Is Start up Culture under threat from fraudsters?

 

Is Start up Culture under threat from fraudsters?

Elizabeth Holmes appeared to be your standard Silicon Valley entrepreneur. Dropped out of Stanford while claiming to have a new breakthrough invention, giving TED Talks, and wearing the iconic Steve Jobs style black turtleneck. As one of the few young female entrepreneurs, Holmes drew attention from the press by leveraging the mentorship and contacts of tech industry titans such as Larry Ellison to secure funds from some of the biggest names in venture capital. Elizabeth employed the typical start-up playbook of buzz, exclusivity, and fear of missing out to entice investors. Theranos could garner so much money because Holmes pitched to technology investors rather than blood testing experts.

 Medical experts would have recognized the assertion that she was claiming to use a drop of capillary blood taken from a finger prick for tests, as a red flag. Such a system contaminates the blood with tissue and cells unlike extraction from a vein, making measurements less accurate. Every test it performs consumes blood, thus the claim that it can perform 200 tests on a single drop of blood would have stretched even the most optimistic of healthcare professional’s imagination.

Theranos had a very impressive board of directors with names such as Henry Kissinger (Former U.S. Secretary of state) and George Shultz (Former U.S. Secretary of Defense), but these board members had a background in government rather than in technology, biology, or science. Earlier this year a jury found Elizabeth Holmes guilty of conspiracy to defraud investors, and of three counts of wire fraud. Holmes might face decades in prison, though a much more lenient sentence is expected.

 Following the Theranos fiasco, people expected changes to be made within venture capital, this has not yet happened. The due diligence period has decreased in recent years which raises concerns over the reliability of due diligence. Many in Silicon Valley have condemned Holmes as a fraud, but not everyone agrees. Tim Draper, a well-known venture capitalist who was an early investment in Baidu, Skype, Tesla, and Bitcoin, and who was also an early investor in Theranos, stated that the trial’s outcome made him “concerned that the spirit of entrepreneurship in America is under risk”. However, it is critical to foster a business culture in which entrepreneurs will take chances and potentially fail. There is a significant distinction between a start-up founder asserting their knowledge and capacity to provide a workable solution and outright lying, claiming to hold working technology that is untested by science.

 Private companies have more leeway on pitching to potential investors. High net worth investors and venture capitalists need to have adequate knowledge and expertise to recognize the risks they are taking and to overcome potential losses from business failures. The lack of tighter disclosure laws for private firms exposes retail investors to greater risk. To shield the investors, there are restrictions on participation of private enterprises. SPACs, which operate around IPO disclosure regulations, and crypto assets, which are unregulated, just 2 grey areas however, open to ordinary investors.

SPACs allow private companies to become public through a merger rather than an IPO. This enables founders to pitch their financial projections and sell the dream rather than depending on actual, certified financial information, as is a requirement for a typical IPO. Retail investors that invest in SPACs wind up accepting substantially bigger risks than usual. To avoid land mines in today’s investment culture, retail investors should exercise caution, especially with high-risk investments and should conduct due diligence in a personal capacity.