The Dropout

I was watching this series [on Disney] about Theranos. It does provide an accurate means to compare to companies in the AWE startup scene.

The question is: what is fraud and what is just excessive optimism? That question is hard to answer. And it is hard also because in the nature of being a company depending on external investors, you may benefit from painting a rosy vs a grim picture. And if you don’t exploit this, you are likely to not get many investors.

Elisabeth Holmes was convicted. So that gives us concrete information about where the line goes for what a court of law would consider illegal.

I will quote chatgpt here:

Me: tell me about the verdict in the holmes theranos trial

Chat: Elizabeth Holmes, the founder of Theranos, was found guilty of investor fraud. The jury convicted her on one count of conspiracy and three counts of wire fraud related to defrauding investors. However, she was acquitted on charges related to defrauding patients and three additional wire fraud counts. The trial revealed that Holmes made false representations about Theranos’s blood testing technology and its financial prospects to investors. Despite claims of revolutionary technology capable of performing a wide range of tests with just a few drops of blood, it was found that the technology had significant accuracy and reliability issues and relied on conventional machines for many of its tests.

Holmes was initially charged in June 2018, and in November 2022, she was sentenced to 135 months (11 years, 3 months) in federal prison for her crimes. The sentence also includes three years of supervision following her release from prison. The case against Holmes and Theranos has been a significant subject of public interest, highlighting issues of deception and integrity in the tech and startup sectors oai_citation:1, Northern District of California | Theranos Founder Elizabeth Holmes Found Guilty Of Investor Fraud | United States Department of Justice oai_citation:2, Northern District of California | U.S. v. Elizabeth Holmes, et al. oai_citation:3,Theranos founder Elizabeth Holmes is found guilty of defrauding investors.

Me: Explain the conspiracy conviction

Chat: The conspiracy conviction against Elizabeth Holmes relates to her involvement in a scheme to defraud investors through her company, Theranos. In legal terms, a conspiracy charge implies that there was an agreement between two or more persons to commit a crime, and at least one of those involved took an overt action towards that end.

In Holmes’ case, the conspiracy charge was focused on defrauding investors. The prosecution argued and presented evidence that Holmes, along with others at Theranos, knowingly engaged in a scheme to mislead investors about the capabilities and performance of Theranos’ blood-testing technology. This involved making false claims about the technology’s abilities, its accuracy, and its validation by the medical and pharmaceutical communities.

The evidence showed that Holmes and her associates used a variety of methods, including presentations, marketing materials, and financial statements, to make these misrepresentations to investors. The goal was to secure investment and boost the company’s valuation based on claims that were not true.

Holmes’ conviction for conspiracy to commit wire fraud indicates that the jury found enough evidence to conclude that she was part of a deliberate plan to deceive investors, and that she took active steps as part of this plan. This is a serious federal crime that underscores the importance of truthful and transparent communications from companies to their investors, especially in the healthcare and technology sectors, where the implications of misleading information can be particularly significant oai_citation:1, Northern District of California | Theranos Founder Elizabeth Holmes Found Guilty Of Investor Fraud | United States Department of Justice oai_citation:2, Northern District of California | U.S. v. Elizabeth Holmes, et al. oai_citation:3,Theranos founder Elizabeth Holmes is found guilty of defrauding investors.

Me: Tell me about the wire fraud

Chat: Wire fraud is a federal crime that involves using interstate communications (like phone calls, emails, or the internet) to carry out a scheme to defraud someone of money or property. In the case of Elizabeth Holmes and Theranos, she was convicted of wire fraud for her role in using electronic communications to deceive investors about the capabilities of Theranos’ blood-testing technology.

Specifically, Holmes was found guilty of three counts of wire fraud against individual investors, involving wire transfers totaling more than $140 million. This means that the jury concluded Holmes used electronic communications to make false representations to these investors, which influenced them to invest substantial sums in Theranos.

The nature of wire fraud means that the deceit doesn’t have to be successful for a charge to be valid; the act of attempting to defraud through electronic communications is enough. In Holmes’ case, the prosecution demonstrated that she used emails, financial statements, and other electronic means to mislead investors about the true state of Theranos’ technology and financial health.

Holmes’ conviction on these counts underscores the severity with which the legal system treats fraudulent business practices, especially when they involve deceiving investors and misrepresenting the truth in order to obtain financial gain oai_citation:1, Northern District of California | Theranos Founder Elizabeth Holmes Found Guilty Of Investor Fraud | United States Department of Justice oai_citation:2, Northern District of California | U.S. v. Elizabeth Holmes, et al. oai_citation:3,Theranos founder Elizabeth Holmes is found guilty of defrauding investors.

Law is so weird; so this would not be illegal if the communications was within a state or abroad?

I have mentioned “WindTree” of maybe two decades ago: Showing photos of pre-existing, simple, standard, spinning rooftop ventilators, claiming they were the answer to wind energy, rationalized by only citing the huge potential power in all the wind in the world, selling “territories” giving the buyer the future right to sell their future supposed product in a given geographic area. They couldn’t sell you a turbine, but they could sell you a territory for a mythical turbine. Someone got in trouble, don’t remember the details.

But for “real wind people”, the Magenn MARS system was nothing but an easy-to-identify ripoff. Only an “idiot” would come up with it, and only another “idiot” would invest in it (I remember a figure of ~$7 million?) , but was it a fraud, or just a bunch of “idiots”? Turns out that, as intelligent as we humans can be, we can also be really dumb. Especially when it comes to things that are invisible, like wind!

