In federal court, lawyers for the US government have begun pressing fraud charges against Elizabeth Holmes, founder of Theranos, the failed blood-test startup that for many symbolizes the danger of funding bold dreams without proper due diligence and board oversight.
Opening arguments in the Holmes trial, which is expected to last at least a few months, suggest that much of the evidence will center on the risk investors agreed to take and whether Holmes fooled them into enabling a scandal of historic significance. Theranos dissolved in 2018, the same year Holmes and her former business and romantic partner Sunny Balwani were indicted.
Prosecutors say Holmes hoodwinked investors into funding her failing technology with an estimated $800 million-plus. Her lawyer responded in court that she didn’t set out to deceive people—rather that she mistakenly believed the testing device would succeed, and that her “failure is not a crime.”
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Whether Holmes is guilty will be up to a jury of five women and seven men. Part of their deliberations will be about how transparent Holmes was in financial projections and on the struggles of its signature device, Edison. Balwani will be tried separately later on.
The list of potential witnesses in the Holmes case numbers more than 200 people, including famous Theranos backers like Henry Kissinger, Rupert Murdoch and James Mattis.
While Holmes is the current target of the prosecution, the trial figures to shine a light on the people who piled onto the Theranos cap table and cheered on Holmes. Their vantage points and their ability to understand the risks of their bets will be picked apart.
So where are those investors now? And what strategy or funding style have they deployed in the aftermath of the Theranos scandal?
PitchBook data shows that just a few of the VC firms backing Theranos have gone on to fund medtech startups in the years since late 2015, when the company began to implode. And only healthcare-focused hedge fund Partner Fund Management and Draper Associates subsequently stepped up their bets on healthcare devices.
Some Theranos backers, like Adit Ventures and Draper Fisher Jurvetson (which later rebranded as Threshold Ventures), found continued success through a series of winning tech investments—but all of those were spread across non-medical categories. Other firms are no longer in business for various reasons, such as early investors Jupiter Partners, ATA Ventures and Tako Ventures.
The venture industry’s biggest medtech-focused firms never became Theranos investors. One team that took a pass at the early stage was MedVenture Associates, a firm specializing in medtech deals. One day in July 2004, according to “Bad Blood” by Wall Street Journal reporter John Carreyrou, Holmes got tense and abruptly ended a pitch meeting when the firm’s partners asked how her technology differed from another product already on the market.
The Theranos debacle was a comeuppance for some of Silicon Valley’s biggest investors, among them Series A investor Draper Fisher Jurvetson. Many of Holmes’ backers came from outside the healthcare industry mainstream, often with diverse portfolios that had few healthcare or life-sciences investments.
That’s not to knock the investing acumen of the startup’s backers. Some have proved to be among Silicon Valley’s more accomplished investors, both before funding Theranos and in the years after the scope of the company’s problems came to light.
There were, however, no venture backers with expertise in medical devices, a highly regulated industry that is accustomed to rigorous scrutiny by peer groups and investors alike. (One firm that has had at least some healthcare experience was Blue Venture Fund. A corporate venture capital group, Blue Venture is jointly backed by BlueCross BlueShield companies and has invested in startups specializing in diagnostic imaging and health-focused software platforms.)
Perhaps it’s unsurprising that so many VC generalists, with thin resumes in the medtech arena, stayed away from that field after getting burned in the Theranos affair. A notable twist since then is that blood-testing technology once again has found more believers, this time with a new crop of future-minded investors.
Silicon Valley is well known for its faith in new technology’s power to solve old problems. But in the Theranos trial, the failings of that optimism are about to go on display for all to see. And a new generation of investors would do well to pay very close attention to what happens in that courtroom.
Featured image by Ethan Swope/Getty Images
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