‘Fake It Till You Make It’ Will Live On After Theranos

(Bloomberg Opinion) -- When Elizabeth Holmes went to court last year to face 11 charges of defrauding investors and patients through her disgraced biotech company Theranos, it looked like Silicon Valley itself was on trial. If the court came down hard on her, it could end the “fake it till you make it” mantra that seeded so many successful tech firms.

Her $9 billion valuation was achieved by pitching a product that was alluring in theory but didn’t work in practice (and quite possibly never would). Plenty of other technology companies have done this. As one venture capitalist put it to me when asked about another egregious startup founder, it’s the fine art of “selling the future.”     

But now Holmes has been found guilty on four of those 11 charges and faces years of prison time. Should we expect a chilling effect on the startups of tomorrow? Police action has had that effect in the past. For instance, the powerful hacktivist collective Anonymous quickly collapsed after several of its top figureheads were arrested and hauled off to prison.

And Theranos isn’t alone as a recent, cautionary example for the industry. Just weeks ago, electric truck maker Nikola Corp. agreed to pay $125 million to the Securities and Exchange Commission, to settle charges it defrauded investors. It essentially faked the success of certain products and technological milestones, according to an official SEC statement.

Yet with more money than ever sloshing around in technology, Silicon Valley’s most notorious business strategy of faking progress will probably continue unabated. The reason: supply and demand.

Globally, venture capital firms doubled the amount of money they invested in technology startups in 2021, to $675 billion, according to data from Dealroom.co, an Amsterdam-based market intelligence firm that tracks the tech industry. Spurred on by the rise of powerful funds like Tiger Global Management LLC and SoftBank Group Corp., venture investors are too busy making sure they catch the next big thing before their competitors to worry about whether they’re being lied to.    

“There’s been no chilling effect,” says Amir Mizroch, an independent advisor to technology startups in Europe and Israel. Even in health tech, “investors are pouring money into B2B, software-as-a-service companies.”

The burgeoning field of artificial intelligence is especially primed for fakery: The technology sounds magical and is difficult to understand and corroborate. For instance, many companies who claim to have developed algorithms that can recognize complicated images or derive meaning from text with machine learning don’t always mention that humans are often doing much of that work behind the scenes.

The practice of hiding human input in AI systems is an open secret in the machine learning and AI community and there is even some data to illustrate the phenomenon: A 2019 analysis of tech startups in Europe by London-based MMC Ventures found that 40% of purported AI startups showed no evidence of actually using artificial intelligence in their products.

Here’s what will change, though. News publications that breathlessly covered innovations from technology startups as early successes, without properly vetting them, are already casting a more cautious eye on such firms, spurred in part by the broader backlash against Big Tech. 

Life has also become more difficult for biotech and diagnostics companies. People are “much more dubious of your data,” one healthcare and diagnostics firm told Fortune magazine last month. Female technology founders may also find it even harder to raise money as a result of Holmes’ legacy, though there’s little public evidence of that yet. And any tech company that appoints grizzled politicos and dignitaries to their board will rightly face greater scrutiny than before.

But the broader practice of selling the future is unlikely to change. The story of Elizabeth Holmes is captivating, but it is not representative of most startups that are continuing to capitalize on astonishing new levels of funding, however truthful they choose to be.

More From This Writer and Others at Bloomberg Opinion:

• Much “ Artificial Intelligence” Is Still People Behind a Screen: Parmy Olson

• The Holmes Verdict Sends a Mixed Message to Investors: Stephen Carter

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Parmy Olson is a Bloomberg Opinion columnist covering technology. She previously reported for the Wall Street Journal and Forbes and is the author of "We Are Anonymous."

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