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Lessons for founders from the Theranos fraud

Fraud and extreme optimism are different

As with most cases of business fraud, the Theranos story raises major questions. Not only about who knew what and when, but who should have known. These questions are raised when a business fails, with the spotlight often on auditors. The focus is usually on whether they asked enough difficult questions of management. Crucially, what did they do with the answers if red flags were raised? Was it incompetence (they didn't spot anything wrong) or something more sinister (they spotted it and covered it up)? The fraud at Theranos has forced similar questions to be asked of investors and the media. Were those responsible for due diligence diligent enough? But when fraudulent behaviour moves beyond a bit of bluffing and obfuscation and into outright lying, cheating and hiding the truth, it changes things. The ultimate blame for the Theranos fiasco can't lie anywhere other than its founder. It was ultimately exposed, so someone did their job. It took too long to get there because the fraud was on such an audacious scale. This went well beyond the over-zealous predictions and hockey stick forecasts that sometimes result from excessive entrepreneurial optimism. This was the work of a fraudster and not an over-eager entrepreneur. It is important not to mix the two up. Everyone writing or commentating on the story should be aware of the risk of collateral damage to the founder community and seek to minimise it.

There is an important place for scepticism

While there was clearly fraud at play, and much was hidden from investors and the media, it does nevertheless highlight the need for a healthy scepticism. I was once, correctly, warned about the difference between being cynical and being sceptical. There (sadly) isn’t a place for constant cynicism, but a good journalist, like a good auditor or any smart investor, must remain at a sufficient distance to ask awkward questions. If something appears too good to be true, it might just not be true. There is no reason to suspect that everything is always off, but there is equally no harm in keeping your eyes peeled. If the Theranos affair has introduced an extra sense of caution in all stakeholders (and that includes health consumers seeking miracle cures) it’s no bad thing.

You can't be both missionary and mercenary

Elizabeth Holmes has been described as all sorts of things following the collapse of Theranos and can now add convicted fraudster to this long list. But one of the most telling lessons from the whole affair may be that she failed to be clearly identified as the right type of founder. There's an old Silicon Valley axiom that separates founders into two camps - either missionaries (usually in it for the greater good) or mercenaries (in it for the money). What Holmes offered was a toxic mix of the two. She presented at the surface as a missionary (as many health tech pioneers often do) but was really driven by a ruthless and more mercenary motivation (success at all costs, even when it was clear she didn’t really have a product). An ideal fallout from the scandal would be (ironically) to develop a simple test to check which category a founder might fall into.

This may not be typical Silicon Valley, but…

Various Silicon Valley figures have been keen to point out that major early investors were in fact big names more familiar with Washington and Wall Street than the Valley (the affair represents another remarkable late career twist for Henry Kissinger, and a painful £100m sting for Rupert Murdoch). But had it been a legitimate flyaway health tech success story, its roots in the Valley and Stanford University would get routinely trotted out. And no one in the Valley would have disowned it then. It is disingenuous now to claim this was not bred in the Valley. Indeed, it was a key part of the pitch to the many tech journalists and business magazine profilers, who were already so in thrall to this amazing story of the “next Steve Jobs” (who was a young woman, too) that they forgot to be sceptical.

Technology is not the villain, either

The Theranos story offers many lessons and has already had a profound effect on the tech community and Silicon Valley since the business was exposed as a scam. What has not been slowed down – as the pandemic proved – is the volume of investment and the level of excitement towards the many and various healthtech, medtech and biotech startups constantly seeking backing. VC funding has done wonders for plenty of amazing science and tech firms and financed some transformational breakthroughs since Theranos was first exposed. Take a bow much of the initial development work on Covid vaccines and treatments, for a start. Science and technology are not the villains here. The focus must remain on this as merely the latest business fraud. Anything else risks reflecting badly on the founder community, while any lessons must be for the whole of the business community and indeed wider society in general.