15:51 PM

Theranos Fraud: Nothing To Do With Silicon Valley Culture

A stellar board of powerful men didn't spot a years long massive fraud

It must be embarrassing for the SEC to have to come to the aid of billionaire investors in Theranos such as Rupert Murdoch, Larry Ellison, and Tim Draper.

The SEC usually focuses its resources on protecting retail investors -- the not-so knowledgeable and not-so smart investors -- from the darker corners of finance. Yet these investors made rookie mistakes.

Francine McKenna at Marketwatch reports:

Theranos and founder Elizabeth Holmes raised $700 million from mostly wealthy investors without ever having to provide financial statements audited by an independent public accounting firm.


Super smart investors plus an impeccable board of directors: Henry Kissinger and George Shultz, former Secretaries of State; William Perry, former Defense Secretary; Bill Frist and Sam Nunn, former US Senators; Jim Mattis, the current US Defense Secretary; and Richard Kovacevich, the former CEO of Wells Fargo Bank.

The investors and the board were all capable of asking for basic financial information and checking the blood-testing technology claims.

Instead, they rounded up other investors and raised even more money, and they used their contacts in government and industry to win large contracts for Theranos and for a technology that did not exist. Ouch! This is hugely embarrassing for these powerful people, but it has nothing to do with startups.

They were all suckered in by a Stanford dropout who convinced them she had the chemical engineering knowledge to lead the development and commercialization of a very complex technology: Multiple blood test results from a single drop of blood.

The SEC said:

“The Theranos story is an important lesson for Silicon Valley. Innovators who seek to revolutionize and disrupt an industry must tell investors the truth about what their technology can do today, not just what they hope it might do someday.”

Silicon Valley investors want their startups to think big. They want giant ambitions because if you promise the stars and you miss you might hit the moon and a moonshot is great.  

I heard Elizabeth Holmes speak in September 2015 (above), and she is incredibly impressive. She authentically believes in her mission and her talents. And she speaks passionately and directly to people's experiences. She can raise the hairs on the back of your neck. It's a valuable talent.

She lives simply and has not sought to cash out her stock or enrich herself in other ways. But knowing what we now know -- in those interviews from 2015 she appears to be as deluded about her own talents and the bright future for Theranos as her investors used to be yet she knew it to be fake. 

So far, the SEC has said nothing about the conduct of the board of directors or its responsibilities in this case. It would be a very brave SEC to question that board.

If there is a meaningful lesson for tech investors from the Theranos case it might be this:

A startup founder's passion cannot substitue for talent or ability - but you will fund it anyway.

Passion almost substitutes for talent and ability -- it can fill in the gaps. It's tremendously useful in leadership but it needs guidance and that's the missed opportunity for the Theranos board.