Elizabeth Holmes and The Mythology of Silicon Valley

Boris Feldman and Sarah Solum are partners at Freshfields Bruckhaus Deringer LLP. This post is based on their Freshfields memorandum.

The Theranos criminal trial is underway. Our task is not to predict its outcome or to pass judgment on Elizabeth Holmes. That is for the jury. Rather, we write to challenge what is fast becoming conventional wisdom: that Theranos is a reflection of systemic flaws in Silicon Valley and the tech industry. We dissent.

Here are a few examples. From the BBC: “in Silicon Valley, many believe that Theranos—far from being an aberration—speaks of systemic problems with start-up culture.” From the Washington Post: “the trial is …an opportunity for the Silicon Valley ethos to be held in front of a public mirror.”

There are recurrent themes in much of the media coverage:

  • Theranos was a demonstration of the Valley’s “fake it ‘til you make it” culture
  • This is what happens with tech companies because of their stealth modes and black-box technology
  • Holmes typifies “Brilliant Founder Syndrome”
  • NDAs cover up fraud

In our view, the reality is that Theranos, and its apparent misdeeds, are not emblematic of Silicon Valley.  A few points for your consideration.

1. The most egregious investment frauds of the modern era have come outside the Tech industry and Silicon Valley.

Take a stroll down the Memory Lane of the epic frauds of this century. Enron: the energy industry. Worldcom: telco utility. These were all as far from the typical Silicon Valley startup as one can imagine. Moreover, unlike Theranos, the losers there were thousands of pension funds and individual investors—not a handful of angel investors who succumbed to the “one drop” spell.

Or revisit the collapse of the financial markets in 2008, which tanked the global economy. Were these startups in Mountain View or their backers on Sand Hill Road? Nay.

Let us not forget the many astonishing trading scams, such as that which destroyed Barings Bank. Hardly the fault of California engineers and entrepreneurs.

In the last 20 years, the most important structural reactions to corporate fraud were the Sarbanes-Oxley and Dodd-Frank laws. Neither was triggered by failures in Silicon Valley.

This is not to suggest that the history of Silicon Valley is unblemished. The Dot Com Bust caused massive financial losses—although one might lay at least part of the blame on an exuberant market betting on the future of this new Inter-Net thing, rather than dissembling companies. (And, by the way, many of the Dot Com companies that died (such as grocery and pet food delivery companies) were ahead of their time, not based on skimpy science.) A dark chapter in the Valley’s story was the wave of options-backdating incidents, which resulted in serious regulatory sanctions. Yet even there, the root problem was greed and laxity, not a fundamental failure in the underlying businesses. Indeed, many of the companies caught up in the backdating scandal went on to have highly successful businesses.

2. A key Theranos distinction was the Board.

Much of the Holmes coverage has focused on the composition of Theranos’ Board of Directors. The typical phrase is “star-studded.” Holmes staffed the Board with retired generals, politicians, Cabinet officers—all with illustrious backgrounds that served to lend credibility to the young company. The articles often suggest that this is a recurrent problem in the Silicon Valley world.

Not so. Several critical features distinguish the Theranos Board from those of most tech startups. First, and perhaps most important: startup boards typically are chock full of people representing institutions with lots of skin in the game. They are the principal investors. Although Tech-haters like to ridicule the “cozy” board relationships among Venture Capitalists, the truth is that VC board members are often among the most valuable providers of meaningful oversight, especially to a young, exuberant Founder. It is their funds’ money that they’ve entrusted to the company. They will be held accountable within their own organizations if the startup turns out to be an illusion. Contrast that to the Theranos Board, which had preeminent individuals who appear to have invested modest amounts in the stock, but certainly were not answerable to significant funders.

Second, the typical SV Board is constructed with an eye to domain expertise—current or former executives who know the relevant industry and customer base and don’t just have lots of stars on their epaulettes. As startups mature, the boards also often expand to include talented CEOs and CFOs who can act as a mentor to the Founder, but more importantly can serve as a reality check to keep dreams tethered to reality.

Good boards, moreover, make a point of building relationships with key players at the company besides just the CEO. This lets them probe what they are hearing from the Founder, rather than simply relying on empty statements.

Measured by these elements, the atypical composition of the Theranos Board was far from emblematic of a systemic problem with the Valley.

3. Theranos relied on an atypical financing approach.

A second distinction between Theranos and most Valley companies is the source of funding. Theranos relied heavily (though not exclusively) on family offices, sometimes those of families that had made a lot of money generations before. The funding differed from the Venture Capital base of most Tech startups. One of the advantages of building on VC investment is the expertise of the funds in subjecting “the next great idea” to rigorous scientific, engineering, and marketing scrutiny. As you scroll down the Theranos cap table, you will find surprisingly few investors with the knowledge or expertise to evaluate whether the “one drop” concept was real or a pipette dream.

