Elizabeth Holmes was convicted on 4 counts of fraud related to her role as founder & CEO of Theranos. Was she treated differently than male entrepreneurs? It is certainly true that there hasn’t been a high profile criminal case against a male entrepreneur in quite a while, at least not one that I can recall (although I am old enough to remember Bernard Ebbers’s conviction in the Worldcom case and Jeffrey Skilling’s conviction in the Enron case). But beyond that observation, I believe that it’s hard to draw strong conclusions about fairness from this verdict.

Let me start by acknowledging that entrepreneurs tend to exaggerate. It takes a high degree of optimism (“irrational exuberance”?) to start a company and so entrepreneurs will err on the side of saying that they are further along than they actually are. For example, when a customer asks about a feature in software, an entrepreneur might say it is about to ship, even though coding hasn’t really started. I see this all the time and most investors are pretty adapt at looking through it. Generally this doesn’t rise to the level of criminality.

There are, however, lines that can eventually be crossed. For example if a company reports revenues that it doesn’t have (Worldcom and Enron) or keeps raising ever more money with product claims that are manufactured (Theranos). I remember one call with someone who asked if USV was interested in investing in Theranos (I forget the exact year). When I remarked that these were pretty extraordinary claims which we would need to diligence, I was told that we would simply have to go on the diligence done by other investors (extraordinary claims require extraordinary evidence - Carl Sagan and many others). That was the end of that conversation. Based on who wound up on the Theranos cap table it appears to have been the end of the conversation with other venture investors as well. By the way this isn’t necessarily unique to Theranos. I was recently offered an “opportunity” to invest in a battery startup and when I asked what the basic chemistry for the battery was, I was told that it was secret and not being disclosed to investors (again a very short conversation).

So instead of venture investors, Holmes raised money from individuals, family offices, and corporates. That was ultimately bad news for her because she was able to keep going and going, long past the point where she went from early enthusiastic exaggeration to full on fraud. These investors also made for witnesses in the government’s case in a way that venture investors would have unlikely have been — after all VCs would have had to admit that they didn’t do their homework, which is a bad look for professional investors.

What about WeWork? Shouldn’t Adam Neuman be convicted of something? This too is a deal that I had seen at USV and while I loved the overall idea, I was deeply uncomfortable with the model, which had a ton of embedded financial leverage in the form of an asset liability mismatch (long term lease obligations, but short term rental income). But here are two salient differences. First, this problem was easily visible (for anyone who cared). Second, most of the money was raised from institutions, which were taking a risk they understood (or at least wouldn’t admit to not understanding). The rest of the shenanigans that went on at WeWork are spectacular in some of the details (that sauna!) but don’t really amount to fraud. By the way, if excess management compensation or privileges were fraud, then a lot of managers of corporations should be charged (that’s a discussion one can have in earnest, but is different from the one at hand).

What about those venture investors who have spoken out defending Holmes? As far as I know there are only a few of them and I get their overall point that in general we should be encouraging entrepreneurial activity and that this could be seen as chilling that. I disagree with that view though. The Theranos case stands on its own, without drastic implications for entrepreneurs or venture capital. I don’t believe for one minute that it will stop people from starting or funding companies.

Oh, there is one more thing though. If you believe that this case “proves something about female entrepreneurs” then you are in fact a sexist idiot.

Elizabeth Holmes was convicted on 4 counts of fraud related to her role as founder & CEO of Theranos. Was she treated differently than male entrepreneurs? It is certainly true that there hasn’t been a high profile criminal case against a male entrepreneur in quite a while, at least not one that I can recall (although I am old enough to remember Bernard Ebbers’s conviction in the Worldcom case and Jeffrey Skilling’s conviction in the Enron case). But beyond that observation, I believe that it’s hard to draw strong conclusions about fairness from this verdict.

Let me start by acknowledging that entrepreneurs tend to exaggerate. It takes a high degree of optimism (“irrational exuberance”?) to start a company and so entrepreneurs will err on the side of saying that they are further along than they actually are. For example, when a customer asks about a feature in software, an entrepreneur might say it is about to ship, even though coding hasn’t really started. I see this all the time and most investors are pretty adapt at looking through it. Generally this doesn’t rise to the level of criminality.

There are, however, lines that can eventually be crossed. For example if a company reports revenues that it doesn’t have (Worldcom and Enron) or keeps raising ever more money with product claims that are manufactured (Theranos). I remember one call with someone who asked if USV was interested in investing in Theranos (I forget the exact year). When I remarked that these were pretty extraordinary claims which we would need to diligence, I was told that we would simply have to go on the diligence done by other investors (extraordinary claims require extraordinary evidence - Carl Sagan and many others). That was the end of that conversation. Based on who wound up on the Theranos cap table it appears to have been the end of the conversation with other venture investors as well. By the way this isn’t necessarily unique to Theranos. I was recently offered an “opportunity” to invest in a battery startup and when I asked what the basic chemistry for the battery was, I was told that it was secret and not being disclosed to investors (again a very short conversation).

So instead of venture investors, Holmes raised money from individuals, family offices, and corporates. That was ultimately bad news for her because she was able to keep going and going, long past the point where she went from early enthusiastic exaggeration to full on fraud. These investors also made for witnesses in the government’s case in a way that venture investors would have unlikely have been — after all VCs would have had to admit that they didn’t do their homework, which is a bad look for professional investors.

What about WeWork? Shouldn’t Adam Neuman be convicted of something? This too is a deal that I had seen at USV and while I loved the overall idea, I was deeply uncomfortable with the model, which had a ton of embedded financial leverage in the form of an asset liability mismatch (long term lease obligations, but short term rental income). But here are two salient differences. First, this problem was easily visible (for anyone who cared). Second, most of the money was raised from institutions, which were taking a risk they understood (or at least wouldn’t admit to not understanding). The rest of the shenanigans that went on at WeWork are spectacular in some of the details (that sauna!) but don’t really amount to fraud. By the way, if excess management compensation or privileges were fraud, then a lot of managers of corporations should be charged (that’s a discussion one can have in earnest, but is different from the one at hand).

What about those venture investors who have spoken out defending Holmes? As far as I know there are only a few of them and I get their overall point that in general we should be encouraging entrepreneurial activity and that this could be seen as chilling that. I disagree with that view though. The Theranos case stands on its own, without drastic implications for entrepreneurs or venture capital. I don’t believe for one minute that it will stop people from starting or funding companies.

Oh, there is one more thing though. If you believe that this case “proves something about female entrepreneurs” then you are in fact a sexist idiot.