Elizabeth Holmes: Silicon Valley toxicity epitomized

$600 million evaporated after the dust settled from the fall of Theranos. Elizabeth Holmes and her fraudulence tainted the once-coveted “Silicon Valley startup” title, but this name has already greatly deteriorated from its formal grandeur. 

Decades of misinformation fueled by poisonous investor behavior have bubbled over, revealing Silicon Valley’s toxic culture of valuing growth over all else. 

It begins with the investor networks, dissuading the entrepreneur from focusing on product quality, and persuading them to focus on pleasing investors. At surface level, the wealth of investors seems a harmless concept, promoting growth, innovation and entrepreneurship. 

But as more firms developed, so did the Silicon Valley network of venture capitalists (VC), and the culture completely shifted into one of fraudulence. 

At its peak, Theranos reached a multi-billion dollar valuation before whistleblowers revealed the complete lack of progress within the company. Theranos isn’t the exception,  but rather representative of practices ingrained within the core of startup culture of the Valley.

Investors inflate the valuation of startups based on ideas without any sort of financial proof otherwise. Revenue-less and customer-less startups are given multi-million dollar valuations, even multi-billion in rare cases. 

There is no better example than Theranos. The idea was brilliant, potentially revolutionary. For that reason alone, its valuation soared exponentially. The company generated a few million in sales between 2010 and 2012 but reached a valuation of $10 billion in 2013 and 2014 through the rosy images Holmes painted and the hundreds of millions in revenue that she promised. 

Across the Valley, tech and SaaS startup valuations are pumped. On paper, these companies look huge, making their entrepreneurs worth millions of dollars, but in reality, the entrepreneurs often can’t afford to pay themselves a salary, and are on the brink of financial ruin. Then the IRS and the state swoop in and tax them heavily because they appear to be  well-established, sizable firms.  

Investors pressure these startups to grow their revenue and customer base, allocating all capital to stock growth instead of research to improve the product itself — for consumer-facing products, such as Facebook ads and Amazon web services. Twenty-five cents for every dollar invested are sent back to these companies. 

But it’s the next few cycles of the investments that are the most evident of Silicon Valley’s fraudulent circles. A speaker event with “This Week in Startups, Canadian Venture Capitalist Chamath Palihapitiya,” who at one point engaged in the following process, describes the fundraising cycles as follows:

Entrepreneurs are encouraged to reach out to various sets of firms at increasingly rising valuations in order to provide the first set of investors opportunities to sell their stakes at massive profits. Investors will encourage these startups to burn all their investments on “growth,” oftentimes completely unsustainable, but great for raising valuation, doing so at each cycle until the startup crumbles and the final unlucky VC takes on the loss, marginal compared to the heaps of capital they manage.

In point of fact, this is a Ponzi scheme, a form of fraud that lures investors and pays profits to earlier investors with funds from more recent investors. Theranos completely exploited this cycle, starting with $5.8 million in 2005 and rising to $100 million raised in December of 2017 — it took over than a decade for Holmes to be caught.

There is no focus upon the product, and the cycle of growth kills startups and naive entrepreneurs. Brilliant ideas and teams are crushed by this culture. Like Theranos, many other Valley companies are little more than a glorified — and legal Ponzi — scheme. 

Heralds of the Silicon Valley point out that Holmes, a pathological liar, cannot be used to represent the culture, and yet use the success of Larry Page and Mark Zuckerberg to characterize what being a Silicon Valley startup truly looks like, completely discounting the hundreds of failures occurring each year. 

This is no jab at the entrepreneurs and the innovators here, not even an attack at the companies. There is no doubt that most entrepreneurs begin with great ideas, motivation and dedication to create change. But the systematic fraudulent behavior encouraged across all levels of startup culture has made the Valley toxic for success and productive innovation — Theranos just happened to be the company that was caught. 

In this cycle of inflated valuations and ridiculous multiples, billionaires and firms implicitly encourage startups to use statistics to lie in order to raise valuations so that the investors can make an exit at a massive profit, leaving the startup and the entrepreneur themselves in the dust. 

Holmes has been convicted on three counts of wire fraud and one count of conspiracy to commit wire fraud for lying to investors about devices developed by Theranos, but the investors who encouraged her, who refused to audit her company and backed her venture, will remain uninvestigated and continue to inflate and harm other young companies. 

Ultimately, the individuals with great ideas, the innovators fooled by the name-value, suffer the most. Theranos’ signs of fraudulence were present from day one. Holmes should never have gained the traction she did, but it was the Valley that granted her all the tools to do so.