4. Stealth mode can only get you so far.

Many of the critiques lash out at the “stealth mode” in which startups often cloak their work and attribute the “black box” phenomenon to the Valley more generally. Stealth mode, however, is usually a phenomenon of relatively brief duration. Until startups have their intellectual property protections in place, they are reluctant to announce their breakthroughs to potential competitors. Typically, stealth mode is self-limiting in terms of a company’s valuation.

The “black box” issue is more like a red herring. Surprisingly few Silicon Valley startups can succeed by claiming that they have managed to convert dross into gold without proving that it actually works. If you invent a radical new form of data storage technology, you have to prove that it actually works. Investors (and potential customers) tear it apart and then put it back together. Refusing to let people look inside the box appears to have been a hallmark of what happened at Theranos. Shame on those who took promoters’ word for it without wanting to see how it did that magic with just one drop.

The dig that “this is what you get with all the NDAs in Silicon Valley” is vapid. Virtually every tech company imposes tight Non-Disclosure Agreements on their employees. How else can they protect their trade secrets? This is especially true in Silicon Valley. A bedrock principle of California law is that restraints on employee mobility are void. Your employees can quit today and start work tomorrow at your competitor across the street. Don’t you need an NDA to make sure that they don’t take the plans for your next-gen breakthrough with them?

5. You can’t blame Theranos on Steve Jobs.

Perhaps the most common refrain in the “SV is bad’ hymnal is that we should blame Theranos on the “genius founder” syndrome. The reasoning appears to be that idol worship of charismatic entrepreneurs is what led to the Theranos situation.

Even if the jury ultimately concludes that Holmes was a faker, that should not lead to the dismissal of other disruptive figures. One of the strengths of the Valley—indeed, of other tech sectors as well, whether Seattle, Boston, or abroad—is that the rare visionary can excel without spending decades climbing up the org chart. Disrupters like Jobs have repeatedly spawned discontinuous change. Yes, they may be flamboyant and larger than life, but many have been able to drive unprecedented growth in part because they looked at things differently than a corporate lifer. At the same time, the tech landscape is littered with other once-acclaimed superstars whose creations ultimately flamed out. Their visions did not come to fruition, but rarely because of dishonesty. Shunning the next Jobs because of Holmes would turn potentially disruptive ventures into the next Kodak: stable but ultimately obsolete.

6. What lessons might we draw?

We are lawyers, not investors or b-school professors, so take our concluding observations with a shaker of salt. Here are a few lessons that we take from Theranos.

  • Focus on the directors: their track record, their role in the company, their stake in the enterprise. If you’re looking for celebrities, go to Hollywood.
  • Distinguish between “early stealth mode” and a lack of scientific scrutiny. There’s a reason why medical journals are peer-reviewed. Before you put money into a company, make sure that the vision has been vetted by outsiders whom you can trust.
  • Be skeptical when the media falls in love with a Founder. Double-down on your skepticism. Ask to see the beef.
  • Don’t depend on a single-customer’s validation unless you have confidence that it conducted the requisite diligence and is not just trying to get a jump on its rivals. And try to see something from that customer itself, not just the company’s gloss on what the customer thinks.
  • In the startup world, perfection is not the test. Lots of great software products began life kind of buggy (e.g., Microsoft Anything 1.0). But flaws that might be tolerable in a program or a piece of hardware present vastly different implications when you’re dealing with health and lives.


Obviously, as lawyers who have made our entire careers in Silicon Valley, we are not objective observers. But let those who cast the stones at Theranos take care not to taint an entire industry and culture based on one company.

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One Comment

  1. Marc Goldstein
    Posted Tuesday, November 16, 2021 at 7:29 pm | Permalink

    Certainly no one would argue that Silicon Valley has a monopoly on corporate fraud, atypical financing or directors chosen for the wrong reasons. But in one sense Theranos is, unfortunately, perfectly emblematic of Silicon Valley culture. Investors have testified that they were scared that if they asked too many questions, they would be seen as insufficiently founder friendly and would not be invited to invest. As long as companies seek to, and are able to, pick and choose their shareholders based on investors’ FOMO-induced willingness to keep quiet, the lessons offered in this article will not prevent another Theranos. Incidentally, the extreme and absurd lionization of founders, even before they have demonstrated that they have created anything of value, is hardly limited to the media: it is absolutely enabled and encouraged by the SV “ecosystem” of VCs, law firms and advisors, through mechanisms like dual-class capital structures that insulate public company executives from any real oversight. After all, if the CEO can single-handedly remove any director at will, in what meaningful sense are any of those directors independent? Defenders of these mechanisms cite the supposed need to protect a founder’s unique “vision” from the short-termism of the market, but the persistence of such defenses at companies with 12- and 13-figure market caps demonstrates that they endure long past the point where they can be justified as offering protection to an otherwise-vulnerable company.