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Elizabeth Holmes was found guilty, but that won’t change Silicon Valley

Theranos founder Elizabeth Holmes, center, and her family leave the Robert F. Peckham Federal Building and U.S. Courthouse after the jury found her guilty on four counts in San Jose, Calif. Holmes was found guilty of four counts of defrauding investors, each carrying a maximum penalty of 20 years in prison. Photo by Dai Sugano/MediaNews Group/The Mercury News via Getty Images

Silicon Valley venture capitalists and major investors can suffer from FOMO—Fear of Missing Out—as much as anyone, say veteran entrepreneurs at Northeastern’s D’Amore-McKim School of Business—and it’s a big reason why Elizabeth Holmes was able to raise millions of dollars to fund a blood-testing machine that never delivered.

“This is all about the fear of missing out,” says Bob Lentz, executive professor of entrepreneurship and innovation, and entrepreneur in residence at Northeastern’s Center for Entrepreneur Education. “Nobody wants to miss out on the next big thing.”

Left to Right: Bob Lentz, BA’73, Chairman of Northeastern University IDEA Venture Accelerator and Fernando Suarez, Jean C. Tempel Professor, Entrepreneurship and Innovation; Entrepreneurship and Innovation Group Coordinator, Research. Northeastern Photo and Photo by Matthew Modoono/Northeastern University

Holmes, who was 19 when she founded Theranos Inc. with a mission to revolutionize blood testing, was convicted in federal court of four counts of fraud this week for lying to investors about the efficacy of her blood-testing system. She claimed her company’s machine would scan for several diseases using a small amount of blood, giving consumers easy access to their health records. 

Holmes is awaiting sentencing and could face up to 80 years in prison. She hasn’t said whether she will appeal the verdict.

Theranos’s meteoric rise and fall has been cast as a troubling product of Silicon Valley’s fake-it-til-you-make-it culture, but some argue that Holmes’ downfall may not have much of an effect  on the tech industry.

“Nothing will change,” says Lentz, who incorporated Holmes’s four-month criminal trial into his venture-investment classes last semester. “I think the traditional venture capitalists will look at it and say it was a fluke. You’ll always get founders who are overly optimistic—the reason they’re entrepreneurs is because they are optimistic and they believe they can solve these problems. And I think there are a lot of investors still chasing the next big deal.”

But those considering working in the high-risk startup industry should take away some lessons from the failed startup, says Fernando F. Suarez, Jean C. Tempel professor of entrepreneurship and innovation.

Theranos had two key elements that attracted investors: A product that targeted the emerging health-care technology market, and a charismatic founder with a unique backstory. 

“The Theranos case shows that neither early investors nor investors in later rounds did the minimal due diligence that was expected at each stage. They were all mesmerized by the power of Elizabeth Holmes’ vision of disrupting testing and health care,” says Suarez. 

As both media exposure and investments increased, Holmes faced more pressure to deliver, which is when she began using tests created by other companies during demonstrations. 

“Even at later stages, investors were naively satisfied with staged demos in an office as opposed to walking around and talking to key employees and watching how things worked on the floor,” says Suarez.

Meanwhile, entrepreneurs must be more realistic in terms of what they can deliver.

“Theranos had a bold vision, but lacked a sense of which milestones needed to be achieved to get there, and was unable to correct their course,” says Suarez. “Although this story will become iconic given the extremely high visibility of the founder, it is of course not the first of such fraud by any stretch, nor will it be the last one.

“It is too bad that in a highly male-dominated ecosystem such as Silicon Valley, it had to be a woman founder who achieved the notoriety that Holmes did and therefore became the example of the dangers and excesses of a culture that her male counterparts have created for decades,” Suarez says.

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