Lessons From Elizabeth Holmes Conviction: For Indian Startups, Investors And Regulators
On the 3rd January of this year, Elizabeth Holmes, founder of the now-defunct health technology company Theranos, was convicted of defrauding investors on several counts. Holmes, a one-time star entrepreneur of Silicon Valley who was touted as the Steve Jobs of the medical field and famous for sporting black turtlenecks —designed by Issey Miyake, the Japanese couturier whose black-mock turtlenecks had been favoured by Steve Jobs— followed the “fake it until you make it” or “move fast and break things” mantra of success until she came a cropper amid shocking revelations of her fraudulent blood-testing startup. Before Holmes could ‘make it’, the law caught up with her sham, leading to her indictment on grounds of criminal fraud. She faces a maximum sentence of 20 years in prison and a fine of $50,000, plus restitution, for the conspiracy to mislead investors and government and for each count of criminal fraud.
Elizabeth Holmes launched her unicorn startup Theranos in 2003. This Silicon Valley private health care and life sciences company professed to revolutionize medical laboratory blood testing through allegedly innovative methods for drawing and testing blood, and interpreting the resulting patient data. Taking advantage of the layman’s fear of and aversion to needles and the vials of blood typically required for traditional diagnostic lab testing, Theranos claimed to have developed a novel method for drawing only a few drops of capillary blood from a fingerprick, using a small lancet to collect and store the blood in a proprietary device called the 'nanotainer'. Theranos also touted, in a 2013 press release, its use of "blood sample[s] as small as a few drops-1/1000th the size of a typical blood draw."
Believing Elizabeth Holmes’ tall claims of revolutionizing the biotech industry , the big investors of Silicon Valley, from Media mogul Rupert Murdoch to Oracle Executive Chairman and founder Larry Ellison, raised funds of over a billion dollars for Theranos’ blood-testing crusade. Moreover, during Theranos’ meteoric rise, influential people like Henry Kissinger and George Shultz, both former United States Secretary of State, served on its Board. Notwithstanding the presence of such heavyweights, the Theranos Board and federal regulators neglected to provide sufficient oversight and supervision.
Surprisingly, no one had any idea of what was going on behind the smokescreen created by Holmes and her partner, Sunny Balwani—who is also facing charges on similar counts of investor fraud and whose trial is to begin this year. It was left to the reporter John Carreyrou of Wall Street Journal to expose the Theranos scam, which had been concealed by Holmes’ artifice.
Startup India
Last week, in a massive boost to India's burgeoning startup ecosystem, Prime Minister Narendra Modi announced 16 January as National Startup Day. Forty-two startups in India turned unicorns in 2021, bringing the current count of unicorns in the country to around 82. Interacting with over 150 startups during the Startup India Innovation Week, organized by the Department for Promotion of Industry and Internal Trade (DPIIT), the Prime Minister declared that India is rapidly moving towards hitting the century of unicorns, ushering in the golden era of India's startups. He also outlined various sops given by the government to promote the startup initiative in the country, including simplifying tax procedures, arranging government funding, allowing self-certification of specific laws, and removing more than 25 thousand compliances.
While the government’s effort to develop a culture that supports innovative ideas is laudable, this plus must be accompanied with sufficient checks and balances in the startup system to ensure that the Holmes collapse is not repeated in India. Every government strategy to promote the success of startups must also safeguard investors and consumers from any fraud. In a race to become a much-coveted unicorn, startups should not be allowed to exploit regulatory loopholes. Before some charlatan takes undue advantage of the government’s liberal policy on startups, the security and safety of the technologies developed by the startups need to be ascertained, especially in the case of products that claim concern for the health and well-being of customers.
Similarly, startup entrepreneurs must accept that acknowledgment of their lack of knowledge is not detrimental to their future but, rather, leads to transparency and a culture of fair play. Carreyrou puts it succinctly: “When you enter industries where lives are in the balance, you can’t really just iterate and debug as you’re going. You have to get your product working first.” He points out the necessity for entrepreneurs to believe in their product, even if no one else does, especially while wooing investors. “There’s a line between that and hyping so much you cross over into outright lies,” was Carreyrou’s studied warning.
The crushing downfall of Theranos, which plunged several high-profile investors too in financial distress, is equally a lesson for investors to keep a careful watch on the startup's performance and validate claims before investment. Their greed should not become their nemesis. Given that investors provide the financial wherewithal to new startups and unicorns to run the business, the onus is also on them to seek honest answers to pertinent questions from the entrepreneurs and bring them back on track if needed. Investors should not focus solely on their own profits at the expense of customers. The reality is that the more cautious they are in funding a startup, the greater their chance in achieving business targets.
The Board of startups, which has a duty towards managing the Company honestly and with caution, must function within the parameters laid down by the relevant statutory procedures and follow standards of good governance. In addition, the government should ensure that the Board members have the requisite industry insight, product knowledge, and operational expertise.
Holmes' trajectory from astonishing rise to disastrous downfall is a cautionary lesson for those startups that vie for funding on false or exagerrated claims based on ideas that promise much but have no, or a significantly slim, chance to succeed. It is also a warning for investors who fail to scrutinize the startup's claims, opting instead to flush them with disproportionately huge amounts of money, which in turn encourages them to make more audacious claims to raise further funding. Galvanized by the positive media reports and society's penchant for making them instant heroes, the startups, started mainly by young Turks, get trapped in the vicious cycle of raising more and more funds on the edifice of lies and distorted data. Such a tendency for stretching the truth to secure funding and business deals in their pursuit of money and fame is a recipe for doom.
The administration, on the other hand, in their enthusiasm to give thrust to the visionary ideas floated by these startups, often gets blinded and neglects to investigate or regulate them. The result is a Holmes jolt to the entire system—making fools of regulators and investors and rousing the suspicions of even genuine startups.
The debacle of a company like Theranos erodes the credibility of other startups, too. Even society in general starts suspecting and losing confidence in the startup culture and the government’s well-intended efforts to create opportunities for its growth. The loss of one startup clouds the future for all. Experience dictates that the startup culture in India be nurtured with forethought to avoid regrets and dismay in the event the business falls short of estimated targets.
If there is one lesson from the Holmes fall from grace, it should be never to “fake it until you make it”, but rather “don’t fake it, just make it.”
