The long-awaited criminal complaint has now arrived, and Elizabeth Holmes, the founder of medical-tech startup Theranos, has been indicted on two counts of conspiracy to commit wire fraud and nine counts of wire fraud. The charges could send her to prison for as long as 20 years; given the sums of money involved, and the utter lack of remorse that she has shown as her company has imploded in scandal, there’s every reason to expect that if she’s found guilty, her sentence will be at the upper end of that range.
None of this is problematic in the slightest. If you’ve read John Carreyrou’s book about Theranos, you will almost certainly think that Holmes, along with her co-defendant Sunny Balwani, very much deserves anything that’s coming to them. After all, she didn’t just waste investors’ money. Hers was a health-care company, and her fraud—claiming that her finger-prick blood-testing technology worked when it largely didn’t, leading to tens of thousands of voided test results—endangered people’s lives.
But while it’s good that Holmes and Balwani are being prosecuted, there’s another message being sent here by the U.S. Attorney’s Office in the northern district of California. Which is, implicitly: If you’re a startup and you’re not in the highly regulated health-care industry, then you probably can continue to embrace Silicon Valley’s fake-it-till-you-make-it ethos without fear of criminal prosecution.
Look, for instance, at the long list of startup scandals enumerated by Erin Griffith in her December 2016 Fortune article about “the ugly unethical underside of Silicon Valley.” Theranos was there, of course, but so were, among many others, Hampton Creek; Zenefits; Lending Club; Skully; ScoreBig; Rothenberg Ventures; Faraday Future; Hyperloop One; and, of course, Uber. Most of those companies ended up embroiled in nasty civil lawsuits, but none of them, except for Theranos, ended up with criminal charges.
Holmes and Balwani are being charged with wire fraud, much of which boils down to “investors wired you money from out of state when they bought shares from you, and you lied to them when you sold them those shares, and that’s wire fraud.”
There’s a reason that prosecutors love to charge individuals with wire fraud: It’s one of the easiest crimes to prove. You show the lie, you show the wire, and boom—that’s all the jury needs. But the fact is that if a U.S. Attorney’s office spent two and a half years examining just about any Silicon Valley startup, it would be able to find lies, and wires, and therefore wire fraud. Silicon Valley, as Griffith showed in her article, is in many ways built on lies, including lies from such luminaries as Larry Ellison (a Holmes mentor) and Steve Jobs (a Holmes idol). Look at the early history of just about any boldface Silicon Valley name, from Bill Gates to Mark Zuckerberg, and you’ll find scandals, lies, and the kind of behavior that no one likes to admit to in polite company. Silicon Valley’s closets are positively bursting with skeletons, and almost everybody in the ecosystem knows it.
What’s more, they’re all OK with it. If founders lie and make it, then everybody gets rich and all is forgiven. If founders lie and fail, then, well, most startups fail, and at least they tried everything within their power to succeed, including breaking the law. That’s why venture capitalist and Holmes mentor Tim Draper will defend Holmes to this day: She exhibited exactly the kind of drive and ambition that he wants to see in all founders.
As companies stay private longer and raise hundreds of millions of dollars in highly opaque private markets, the incentives for founders to lie about their finances become bigger every year. Meanwhile, the disincentives to lying remain negligible. If you fail, in Silicon Valley, it’s never because you lied to investors, it’s just because you failed to achieve the fabled product-market fit.
The only way to disincentivize founders from lying to investors is to throw one or two of them in jail for doing so. And Elizabeth Holmes doesn’t count. The Theranos indictment is likely to have zero deterrent effect, because it’s clear that she’s not really being prosecuted because she lied to investors. That’s just the easy, prosecutorial low-hanging fruit. The real reason for the prosecution is that her activities were incredibly reckless and dangerous on a human level for thousands of patients’ health.
Or, to put it another way: So long as you’re not killing anybody, you probably won’t face criminal charges. Even if what you’re doing is just as much wire fraud as what Holmes and Balwani did. The message, then, is that Silicon Valley can carry on lying with impunity. And that’s not a healthy message to send.