SAN JOSE, Calif. – In 2016, startup founders sang “Theranos doesn’t represent, we’re better” in a vacation video created by venture capital firm First Round Capital.
Over the next few years, several columnists wrote that Silicon Valley should not be blamed for Theranos.
Last month, Keith Rabois, a venture capitalist, said on Twitter that articles linking Theranos to Silicon Valley culture “contained more invention than anything Trump has ever uttered.”
The technorati of Silicon Valley and beyond have long sought to divest themselves of Theranos, the blood testing start-up in Palo Alto, California, which was exposed for lying about its capabilities. But the fraud trial of company founder Elizabeth Holmes showed that just as Bernard Madoff was a Wall Street creature and Enron represented the get-rich-quick excesses of the 1990s, Theranos and its leader were largely products of Silicon Valley.
The usual refrain went like this: Theranos was more of a healthcare company than a technology company. It raised money from wealthy families and people outside of the tech industry, while insiders saw through the hype.
But testimony and court documents in Ms. Holmes’ nearly four-month trial, which ended Monday when a jury found the entrepreneur guilty of fraud on four of 11 counts, clearly underscored her involvement in Silicon Valley culture.
Ms. Holmes, 37, used the mentorship and credibility of tech industry big shots like Larry Ellison, a co-founder of Oracle, and Don Lucas, a Silicon Valley venture capitalist, to raise money from others. She lived in Atherton, California among the elite of Silicon Valley and was accepted into their circles.
She also used the startup playbook of hype, exclusivity, and a “fear of missing out” to win over later investors. She embodied start-up hustle culture by optimizing her life for maximum work. She dismissed the “haters” and everything that interfered with her vision of a better world. She parroted mission-driven technobabble. She even dressed like Steve Jobs.
No industry wants to be judged solely on its worst performers. And many venture capitalists who heard Ms. Holmes’ impossibly high claims didn’t fall for her. But if anyone in Silicon Valley was suspicious of their proclamations, nobody spoke publicly about them until things went south.
Immediately after the Wall Street Journal exposed Ms. Holmes’ alleged fraud at Theranos in 2015, some prominent tech investors even rushed to defend her in knee-jerk tribalism.
The Epic Rise and Fall of Elizabeth Holmes
The Theranos founder’s story, from being worth $9 billion to a conviction for fraud, has become emblematic of the pitfalls of Silicon Valley culture.
Even the judge overseeing Ms. Holmes’ case, Edward J. Davila of the US District Court in San Jose, California, agreed that Silicon Valley culture was an integral part of her trial. He allowed her attorneys to discuss the tech industry’s overly optimistic boast as part of her defense.
“It’s common in Silicon Valley for project promoters to engage in this type of behavior,” Judge Davila said at a May pre-trial hearing.
At best, Silicon Valley is optimistic. In the worst case, it is so naive that it believes in its own nonsense. During her trial, Ms Holmes’ lawyers argued that she was simply a wide-eyed believer. All statements that are not entirely true relate to the future. That’s what investors wanted to hear, they said.
“They didn’t care about today or tomorrow or next month,” Ms. Holmes testified. “They were interested in what we could change.”
Shortly after founding Theranos in 2003, Ms. Holmes used her vision of the future to attract investors and advisors such as Mr. Ellison and Mr. Lucas. Mr. Lucas, who was CEO of Theranos until 2013, has been involved in more than 20 investment vehicles backing Theranos. These included his son’s venture firm, Lucas Venture Group; another vehicle, PEER Venture Partners; and trusts and endowments associated with members of his family.
Mr. Lucas introduced Ms. Holmes to Hall Group, a real estate company that has invested $4.9 million in Theranos. His nephew’s company, Black Diamond Ventures, invested $5.4 million. Other Silicon Valley investors included ATA Ventures and Beta Bayview, a fund operated by Crosslink Capital.
Mr Lucas and his son have since died. Lucas Venture Group did not respond to a request for comment.
Dixon Doll, founder of Silicon Valley investment firm DCM, also invested, as did Reid Dennis, founder of venture firm IVP, which has backed tech companies like Slack, Twitter and Snap. Draper Associates, founded by venture capitalist Tim Draper, also invested in Theranos, as did two funds run by his other firm, Draper Fisher Jurvetson.
