Theranos and the Logic of Start-Up Bets – World News

Theranos and the Logic of Start-Up Bets

This article is part of the On Tech newsletter. Here . is a collection of last column,

Elizabeth Holmes, founder of the failed blood testing start-up Theranos nearing the end of a criminal trial To decide whether he intentionally misled investors in his company, as well as patients and doctors.

A central question in the case is the line between fraud and The “Fake It Until You Make It” Ethos In Silicon Valley, Theranos also feels like an extreme consequence of a financial system that often rewards throwing money blindly in search of winning start-up lottery tickets.

Start-up investors take pride in finding promising young companies, but their work is kind of bullshit. All investments are a lot of luck. But the support of young companies is essentially a bet that a small number of wins can make up for a whole lemon. Start-up investors could, in theory, lose 99 times out of 100 all their money, and they’re golden if there’s the next Google.

This has been the start-up venture capital system, until recently, a small corner of finance, but its impact is enormous. It helped bring us iPhones, electric cars, social media, and life-saving drugs. Sometimes there are incentives baked into the system to not look too hard for shoddy finances and ignore bad behavior.

In the Holmes trial, some financial professionals admitted that they wrote checks to Theranos without seeing the financial details or doing much to verify its technology and promises, Despite his doubts about the company’s claims, Theranos collected nearly $1 billion from investors, and when the company To close in 2018.

Theranos had a grand vision of making blood testing faster, cheaper, and more accessible. But its machines run lab tests with a prick of blood didn’t work As the company said they did. Now the question is whether Holmes knew Theranos could not keep the promises he had made, and lied about it. He pleaded not guilty and testified That he did not intend to deceive or deceive anyone.

as my colleague Erin Griffith Reported, Holmes’ lawyers said investors in the company should have known better and had done their due diligence. (Some did.) Prosecutors said they based their decisions on false information.

Maybe some investors who bet on Theranos were unaware or careless. But believing the very best of promises Start-ups are not necessarily ineligible to invest. If the mission is to find a handful of diamonds in a sea of ​​garbage, it may not be worth spending the time and resources to spot potential failures or frauds.

Sometimes I wonder, only half-jokingly, to the people who scour the world for budding tech superstars and nurture them to success, what better thing to do than to throw cash at everyone with a business idea and Leave them alone. that’s not too far softbank strategy, the Japanese conglomerate that is one of the largest start-up investors in the world.

It is not without consequences. Investors and boards of directors often give too much power to start-up founders and don’t oversee. some start-up executives Spend Years Building Formidable Businesses Without his supporters calling him out for it. other pay yourself make a bunch of money or run your business like a frat house,

A part of me understands the cold rationality of being lax towards young companies. maybe adam newman Will Start WeWork, the office rental company he helped start, in a trillion dollar companyy if investors let him do what he wants. If he does, money will rain on everyone. If he doesn’t – and he was not – Investors are on the next potentially winning ticket. (Newman has not been charged with fraud, and WeWork continued without him.)

Holmes said in his test that investors wanted it to offer a bigger picture of the significant change Theranos could bring to the world. She said, in short, that if Theranos had more time it could have become the life-changing company she had imagined.

Whether she pleads guilty or not, Holmes is correct about the nature of the start-up investment. This Is About this believe in a fantasy, Sometimes that thread turns out to be a Tesla, and a lot of people get rich. And sometimes that fantasy vanishes. It is part of the package.

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