And not only for “real wind people”, but for anyone with common sense, the hollow tubular blimp of Altaeros also looked like a non-starter, due to the hollow central area requiring more fabric material, thereby costing more, while holding less lifting gas, than a standard off-the-shelf advertising blimp, not to mention being weaker and more flimsy.

Their entire effort could have consisted of merely hanging an off-the shelf Skystream turbine, which is what they did use, from a standard advertising blimp, which could have been accomplished for about $10,000. But no, they used the fact of having attended MIT to raise, what was it, millions of dollars? Probably used to pay a bunch of high salaries for years on end for a project that could have been accomplished by a single dedicated person from a garage?

It was the “MIT” pedigree that bugged me. That assumes they had highly developed and sophisticated analytical skills, and that some careful comparative design choices must have been made, but no, with all the “education” they were just like a teenage kid, or any uneducated crackpot tinkerer, just going with their gut instinct. I’m sure the hollow tube was supposed to focus the wind, enhancing output, which it may have, to some limited extent, but was that worth losing most of your lifting volume? And was it worth compromising the integrity of what could have been a standard blimp that could survive at least moderately strong winds, to end up with a design so frail and flimsy that anyone could plainly see it would not do well when the wind got strong?

So was it a fraud? I mean, if someone from MIT says something should work, who is an investor with no engineering background, to question it? Aren’t they relying on the MIT peoples’ say-so, just as investors were relying on Theranos to tell the truth about their (lack of) a successful product?

But in the case of Theranos, one could point to definite workarounds, such as using standard, off-the-shelf testing equipment and claiming it as their own results. I guess that would be like Altaeros installing standard wind turbines on towers, or even just using those dreaded diesel generators, and claiming the power came from their blimp turbine. But the Theranos thing involved things you could see, even if you needed a microscope.

In the case of Altaeros, as with Magenn, “Wind is invisible, so people can imagine it doing whatever they want!” :slight_smile:

They had some episodes on the series like when they were doing a demo, they played back results from the week before. This would be clear fraud. Though Im not sure if the court reacted to that specifically.

Genuine question: Do you know of VC-funded hardware startups that don’t engage in excessive optimism? If you’re excessively optimistic you often intentionally haven’t done your homework I think because you were afraid of what you might find, which I think is in some way fraudulent if you use this deliberate ignorance in your pitch to investors, or other stakeholders like employees. It’s just that this is much more difficult to prove as you can’t look inside people’s heads like you can look at test results and machines that don’t exist.

I think perhaps a large part of the bad success rate of VC funding is due to this and then also the investor not doing their due diligence, or maybe it’s because no one can look into the future and no one has infinite time to look up every answer.

The documentary sounds interesting.

Knowledge is infinitely deep. You never know until something is proven. A startup needs to gather information but getting that is expensive and time consuming. So clearly you cant have it before you ask for money. This is the dilemma I guess.

Example: Does any AWE company know the exact drag and noise emission of the tether? That information is crucial to have in order to make completely accurate power curve estimates. Or to determine if noise is a showstopper. But how to aquire that data? Litterature and wind tunnels can only give hints. To know, you need the finished product running. And, you also need to add tech to reduce drag and noise that has not been invented yet but will be before launch.

But; if you had clear indications that eg noise would be unacceptable, but kept that information from the investors, I guess that could be considered fraud. [note this is just an illustration, no comments made on reality about tether noise]

I believe all startups looking for VC money are overly optimistic. And VCs expect their presentations to be so, taking that into account.

The interesting point is at which point would a court of law consider «overly optimistic» projections to become criminal. Like, even hearing about noise issues, one may be convinced those are easily solvable and of less importance.

We also should not forget that success often comes when plans change from their original version as knowledge is gained.

In the case of wannabe wind energy breakthroughs though, it’s almost always a case of wannabe “innovators” ignoring known, standard, everyday working knowledge, and instead substituting their own uneducated, shoot-from-the-hip, typical newbie-esque, first impressions. The results are usually already easily predictable by “real wind people”, and a surprise only to everyone from investors to the wannabe innovators, who didn’t do enough, if any, “due diligence” or background research of the existing knowledge in the art of wind energy, including typical beginner pitfalls, and all the nonintuitive facts that took thousands of years to slowly be recognized, such as using defined airfoils to sweep a given area most efficiently, with regard to both material used, and the actual energy extraction itself.

Who would have EVER guessed that only a 2% solidity of working surfaces/total swept area would turn out to be the most efficient at energy extraction, let alone material use? It sounds completely insane, but it turns out to be the way it’s been done for decades now! I was at an event where I was hanging out with the CEOs of Google (Eric Schmidt), Linked-In (Jeff Weiner), Amazon (Jeff Bezos) and Bill Gates, not to mention the Principals of “Kleiner-Perkins” (Bill Joy and John Doerr), the number-one Venture Capital company for clean energy, and they could not understand why the ducted turbine company they had invested in would never succeed. I told them their turbines looked like the ducted-fan snowmaking machines we were all surrounded by. You couldn’t explain a low-solidity rotor being the most efficient way to sweep a given area, as simple as that sounds. For non-wind people, it’s just all a bunch of gibberish that they can’t be bothered to try to understand.