SAN JOSE, California – In 2016, startup founders sang “Theranos doesn’t represent, we’re better” rolled into one Vacation video Founded by the venture capital company First Round Capital.
Last month Keith Rabois, a venture capitalist, said on twitter that articles relating Theranos to Silicon Valley culture “contained more inventions than anything Trump ever voiced”.
Technorati in Silicon Valley and beyond have long tried to part ways with Theranos, the blood testing startup in Palo Alto, California that was exposed for lying about its abilities. However, the fraud trial against company founder Elizabeth Holmes has shown that just like Bernard Madoff one Wall Street creature and Enron represents In the get-rich-quick excesses of the 1990s, Theranos and its leader were very 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 lectures in Ms. Holmes’ nearly four-month trial, which ended on Monday when a jury found the entrepreneur guilty of four out of eleven cases of fraud, strongly emphasized their participation in the culture of Silicon Valley.
Ms. Holmes, 37, used the mentorship and credibility of big shots in the tech industry 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 welcomed in their circles.
She also used the start-up playbook of hype, exclusivity and “fear of missing out” to attract future investors. She embodied start-up Hustle and bustle through Optimizing their life for maximum effort. 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 measured only by its worst actors. And many venture capitalists who heard the incredibly lofty claims made by Mrs. Holmes did not fall for her. But if anyone in Silicon Valley was suspicious of their proclamations, no one spoke about them publicly until things went south.
Immediately after the Wall Street Journal exposed Ms. Holmes’ alleged scam at Theranos in 2015, some prominent tech investors even rushed to defend her in knee-jerk tribalism.
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 lawyers to speak about the overly optimistic chatty nature of the tech industry as part of their defense.
“It is common in Silicon Valley for promoters to engage in this type of behavior,” Judge Davila said in a hearing May before the start of the trial.
At best, Silicon Valley is optimistic. At worst, it’s so naive that it believes it’s own rubbish. Throughout her trial, Ms. Holmes’ lawyers argued that she was simply a devout believer. Any statements that were not entirely true were about the future. It was what investors wanted to hear, they said.
“They were not interested in today or tomorrow or next month,” said Mrs. Holmes. “They were interested in what kind of change we could make.”
Soon after starting Theranos in 2003, Ms. Holmes used her vision of the future to attract investors and advisors like Mr. Ellison and Mr. Lucas. Mr. Lucas, who was Theranos CEO until 2013, was involved in more than 20 investment vehicles that supported Theranos. These included his son’s venture firm, the Lucas Venture Group; another vehicle, PEER Venture Partners; and trusts and foundations affiliated 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. The Lucas Venture Group did not respond to a request for comment.
Dixon Doll, founder of the Silicon Valley investment firm DCM, invested as did Reid Dennis, founder of the venture firm IVP, which has supported technology companies such as Slack, Twitter and Snap. Draper Associates, founded by venture capitalist Tim Draper, also invested in Theranos, as did two funds from his other firm, Draper Fisher Jurvetson.
A DCM representative said Mr. Doll left the company more than eight years ago, and a DFJ spokeswoman declined to comment.
In a statement, Mr Draper said he was concerned about Ms. Holmes’ judgment because it suggested America’s entrepreneurship was in danger. “The willingness to rely on these entrepreneurs and their visions has made Silicon Valley the engine of innovation in the world,” he said.
Not everyone who heard Mrs. Holmes speak was delighted. Bijan Salehizadeh, an investor at Highland Capital Partners, said he did not invest in Theranos in 2006 because Ms. Holmes did not want to or could not answer most of his questions.
But when Theranos’ fundraising hit the headlines, Mr Salehizadeh questioned his judgment. Venture capitalists hanging out at the Rosewood Hotel on Sand Hill Road, one of Silicon Valley’s main arteries in Menlo Park, California, started raving about the company, he said.
“They said, ‘That hot Theranos thing – you as a health care worker saw it and didn’t do it? How could you have bequeathed a unicorn if it was in your office at the beginning? ‘”He said.
Ms. Holmes took advantage of the hype to collect major checks from wealthy families, including heirs to the fortunes of Amway, Walmart, and Cox Enterprises. Industry insiders also offered their support. Media mogul Rupert Murdoch met Ms. Holmes at a gala in Silicon Valley hosted by Yuri Milner, a technology investor. Mr. Milner loudly praised Mrs. Holmes to Mr. Murdoch “Bad blood“, A book by John Carreyrou, a former reporter for the Wall Street Journal.
Brian Grossman, an investor in health care hedge fund PFM Health Sciences, learned about Theranos from Thomas Laffont, a co-founder of Coatue Management, a well-known mutual fund based in San Francisco. In an email that was part of the court records, Mr Laffont said raved that Theranos had “one of the most impressive boards I have ever seen” and said that Mr. Grossman’s company should let him know “as soon as possible” if they were interested in an introduction.
Don’t coatue Reply to a request for comment and PFM Health Sciences declined to comment.
As Theranos brought in more shareholders, Ms. Holmes increased her influence over the company and made sure that she would control voting power even if the start-up went public. Chris Lucas, founder of Black Diamond Ventures, stated in a phone conversation with other investors that was taped and played in court that this was typical of such companies.
Ms. Holmes’ supervised stock was “just like some of the other high profile companies in Silicon Valley,” he said.
In 2014, DFJ bragged about its investment in Theranos on Facebook. “I am proud to have supported Elizabeth Holmes and Theranos as their very first investor for over a decade,” the company wrote.
The next year when Mr. Carreyrou investigated Theranos’ claims for The Journal, Ms. Holmes hailed Silicon Valley’s most popular form of distraction: calling anyone who asks tough questions a hater. Before Mr. Carreyrou published his first exposé on Theranos, Ms. Holmes and her then partner Ramesh Balwani, Chief Operating Officer of the start-up, made fun of 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 article was published in the Journal, Ms. Holmes used a rebuttal hugs by many in the tech industry. “That happens when you’re working to change things,” she said in a TV interview. “First they think you’re crazy, then they fight you and then suddenly you change the world.”
In the years since Theranos’ collapse, more and more tech startups have followed their strategy of seeking funding outside of the small network of venture capital firms on Sand Hill Road. Startups raise more money with higher ratings, and Deal-making has accelerated. Mutual funds, hedge funds, family offices, private equity funds and mega funds like SoftBank’s Vision Fund have rushed to support them.
Mr. Salehizadeh said Silicon Valley’s shift to focus more on fundraising was one of the reasons he left to start a private equity firm on the east coast. The big bucks added shine to tech startups, he said, but had little foundation in the fundamentals of business.
“You always feel like you’re either an idiot or you’re brilliant,” he said. “It’s a tough way to be an investor.”