about personal injury cases. Sure, there is excess —- but the message sent maybe convinces those in the crosshairs to take a little more care before they too move beyond just being a target.

    She sure is not going to jail for awhile, if even for a day ever. But her message may save the next victims from egregious lying and cheating just to keep failed projects afloat a little longer. Because I have yet to hear one of these liars step up and say: “you know, if I hadn’t lied like hell, cheated my ass off, we wouldn’t have that polio vaccine.”

    Still waiting to “he saved the world by lying and cheating.”

    So yeah, she got tagged, most others never do. Good. Throw the book at all of then for all that the law allows.

    Reply
  3. Tom LOFGREN

    A well done piece of journalism.Fair and knowledgeable. She should have gone to Shark Tank First.

    Reply
  4. Ben

    Once again, a PBP contributor was sooo close to the right answer.

    Now, I understand you have to be provocative in order to get clicks. And you are correct in the way the system works. But instead of “defending” Homes, because everyone does it, you missed a golden opportunity to explain how broken the system is and how to fix it. I mean you have the next Charles Krauthammer on staff, surely you could have explained that it is nothing more than gambling with other peoples money.

    But alas, another missed opportunity by PBP

    Reply

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