Theranos might be one of the most infamous case where the classical “Fake it till you make it” attitude doesn’t work. But what exactly happes when you fake it, but don’t make it?
Of course, lying and exaggerating is sometimes necessary. How else can you persuade investors to give money for a new project? It’s gonna be great someday! But it isn’t just sunshine and rainbows in the Silicon Valley, like with Elizabeth Holmes and her miracle creation Theranos.
You tell possible investors that you have almost finished your dream and are just *this* close to having a complete products, and that you just need that small push in the form of their money. If you “fake it” well enough, they might just give the money to you and you will have a chance to realize you dreams.
This is where the “Fake it till you make it” saying comes from. If you pretend you’re working on something, chances are that with enough time, you’ll actually make it. This practice has become really populat in Silicon Valley. Everybody now know that any aspiring entrepreneurs have to fudge reality at least a bit to actually succeed.
The problem, however, is when it doesn’t work out in the end, or when the entrepreneur engages in lies until they bury their company. When they cross the fine line between breathtaking courage and lies and deceit.
You want to know what isn’t just lies and deceit? This article about passive income!
Has this happened before?
And these stories aren’t even that rare. There was “Just Mayo“, a vegan mayonnaice producer, whose founder, Josh Tetrick, leaned really heavily on the “Fake it” part. He even tasked his employees to go to their local stores and buy his product, so that he could show investors how his sale grew. In 2016, the company got into legal troubles with the federal law, and, in 2020, almost all of it’s products got removed.
Or how about the car company Nikola, which release a video last year about their new hydrogen powered car? The company faces legal issues to this day, being mostly criticized about the fact that their “miracle car” was actually just running on bog-standart fossil engine. It also didn’t even really “drive”, rather, it was rolling down on a hill in front of a camera.
But only a few of the entrepreneurs ever faced any legal actions agains them, and even fewer of them faced any actuall punishment.
That is why it was such a schock, when the court found, Elizabeth Holmes guilty this November, sentencinh her to 11 years in prison.
The perfect plan
Elizabeth wasn’t new to bussiness. All the way back in 2014, her photographs were stapled on headlines of many popular magazines, such as Forbes and Fortune, or the Wall Street Journal. All of them writing about how she became the youngest self-made billionaire at the young age of 30.
So when she founded Theranos, promising that she would revolutionize health care, people beleived her. Like many others before her, she promised a miracle – a device that could run hudreds of tests from a single drop of your blood. Anything from pregnancy to multiple diseases or dietary problems. Theranos had it all! No longer would you have to go to the doctor for a blood test. All you’d need is a single drop.
The company, estimated at the time to be worth nine billion dollars, was based in Silicon Valley. It was playing with the big dogs of tech industry like Apple, Facebook and Microsoft. Around there, investors don’t worry about “going red”, because they will always make it back. Like they did back when Facebook went public in 2012. Even though it started off in a deficit, it only took it 2 years to go into a profit.
White lies and green cash
Theranos knew his recipe for success. Americans spend the most in the world on healthcare per GDP. Some people, even when saving as much as they can, cannot afford even the most basic of medical operations. Theranos was supposed to fix this, having the same options for poor and rich alike. And Holmes was backed by investors ranging from businessman Mark Andreessen to former Secretary of State Henry Kissinger.
Even from the very beggining, signs of potential failure were there, but as it goes with most investors, they can get easily persuaded. Those who invested told friends not to miss the opportunity to make a profit and be part of a new technological revolution. Everyone was banking on the “fake it till you make it” mindset – even though they don’t have anything now, the’ll surely will in the future. Well, as it turns out, sometimes someone fakes it, but just doesn’t make it
Salesmen of the future
The term fake it till you make it was not originally associated with business. It jumped into it from psychology and positive thinking philosophy. It is based on the idea that you can achieve anything if you set yourself up internally to do so. Not confident in a job interview? Put on a show, hold your body the way confident people do, look others in the eye.
This mindset has actually been proven to work. Even if you are a socially anxios introvert, if you act like an extrovert and interact with people more, you will, in time, get more comfortable in the role of an extrovert. There are, of cource, things about ourselves that we might never change, but that’s not a bad thing. But even if something works in psychology, it might not be the best bussiness mindset.
But even if something might not be the best idea, someone will always try it. These “someones” are usually aspiring entreprenerurs. Startups often raise funds for their project gradually. One round of investment is usually not enough to develop and produce. Investors just want to see results, so the entrepreneur simply announces that the product is completely or almost ready – and then “suddenly finds” that something needs to be tweaked and finished.
Ratislav Turek, an entrepreneur from Slovakia, who now lives and work in the Silicon Valley, explained it like this: “The thing is, you can’t sell the present because you have no advantage in it, the product doesn’t exist, it’s just an idea – so you sell the future. For some people that might mean making things up.”
“People know that you can’t make a sale in a day, that you can’t build it on what you have. So they build it on the future. A startup will come along and announce, ‘We’re going to sell you a better product than you have now, like a better car. Just because they don’t have it today doesn’t mean they won’t have it a year from now,” Turek says.
But if you are interested more about the past of investing, why not check out this article about the first ever econimical bubble, the Tulip crisis?
Pyramid of Lies
And so we return to Elizabeth Holmes. As you propably guessed by now, Theranos didn’t work. And not only didn’t it work, even if the stars aligned in Elizabeth’s favor, it still wouldn’t work, because it wasn’t physically possible. Some of its test either required blood directly from a vein, not from a finger. Some other tests it promised (like the pregnancy one), can’t be so simply determined from blood. But even through these illogical mistakes, investors were still fooled by the shiny promises.
The largely non-functional device was then used by real patients at the Walgreens drugstore chain. Eventually, Theranos employees brought in samples from pharmacies to test on other companies’ devices. But they weren’t built to test non-vital blood, and the results were like roulette. Theranos employees protested, but Holmes convinced them that everything would work out. Anyone who couldn’t be convinced was fired, and their silence was enforced by lawyers.
But you can’t silence everyone. Several employees and even some customers spoke up, and Wall Street Journal journalist John Carreyrou exposed the fraud in 2015. Holmes managed to keep the pyramid of lies going for a while, but then the company collapsed. A lawsuit and a trial followed.
Holmes defended herself by saying that she just believed in her project – which no one in Silicon Valley would have blamed her for – and that she was pushed into the fraud by her then-partner, also the CEO of Theranos. The jury didn’t believe her. In November, the court sentenced her to 11 years and three months in prison.
But will Holmes’ conviction change anything about the attitude of start-ups and investors? Both sides are likely to be more cautious, but only a little. Investors, in particular, will have a hard time. When it comes to funding technically complex industries or when major innovations are made, they often have no chance to find out the true state of affairs.
Everytime a young entrepreneur comes with promises, however false they might be, someone will alway take the bait. Elizabeth’s case only shows what happens when the bait attracks more people you could’ve hoped for. As we said before, there are dozens of stories like Theranos, and even more will happen. The question is: Will we be fooled again?
An area where information asymmetry is great is artificial intelligence. As the Washington Post recently reported, there are many companies claiming to have developed algorithms that recognise complex images or infer the meaning of text using machine learning. But in many of these companies, the bulk of the work is ultimately done by humans.
In 2019, London-based MMC Ventures found that 40 percent of European AI startups had not published evidence that they were actually using AI in their products. So fake it till you make it is far from over. It’s just that startup founders already know that they mustn’t overdo it and that, in addition to losing their company (which was paid for by others anyway), they can face jail time for knowingly committing fraud.