A DCM representative said Mr Doll left the company more than eight years ago, and a spokeswoman for DFJ declined to comment.
In a statement, Mr Draper said Ms Holmes’ ruling worried him because it suggested America’s entrepreneurial spirit was at risk. “The willingness to rely on these entrepreneurs and their visions has made Silicon Valley the innovation engine of the world,” he said.
Not everyone who heard Ms. Holmes’ pitch was thrilled. Bijan Salehizadeh, an investor at Highland Capital Partners, said he did not invest in Theranos in 2006 because Ms. Holmes was unwilling or unable to answer most of his questions.
But when Theranos’ fundraising made headlines, Mr Salehizadeh questioned his judgement. Venture capitalists who hung out at the Rosewood Hotel on Sand Hill Road, one of Silicon Valley’s main thoroughfares, in Menlo Park, Calif., began buzzing about the company, he said.
“They said, ‘This hot Theranos thing – you as a health professional saw it and didn’t? How could you have passed on a unicorn if it sat in your office in the earliest stages?’” he said.
Ms. Holmes used this hype to rake in bigger checks from wealthy families, including heirs to fortunes from Amway, Walmart, and Cox Enterprises. Industry insiders also offered their support. Media mogul Rupert Murdoch met Ms Holmes at a Silicon Valley gala hosted by Yuri Milner, a tech investor. According to Bad Blood, a book by John Carreyrou, a former Wall Street Journal reporter, Mr Milner praised Ms Holmes to Mr Murdoch.
Brian Grossman, an investor in healthcare-focused hedge fund PFM Health Sciences, learned about Theranos from Thomas Laffont, a co-founder of Coatue Management, a well-known mutual fund with a presence in San Francisco. In an email that was part of the court filing, Mr. Laffont gushed that Theranos has “one of the most impressive boards I’ve ever seen,” and said that Mr. Grossman’s company should let him know “as soon as possible.” , if you are interested in an introduction.
Coatue did not respond to a request for comment and PFM Health Sciences declined to comment.
As Theranos brought in more shareholders, Ms. Holmes tightened her grip on the company and made sure she would control voting rights even if the start-up were to go public. Chris Lucas, founder of Black Diamond Ventures, said in a conversation with other investors that was recorded and played in court that this is typical of such companies.
Ms. Holmes’ supervoting shares were “just like some of the other high-flying companies in Silicon Valley,” he said.
In 2014, DFJ boasted about its investment in Theranos on Facebook. “Proud to have backed Elizabeth Holmes and Theranos as their first-ever investor for over a decade,” the company wrote.
The following year, while Mr. Carreyrou was investigating Theranos’ claims for The Journal, Ms. Holmes embraced Silicon Valley’s favorite form of distraction: label anyone who asks tough questions a hater. Before Mr. Carreyrou published his first exposé on Theranos, Ms. Holmes and her then-partner, Ramesh Balwani, the start-up’s chief operating officer, poked fun at the reporter’s French origins.
“Proud cynic,” Ms Holmes wrote in a text message to Mr Balwani.
“Cynicism and skepticism are diabetes of the human soul,” replied Mr. Balwani. “Nobody should be proud of diseases.”
After the Journal article was published, Ms. Holmes used a rebuttal hugs by many in the tech industry. “That’s what happens when you work to change things,” she said in a television interview. “First they think you’re crazy, then they fight you, and suddenly you change the world.”
In the years since Theranos collapsed, more tech startups have followed its strategy of seeking funding outside of the small network of venture capital firms on Sand Hill Road. Startups are raising more money at higher valuations, and doing business has accelerated. Mutual funds, hedge funds, family offices, private equity funds, and megafunds like SoftBank’s Vision Fund have rushed to support them.
Mr. Salehizadeh said Silicon Valley’s shift toward a focus on raising capital above all else was one of the reasons he left to start a private equity firm on the East Coast. Big money brought glamor to tech startups, he said, but it had little basis in business fundamentals.
“You always feel like you’re either an idiot or brilliant,” he said. “It’s a tough road to be an investor.”