Why The Elizabeth Holmes Trial is a Such a Big Deal

People who follow business news might remember Elizabeth Holmes. This is because she was once one of the most celebrated entrepreneurs who could be found out there, not least because she was once the single wealthiest self-made female billionaire in the United States. However, Holmes’s company turned out to be nothing more than an illusion, with the result that she and her ex-boyfriend Ramesh Balwani are now on trial for nine counts of wire fraud plus two counts of conspiracy to commit wire fraud. Something that some people found particularly hilarious because Holmes’s father had been a vice president at Enron Corporation, which had an accounting scandal so bad that it took down what had been one of the biggest accounting firms in the entire world as collateral damage.

What Did Elizabeth Holmes Do?

Background-wise, Holmes isn’t that interesting. Since her father was a business executive who went on to work in government agencies while her mother was a congressional committee staffer, it should come as no surprise to learn that she came from a well-off background. Besides that, Holmes went to school at Stanford University where she studied chemical engineering. She never finished her schooling. Instead, she dropped out of school with the intention of using her tuition as seed funding for a healthcare startup.

That startup was what would become Theranos. In short, it was supposed to become capable of performing blood tests with very small amounts of blood, which Holmes claimed to have been motivated by her fear of needles. A number of medical professors straight-up told her that what she wanted to do was impossible. However, Holmes eventually managed to convinced her advisor Channing Robertson to back her idea. This was important because Robertson became the first member of Theranos’s board, thus providing the company with a notable boost of credibility. Moreover, he introduced her to venture capitalists who could offer her the funding that she needed to pursue her dream.

By 2004, Holmes had managed to raise $6 million in funding; by 2010, Holmes had managed to raise more than $92 million in funding. As such, it seems safe to say that there was a lot of interest in what she was promising. For some time, Holmes stayed out of the spotlight. However, she was working the entire time to improve Theranos’s position. One excellent example was her efforts to secure ever more prestigious members for her company’s board, with the result that she managed to build one of the most prestigious boards of the time. Another excellent example was her conscious emulation of Steve Jobs, presumably because that made her seem more serious as an entrepreneur.

In any case, there came a time when Theranos started getting widespread attention. As a result, the company was able to get real contracts with real business partners. Something that sent the company’s value soaring because it seemed as though the startup was in the process of maturing. Eventually, Theranos was valued at $9 billion, which was enough to make Holmes not just the youngest self-made female billionaire in the United States but also the wealthiest self-made female billionaire in the United States.

However, it soon became clear that Theranos was founded upon nothing. The Wall Street Journal released a devastating report on the company’s practices after a months-long investigation. It revealed that Theranos’s device gave bad results and that Theranos had been using machines made by other manufacturers for most of its testing. Holmes made an attempt to prevent the release of the report and then another attempt to blunt the impact of the report. However, it seems safe to say that said attempts weren’t very successful, seeing as how both she and her company started running into serious trouble with the authorities. To name an example, the Centers for Medicare and Medicaid Services straight-up banned her from either owning, operating, or even directing a blood testing service for two years in 2016. To name another example, the state of Arizona sued Theranos for selling blood tests to Arizonans while either concealing or misrepresenting important information about those products, with the result that the company was forced to pay a total of $4.65 million in fees, fines, and refunds. Eventually, both Holmes and Balwani were charged in 2018, which was followed by the formal dissolution of the company soon afterwards.

Originally, Holmes should have already had her trial by this point in time. However, the trial was delayed by her pregnancy as well as the COVID-19 crisis. Thanks to this, Holmes’s trial didn’t start until August 31 of 2021, with the result that a verdict is expected soon. As a lot of people expected, her defense was based on intent. Essentially, Holmes acknowledged that she had made mistakes throughout her time at the head of Theranos. However, she also maintained that she always believed that her company was on the verge of making a breakthrough. Something that is very relevant for the crimes that she has been charged with. On top of this, Holmes also claimed that she had been lied to by her then boyfriend Balwani, who she claimed made her into a pawn through a long-running pattern of abuse. Once again, this was something that she was expected to bring up. In any case, it will be interesting to see what happens next, particularly since Holmes’s trial has potential consequences for startup culture in the United States as a whole.

Why Is Elizabeth Holmes’s Trial Such a Big Deal?

The gist is that Holmes’s trial serves as a reminder to entrepreneurs that they need to tell the truth rather than what they hope will become the truth at some point down the road. This is important because Theranos isn’t as unique as what most people would like it to be. Instead, its misdeeds were exceptional in scale rather than in kind.

