The Elizabeth Holmes Trial: Will Bad Blood and Big Lies Affect the Future of Venture Capital?

As 2022 began, many startup companies held their breath, awaiting the verdict of the Elizabeth Holmes trial and what the verdict meant for the future of venture capital.

Elizabeth Holmes was the founder and chief executive officer (“CEO”) of a well-known startup company, Theranos. (Kevin O’Brien, Bloomberg Law). Her startup promised to revolutionize the healthcare industry by creating fingertip blood tests capable of diagnosing 200 different medical conditions in human beings. (Paul Farhi, Washington Post).  

Holmes’ ideas skyrocketed to fame, drawing in many large investors, like Oracle founder, Larry Ellison; venture capital firm, Draper Fisher Jurvetson; media mogul, Rupert Murdoch; Walgreens Boots Alliance, Inc. (“Walgreens”); and BlueCross BlueShield. (Sara Ashley O’Brien, CNN Business). In addition to having many big-name investors, the Theranos board of directors was comprised of many powerful people. Id. Past board members included former Secretary of State, Henry Kissinger; former Secretary of Defense, James Mattis; former Wells Fargo CEO, Richard Kovacevich; and former director of the Centers for Disease Control and Prevention, William Foege. Id. Through her influential connections, Holmes raised roughly $724 million from investors to fund Theranos. (Zaw Thiha Tun, Investopedia).

Theranos blood tests hit the market in 2013 through the company’s partnership with Walgreens. (Paul Farhi, Washington Post). In 2015, Holmes was announced the world’s youngest, self-made, female billionaire, receiving much acclaim in the tech world and beyond. (Kari Paul, The Guardian). She began gracing the covers of magazines, making many public appearances, and most notably, was appointed to Harvard Medical School’s Board of Fellows. (Avery Hartmans, Paige Leskin, and Sarah Jackson, Business Insider). That same year, cracks in Theranos’ “revolutionary technology” began to appear. Id.

The Food and Drug Administration (FDA) launched an investigation into the company’s blood tests and found major inaccuracies in the results. Id. By 2016, the FDA, Centers for Medicare & Medicaid, and the Securities and Exchange Commission were all looking into Theranos. Id. Holmes was banned from the lab-testing industry, which resulted in Theranos completely ceasing all operations in 2018. (Zaw Thiha Tun, Investopedia). Around that time, the Department of Justice announced that Holmes was being charged with two counts of conspiracy to commit wire fraud and ten counts of wire fraud. (The United States Attorney’s Office Northern District of California).

Holmes pled not guilty to all charges. (Lisa Kim, Forbes). Her defense team painted the picture of a young, naïve entrepreneur who believed in her technology’s potential. Id. At trial, she blamed her ex-boyfriend, and former president and chief operating officer of Theranos, Sunny Balwani, by alleging that emotional and physical abuse throughout their relationship affected her judgment. Id. However, Balwani was not the only one Holmes blamed. Id. She claimed that mechanical engineers and product designers at Theranos misled her by telling her the technology was moving in the right direction. (Taylor Dunn, ABC News). When asked why she did not reveal the technology’s inaccuracies to investors, she claimed the development of Theranos technology was a “trade secret”. (Lisa Kim, Forbes).

The prosecution painted the opposite picture of Holmes. Id. Twenty-nine witnesses, including former investors and employees, took the stand claiming Holmes intentionally misled investors by lying about the technology’s capabilities. (Bobby Allyn, NPR). Testimony revealed Holmes made false statements about the company’s business partnerships and financial outlook. Id. For example, Holmes’ added the Pfizer logo to company reports, which led large investors, like Walgreens, to believe that the blood tests had been validated by the pharmaceutical giant. (Sarah Jackson, Business Insider). Many Theranos engineers and designers speculated as to whether Holmes understood the technology at all. (Erin Woo and Erin Griffith, New York Times).

On January 3, 2022, the jury found Elizabeth Holmes guilty on one count of conspiracy to commit fraud and three counts of wire fraud in connection with a multi-million-dollar scheme to defraud investors. (Sara Ashley O’Brien, CNN Business). The jury acquitted Holmes of the patient-related conspiracy and wire fraud counts for being “one step removed” from patients. (Bobby Allyn, NPR). Another patient-related wire fraud count was dismissed altogether. (The United States Attorney’s Office Northern District of California). Lastly, the jury was unable to reach a unanimous verdict for the three investor fraud-related counts. Id. 

Holmes faces a maximum sentence of twenty years in prison and a fine of $250,000, plus restitution. Id. Her sentencing date is scheduled for September 26, 2022. (Bobby Allyn, NPR).

Now, the question is, how will the Elizabeth Holmes verdict affect startup companies and the future of venture capital?

As far as venture capital and startups go, Theranos was quite different from other startup companies. (Matthew McCooe, Market Watch). Theranos had a wide variety of investors, outside of typical venture capitalists. (Heather Somerville, The Wall Street Journal). In an interview with the SEC in 2017, Holmes stated that she specifically sought out wealthy families with family-controlled businesses as investors because she thought they were more likely to support keeping Theranos as a private company moving forward. Id. As a result of these tactics, most, but not all, Silicon Valley insiders were distanced from Theranos. (Matthew McCooe, Market Watch). Additionally, Theranos was a medical device company operating in a highly regulated biotech space. Id. Because of this, many of Holmes’ investors felt a sense of trust in the company, which made Holmes’ deception even more shocking. Id. Since Theranos can be distinguished from other startups, the Holmes trial isn’t predicted to have any major ramifications on startups and the venture capital industry. Id.  In fact, tech stocks continue to rise, and there are no signs that this trend will end anytime soon. Id. Even biotech stocks specifically related to other blood testing startups, which initially faced difficulty with fundraising, are continuing to do well. (Heather Somerville, The Wall Street Journal).

 For investors, the Theranos scandal presents a lesson about finance and investment. (Stephanie Sy and Ryan Connelly Holmes, PBS New Hour). The trial revealed that investors were swayed by the earlier big-name investors and that a majority of Theranos investors seemed to hardly investigate the company’s credentials at all. (Peter Cohan, Forbes). Investors should always verify information, hire experts to research technology, and, to the extent possible, review a startup’s financials and projections to avoid unsafe investments. (Matthew McCooe, Market Watch).

While this is a landmark case as it is the first time a Silicon Valley CEO has been reprimanded so strictly, the lesson from the Elizabeth Holmes trial is age-old. (Matthew Moisan, Forbes). Honesty is always the best policy.