Currently Elizabeth Holmes, the disgraced founder of Theranos, is on trial for allegedly defrauding investors. I’m fascinated by the trial because most startups exaggerate and embellish their capabilities in order to attract investors. I’ve definitely embellished myself about a few of my startups. Where’s the line that should not be crossed?
This got me also thinking about another recent disgraced celebrity entrepreneur, Adam Neumann, co-founder of WeWork (or the We Company) who had been fired by its board. There are no current fraud charges against Neumann but some still think he also crossed “the” line. Is there a way to distinguish these scam celebrity entrepreneurs from the ones that do end up changing the world? What is the lesson for other entrepreneurs?
Much of Holmes’ defense in her trial is claiming that she was only doing what other entrepreneurs from the Silicon Valley have always done, “faking it until you make it”. There are many stories of companies falsely touting aspirational capabilities before they had become reality. One example is the history of Oracle. Founder Larry Ellison, who was an investor in Theranos, touted his relational database to be more stable than it actually was at the time. In fact, he named his version 1 as version 2 to support his embellishments.
To paraphrase the trial defense team, Holmes believed in her vision of offering hundreds of blood test results from a few drops of blood. It was just a matter of time and money before Theranos would accomplish that vision, so she believed. Therefore, Holmes was just selling her dream to institutional investors. The problem is that she knowingly allowed unproven technology to be sold as working technology directly to patients. Many times the test results dangerously mis-diagnosed the patients’ health. She also falsified information when raising money, claiming that Theranos had secured contracts with the US military for field testing. She even lied about filing Theranos’ technology with the FDA in front of prospective investors.
Neumann has not been charged with fraud. However, some people believe that he was passively misleading investors about the financial state of the company as well as his many personal conflict of interest dealings while running the company. This information came out when WeWork filed to go public. More likely, it seems, he just didn’t have a good grip on proper corporate governance and was much more focused on presenting himself as a once-in-a-lifetime visionary whose quest was to “live forever, be king of the world and be the first trillionaire“. He was not qualified to be in charge of a large, fast-growing company such as WeWorks.
Neumann fooled investors, mainly the head of Softbank, Masayoshi Son, with his charisma and unwavering self-belief. Holmes, on the other hand, fooled investors with falsified information and put consumers in harms way. The line that entrepreneurs cannot cross is giving false data about their key metrics to investors, such as claiming to have secured contracts or affirming that filings for regulatory compliance were in process, when they were not.
So are there any discernible ways to distinguish a scammer entrepreneur from a real world change agent? I tried to answer this question by comparing Holmes and Neumann’s personal traits with that of Elon Musk, Jeff Bezos, Bill Gates and Steve Jobs. Of course this was done NOT by any scientific means but just by applying my arms-length qualitative observations.
All of them, including Holmes and Neumann, were extremely ambitious, captivating story tellers with magnetic personalities. Those qualities are prerequisites to gaining people’s trust and raising a lot of money from sophisticated investors. In addition, all of them exhibited “bullying” tendencies in working with others. They were/are so driven that they have little tolerance of people whom they consider inadequate. They also all eventually developed some form of a “cult of a personality” work environment. This is to be expected as these celebrity entrepreneurs become bigger than life heroes of the media over time.
Where I see a clear differences between someone like Holmes and Neumann and the comparison set of entrepreneurs is in technical expertise. Musk (physics), Bezos (computer), Gates (programming), and Jobs (computer/hardware) were extremely technical when starting their companies and knew how to apply science to their solutions. Holmes did not have any formal training in medicine and Neumann was working in the office leasing industry, talking about connecting people. He didn’t have a social-science background either.
Musk, Bezo, Jobs and Gates were/are all extremely detailed oriented. Jobs was difficult to deal with because of his obsession to every detail of his products. Musk still walks the floor in his production facilities for both SpaceX and Telsa getting into minute details with his teams. Holmes and Neumann were more about peddling a vision to the press and public. They both shied away from the day-to-day details of their business. Holmes, while knowing that her product was repeatedly failing in tests, did not appear to have spent much time in the company labs trying to help solve the problems.
Another big difference that I noticed is the motivation to make money. The four successful entrepreneurs were primarily motivated by their visions and money came as a result. None of them engaged in lavish lifestyles until later in life after their companies were well established. In particular, Neumann was immediately seduced by an extravagant lifestyles after raising substantial funds, long before his company reached financial stability. Holmes had private planes and a team of body guards follow her around early in her company’s history when it was bleeding money.
In summary, it is not easy to distinguish scammers from the world changers on the surface. They both are capable of selling an extraordinary story. However, some distinctions seem to serve as possible tale tells. First and foremost is the person’s technical brilliance. Is the entrepreneur’s brilliance driven by technical knowledge? Secondly, how detailed is the person in understanding his/her business? If they divert away from detailed discussions, it’s likely a warning sign. Lastly, what is the person’s motivation? If the motivation seems too focused on quickly getting rich and famous and not on solving a world problem, that is likely another warning sign.
The lesson for aspiring entrepreneurs is to learn how to tell your story that is appealing to investors, but not to get so swept up in “selling” that you deviate into blatant lies, especially when it comes to your key metrics. Also, evaluate your motivations as an entrepreneur. Are you really trying to change something in the world that is important to you, or just trying to make a fast buck? Curiosity, challenge and a desire to prove a new concept are good motivating factors.
If you are interested in the ongoing trial of Elizabeth Holmes, I recommend that you follow the podcast, Bad Blood, the Final Chapter by John Carreyrou, the Wall Street journalist who broke the story on Theranos’ lies.
Also, I’d love to hear your feedback on spotting traits of potential scammer entrepreneurs, or on any other matter. I hope to get inspirations for future blogs by interacting with the readers. If you enjoyed this post, please consider subscribing.