In the latest of continuing bad events for Theranos (a (former?) unicorn health technology startup), 2 shareholders have recently filed a class action lawsuit against the company, accusing Theranos of fraud and negligence. Startups go out of business all the time due to their speculative nature, but rarely do you hear about a startup being involved in class action shareholder lawsuit. Due to their nature, a startup’s equity is normally held by a limited amount of shareholders who typically will go to bat to the end for their entrepreneurs. Investors and VCs also typically have little desire to air their drama so publicly.
What struck us as important from this lawsuit is that it focuses on Theranos’ press releases and coverage and is presented as evidence that Theranos’ CEO, Elizabeth Holmes, deceived shareholders. Cover stories, awards, conference appearances and hype is all presented as evidence of Theranos’ fraudulent shareholder solicitation. Plaintiff’s attorney representing the class action shareholders in this lawsuit claims that “thousands” of Theranos’ shareholders were misled. This is despite the fact that the lead plaintiff is being presented as a “sophisticated investor.”
As well put by Erin Griffith of Fortune’s Term Sheet covering this lawsuit in more details here, “Startups have long had a “fake it till you make it” culture, in part, out of necessity. When you are inventing the future—something new that didn’t exist before—you have to sell people on your vision, over and over. And you don’t know if it’s going to work. If it doesn’t, those cover stories could come back to haunt you.”
Theranos and this lawsuit should serve as a very important reminder for entrepreneurs that “fake it till you make it” without substance behind the claims and hype publicity can lead to outright fraud, and that has major negative consequences. This case could shift Silicon Valley to turn down the hype machine and focus on delivering real results and striving for actual profitability instead of a pie in the sky.