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VWV Volumes #22: Analyst-in-Training Cécile Tang on Elizabeth Holmes's Trial and what it means for the Future of Silicon Valley Investment
On Jan. 4, 2022, Elizabeth Holmes, the founder of the failed blood-testing startup Theranos, was found guilty of four charges of fraud.
After a week of deliberation, the jury agreed that Holmes, who once graced the covers of business magazines and was lauded as one of the youngest self-made female billionaires, had lied to investors and patients about the capabilities and accuracy of Theranos’s blood testing services. Unless overturned through appeal, each count could subject Holmes to as long as 20 years in prison.
The verdict represents a final coup de grace for Holmes, whose fall from her status as celebrated entrepreneur to convicted criminal, has sparked conversations about the dangers of Silicon Valley’s “fake it until you make it” ethos. But the verdict also stands out for another reason, namely the troubling legacy that Holmes leaves for budding female entrepreneurs.
Optimism or Dishonesty?: The Implications of Holmes’s Conviction
Elizabeth Holmes embodies an extreme case of lying to the press and investors about her technology, which she claimed could reliably test for a wide range of ailments with only a few drops of blood. After raising $945 million during the startup’s lifetime, a 2015 Wall Street Journal investigation found that Theranos only performed, with questionable accuracy, fifteen of the hundreds of tests it offered. Theranos’s technology has since then been debunked as fraudulent and the startup was dissolved in 2018.
Many observers of Elizabeth Holmes’s trial remain divided on the implications of the verdict. Some view it as an important cautionary tale for both entrepreneurs and investors alike: from now on, founders will be more careful with making bold and exaggerated claims about their businesses to potential investors, while investors will start prioritizing skepticism and avoiding heedlessly pouring money into overly-optimistic startups.
Others, however, point to a fundamental principle of early-stage investing itself: VCs and angel investors are constantly looking for visionary entrepreneurs with innovative ideas, and investing in these projects comes with the inherent risk that they will fall through. Similarly, entrepreneurs must balance between the precarious line that separates healthy optimism from outright dishonesty, but tempering their enthusiasm might also mean losing investors to more ambitious pitches from their competitors. People thus argue that despite Elizabeth Holmes’s dramatic downfall and egregiously fraudulent practices, the general culture of investor intrepidity and founder idealism is here to stay. Whether Holmes’s conviction will have an impact on founder and investor behavior, however, remains to be seen.
Unintended Side Effects: What Holmes’s Downfall Means for Female Entrepreneurs
Although the implications of Elizabeth Holmes’s conviction for the general startup environment in Silicon Valley are debated, its adverse effects can be undeniably felt by a specific subgroup: female founders of healthcare startups.
Historically, female entrepreneurs have already received a significantly smaller amount of funding compared to their male counterparts: in 2019, only 2.8% of VC funding went to women-led startups, a figure that shrunk to 2.3% in 2020. In recent years, women founders have also increasingly felt Elizabeth Holmes’s infamous legacy looming over their chances of raising capital from potential investors.
A New York Times article details the struggles of female entrepreneurs in biotechnology and health care: Alice Zhang, the founder of a startup that uses artificial intelligence to discover therapeutic drugs, says that her startup is constantly compared to Theranos despite offering entirely different services. Similarly, Heather Bowerman, the founder of a company that develops a test to identify endometriosis, is often asked by investors to explain how her company would be different from Holmes’s.
The only common thread between these entrepreneurs and Elizabeth Holmes is that they are women founders in the hard-science space; nevertheless, female entrepreneurs find it increasingly difficult to convince investors to back their ideas, narrowing their already-thin chances of successfully raising capital.
Perhaps one of our main takeaways from the Elizabeth Holmes trial should be that, now more than ever, VCs and other investors must reshape their implicit assumptions and biases when it comes to women-led startups. One convicted female entrepreneur should not be representative of all women founders aspiring to bring innovative ideas to life. Caution and skepticism, while important for making smart investments, are qualities that can be cultivated in the VC world in tandem with values of inclusivity and acceptance.