One of the most elaborate business schemes ever perpetrated came to a close this month as Theranos Inc. notified shareholders the blood-testing company will soon officially dissolve.
It initially became a household name thanks to a supposedly proprietary technology allowing complete, extensive laboratory-quality testing with just a drop or two of blood. It soon became better known for its entirely false claims.
The “massive fraud” — as the Securities and Exchange Commission put it — resulted in the loss of nearly $1 billion of investor money. Multiple investors each lost $100 million or more. Elizabeth Holmes, the startup’s founder and chairman, now faces a maximum sentence of 20 years in prison.
After the collapse of the company that was once valued at more than $9 billion, Silicon Valley innovators rushed to label Theranos as an outlier not representative of the rest of the startups seeking to improve the world. The repeated emergence of startups that mislead investors and consumers suggests it was, in fact, no exception.
In another high-profile case, the CEO of Zenefits developed a secret browser extension that allowed his company to avoid licensing requirements mandated by law. The startup – which sells software that automates human resources management – used the browser extension to fake the completion of online training courses required for employees to become licensed health insurance brokers.
The covert, illegal shortcut led to CEO Parker Conrad’s resignation and a $7 million fine from California’s insurance regulator. The startup not only lied about compliance with government officials; it also lied to its customers about the software’s capabilities.
However, former CEO Parker Conrad has already moved on. He is now CEO of his next great startup idea – another HR software company – and is raising millions of dollars from investors.
There are too many instances of bad startup behavior to chronicle. There’s WrkRiot which defrauded its employees with fake wage payment documents. There’s Hampton Creek, which hired contractors to buy their products off shelves and artificially drive up sales. And now recent whistleblower statements show HouseCanary misrepresented its product and offered those who were aware of the scheme financial incentives to remain mum.
According to a former employee, HouseCanary passed off another company’s technology as proprietary and delivered “wireframes and apps that didn’t function.” The emergence of the whistleblower encouraged another former employee to come forward.
That person confirmed the initial accounts and reported being offered a lucrative $250 an hour consulting agreement with “no specifically-defined scope of work, nor any minimum or maximum number of hours per month.” Recognizing the offer as hush money, the person declined.
The whistleblowers emerged in response to a $706 million jury verdict HouseCanary won against its former client, Amrock. HouseCanary continues to allege that Amrock misappropriated trade secrets related to its real estate valuation model.
The jury verdict – the largest ever rendered in Bexar County, Texas – moved the initial whistleblower to action. That person informed the court that he had “serious concerns about the integrity of the jury verdict” and viewed it as “an egregious miscarriage of justice.” HouseCanary won its lawsuit despite its own expert witness confirming multiple times in sworn testimony that Amrock did not use the startup’s code.
While startup deceit is by no means unusual by now, the ongoing HouseCanary case introduces the new worry of fundraising via litigation.
Citing almost the exact same allegations, HouseCanary sued three additional companies upon winning the $706 million award – a sum that is over ten times the amount of money it has managed to raise from investors.
Silicon Valley startups continue to manufacture hype that their products fail to live up to. Now, the toolbox has apparently expanded to include litigation as a vehicle for fundraising. While the American startup sector may be fiercely competitive, it does not license these small companies to commit fraud.
With this pervasive trend in Silicon Valley, expect to see startup behavior worsen before it improves. At which point the government will likely be called on to step in and, in all likelihood, kill the goose that’s been laying golden eggs for decades.
Peter Roff is a senior fellow at Frontiers for Freedom and a former senior writer for United Press International and commentator who appears regularly on the One America News network. You can reach him by email at RoffColumns@gmail.com and follow him on Twitter.
The views and opinions expressed in this commentary are those of the author and do not reflect the official position of The Daily Caller.