“Fake it until you make it” is an extremely common sentiment in the startup culture of Silicon Valley. To an extent, this is unsurprising. After all, entrepreneurs don’t become entrepreneurs unless they are also dream-chasers of considerable conviction. As a result, it is common for them to have a strong belief in their dream, particularly when that strong belief in their dream can get them millions and millions of dollars in funding from venture capitalists. The problem is when that belief starts cutting into other things that businesses are supposed to value, with excellent examples being the honesty and transparency that are supposed to serve as the basis of trust between them and their stakeholders.

However, this issue has been strengthened by precedent. “Fake it until you make it” isn’t a new sentiment. In fact, it can’t even be considered a recent sentiment because it has been around since before some modern entrepreneurs were even born. Microsoft founder Bill Gates won an IBM contract for an operating system even though he didn’t have one. Similarly, Apple founder Steve Jobs gave a demo of the iPhone before it was capable of working properly. Said individuals aren’t criticized for these incidents because they were successful at faking it until they made it. If anything, they tend to be celebrated for their successes. Unfortunately, the case of Theranos should make it clear that many startups fail in this regard because mere belief isn’t enough to overcome cold reality.

The nature of startups combined with the immense rewards awaiting the successful means that a wide range of people are willing to cross a wide range of lines in order to get what they want. Theranos went further than most. This can be seen in the company’s deceptions to keep the dream going. Furthermore, this can be seen in the company’s culture of secrecy, which played an important role in preventing the facts from slipping out for so long. Moreover, Theranos managed to alienate a lot of people because of the nature of its promised product. If it had been making software for a small segment of commercial clients, chances are good that it wouldn’t have aroused the same kind of ire. However, Theranos promised a healthcare product that sees use by a huge number of consumers, meaning that its lies had very clear and very immediate negative consequences for said individuals. Under those circumstances, it was no wonder that it started collapsing so fast when everything started coming out.

In any case, there are very good reasons why such distortions of the truth on the part of startups should be prevented. To name an example, trust is hard-earned but easily lost because it is so foundational to the interactions between businesses and their stakeholders. Most people have a keen understanding that businesses have very strong incentives to present themselves in the best light. After all, the better that businesses look, the better that their sales will be. As a result, it is natural for most people to be cynical about a business’s claims, which in turn, causes them to be cynical when it comes to interacting with such organizations. Something that can hold up a lot of important processes. What enables matters to move forward is the belief that there is a limit to a business’s willingness to lie, meaning that interested parties are still capable of making informed decisions by utilizing the sources of information that can be relied upon.

When that belief is shattered, things can go very wrong very fast. To return to the aforementioned example of the Enron Corporation, the fall of Arthur Andersen LLP was inevitable. A company is supposed to relate its financial circumstances in a fair and accurate manner on its financial statements. However, people aren’t foolish enough to just believe such claims, which is why corporations are supposed to get their financial statements audited by accounting firms to confirm that they are doing everything in accordance with accounting principles. Arthur Andersen LLP didn’t miss Enron Corporation’s accounting shenanigans, which would have been quite bad on its own. Instead, it failed to challenge the latter, meaning that it failed to live up to the responsibilities of its profession. Accounting firms live or die based on their reputation, so the whole thing was very much self-inflicted.

Similarly, it isn’t hard to imagine a scenario in which rampant misrepresentation of the truth has a negative effect on the willingness of people to invest in startups. Something that would be very bad because those startups do play an important role in advancing technology as well as otherwise fulfilling unfulfilled needs. In this as in other things, a wholly unchecked environment in which everyone can do what they want isn’t necessarily the most flourishing environment. Instead, there is very much a need for an overarching authority to make sure that everyone behaves in an honest manner. That is critical for ensuring the basic degree of stability needed for everything to flow smoothly.

Of course, this kind of thing is particularly important when it comes to healthcare products. Simply put, healthcare products can have a huge impact on people’s health, which in turn, influences just about every single aspect of their lives. As such, lying about healthcare products is something that shouldn’t be permitted because it can have such negative consequences for people. Something that can be particularly problematic because the people who are most concerned about healthcare products are often the most desperate, meaning that they are that much more susceptible to those with ill intentions. The outcome of Holmes’s trial remains to be seen. However, it addresses a very serious issue, so it will be interesting to see what kind of effect it will have on startup culture in the United States in the times to come.