Larry Horist | Nov 18, 2022 | 52
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.