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George Boardman: Even the smartest guys in the room can be conned

They have a saying in Silicon Valley to describe the interregnum between the time a start-up is a bet and before it becomes a business: Fake it until you make it. But what happens if you never make it?

Well, you could find yourself in the position of Elizabeth Holmes, the previously charismatic creator of a revolutionary blood-testing technology who is now standing trail in San Jose on 10 counts of wire fraud and two counts of conspiracy to commit wire fraud.

The case is the latest chapter in the fall of a Silicon Valley superstar, a drama that has inspired books and television series. The case has focused the spotlight on tech stardom, start-up culture and Silicon Valley hubris, according to The New York Times.



Holmes was the golden girl of the valley for over a decade after dropping out of Stanford to establish Theranos Inc. to utilize breakthrough technology that could test for a range of health conditions using a few drops of blood from a finger prick.

An insufficiently skeptical media bought her story with few questions asked, and Holmes and her co-defendant in the case used the attention to attract big bucks investors to the company. Well-known public figures like George Shultz and Henry Kissinger joined the company’s board, and big-time players in health technology bought into the company’s promise.




At its peak, Theranos — a company that never had more than $500,000 in annual revenue — had an implied value of $9 billion before The Wall Street Journal burst the bubble.

The paper’s investigative reporting in 2015 and 2016 exposed how Theranos’ technology didn’t work, and how the company tried to cover up its failures. Those revelations triggered an implosion that cost the company’s backers at least $600 million.

Holmes’ attorneys portray her as a hard-working entrepreneur who was convinced she could achieve technological breakthroughs. “Failure is not a crime,” said one of her attorneys. “Trying your hardest and coming up short is not a crime.”

Court filings by her attorneys suggest her co-defendant, Ramesh “Sunny” Balwani, Theranos’ No. 2 executive and former lover, subjected Holmes to mental, physical and sexual abuse that affected her decision making as head of Theranos. Balwani, who will be tried separately next year, has denied the claims.

Holmes was described as a hard-working visionary who never sold one share of stock in the company she believed in, but apparently not all of the money the founders raised went into the business. Her lawyers are trying to block testimony about her lavish lifestyle, and her attorneys are from Williams & Connolly, a white shoe Washington, D.C., law firm that represents corporations and well-heeled defendants of white collar crimes.

Venture capital investors end up funding a lot of start-ups that eventually go bust or are folded into other companies, but they take the risk with the hope of striking gold with the next Facebook. They typically cut their losses before these ventures suck up the kind of money Theranos did.

Prosecutors allege that once Holmes realized her promised technology breakthrough wasn’t one, she resorted to fraud to keep the money coming in the door. “Out of time and out of money, Elizabeth Holmes decided to lie,” said Assistant U.S. Attorney Robert Leach in the prosecution’s opening argument.

Holmes — young, blonde and attractive — convinced a lot of so-called savvy investors as she promoted her story in the media, often attired in a Steve Jobs-like black turtleneck sweater. She even convinced Walgreens and Safeway to use the blood testing machines at onsite clinics. Walgreens actually installed 41 of them in clinics before The Journal’s expose appeared in print.

Holmes’ guilt or innocence interests me less than the reasons why big time investors — supposedly among the smartest guys in the room — bought into this pipe dream without applying their legendary due diligence to Holmes’ grandiose promises.

There are plenty of people who could be embarrassed here: The Walton (as in Walmart) family, which lost its $150 million investment, media mogul Rupert Murdoch ($120 million), former Trump Education Secretary Betsy DeVos ($100 million), and the heirs of the Cox Media Group ($100 million).

Then there are Silicon Valley smart guys like Tim Draper, of the legendary venture capital firm Draper Fisher Jurvetson, and Larry Ellison, founder of Oracle. Both of them were apparently early but relatively small investors. I would love to hear some of these people explain to the jury how they were sucked into this disastrous investment, but I have a hunch they will be able to avoid such an unpleasant situation.

Investment scolds are now suggesting that regardless of Holmes’ fate, the implosion of Theranos will make it more difficult for women to raise venture capital money at a time when their companies already have a hard time raising cash. Of course, they said the same thing about investors chasing unrealistic returns as Bernie Madoff was carted off to prison.

Investors are always on the lookout for the next Whitney Wolfe Herd, who became the world’s youngest female self-made billionaire when she took public Bumble, a dating and social site “by women, for women.” Herd, the youngest women ever to take a company public at 31, is now worth an estimated $1.68 billion.

Blackstone and other early investors in Bumble always think they can dodge the next Holmes and find the next Herd. They just need to keep in mind that tried-but-true axiom: Let the buyer beware.

George Boardman lives in Nevada City. His column is published biweekly on Tuesdays by The Union. Write him at boredgeorgeman@gmail.com.

Observations from the center stripe: Camouflage edition

I AM amazed at the number of people who walk along the narrow edge of Banner Lava Cap dressed in what is essentially camouflage. They seem to be daring inattentive drivers to hit them…HOT MARKET: The sale of a house in South Lake Tahoe that went for $35,000 above the asking price closed on a day when the town was deserted because of the Caldor Fire…AFTER IT became clear that Gavin Newson would easily repel the recall effort, Fox News’ coverage of the election turned to people whining about the governor…IF JOE Biden is Grandpa Joe, then Donald Trump is the loud-mouth uncle you hope doesn’t show up for Thanksgiving dinner…SEVERAL POLLS show Biden losing support because of his handling of the pandemic. It’s his fault that 30% of the population is too stupid to get vaccinated?…WHY AM I not surprised that some Tesla drivers are using the Autopilot feature when they are too drunk to drive home…


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