Let’s start with the assumption that the enterprise founder’s contract is built almost entirely on trust, especially in the beginning. Of course, due diligence matters in the investment process, but lying about your abilities can undermine the founder-investor relationship – and in extreme cases, to the detriment of the larger global startup market.
After Elizabeth Holmes’ sentencing on Friday for defrauding investors, I’ve seen people argue that she’s only guilty of messing with the wrong people – the rich. The bottom line here is that Holmes’ wealthy investors deserve to lose their money. I’d say what she did helped undermine the entire venture contract and that’s why she’s going to jail.
As TechCrunch’s Amanda Silberling wrote on Friday For the company:
Holmes founded Theranos in 2003 after dropping out of Stanford. She pitched investors and partners to a technology that would revolutionize the health care system — instead of drawing blood intravenously and waiting days for test results, her technology would draw a small sample of blood and immediately perform dozens of tests on it. Soon she was the CEO of a company with a valuation of 10 billion dollars, but it turned out that the technology did not work.
What Holmes did was build a company by convincing investors that he could create something she knew it was a lie.
The tech startup ecosystem exists in part because free-capital investors are willing to risk some of that money for a founder with an idea.
These investors can be fabulously wealthy people. They can be athletes like Stephen Curry or Serena Williams or entertainers like Kevin Hart or Ashton Kutcher. But they can also be larger entities such as venture capital firms, investment funds or pension funds investing on behalf of people who are not fabulously wealthy.