Theranos trial puts investors in the spotlight

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The Weekend Pitch

September 12, 2021

Presented by Stout

Theranos founder Elizabeth Holmes (Ethan Swope/Getty Images)

Silicon Valley's go-go venture capital system has gone on trial in a packed, fifth-floor courtroom in downtown San Jose.

In federal court, lawyers for the US government have begun pressing fraud charges against Elizabeth Holmes, founder of Theranos, the failed blood-test startup that for many symbolizes the danger of funding bold dreams without proper due diligence and board oversight.

I'm Alexander Davis, and this is The Weekend Pitch. Contact me at alec.davis@pitchbook.com or @alecdavis.

Theranos trial puts Silicon Valley investors in the spotlight: Where are they now?

Opening arguments in the Holmes trial, which is expected to last at least a few months, suggest that much of the evidence will center on the risk investors agreed to take and whether Holmes fooled them into enabling a scandal of historic significance. Theranos dissolved in 2018, the same year Holmes and her former business and romantic partner Sunny Balwani were indicted.

Prosecutors say Holmes hoodwinked investors into funding her failing technology with an estimated $800 million-plus. Her lawyer responded in court that she didn't set out to deceive people—rather that she mistakenly believed the testing device would succeed, and that her "failure is not a crime."

Whether Holmes is guilty will be up to a jury of five women and seven men. Part of their deliberations will be about how transparent Holmes was in financial projections and on the struggles of its signature device, Edison. Balwani will be tried separately later on.

The list of potential witnesses in the Holmes case numbers more than 200 people, including famous Theranos backers like Henry Kissinger, Rupert Murdoch and James Mattis.

While Holmes is the current target of the prosecution, the trial figures to shine a light on the people who piled onto the Theranos cap table and cheered on Holmes. Their vantage points and their ability to understand the risks of their bets will be picked apart.

So where are those investors now? And what strategy or funding style have they deployed in the aftermath of the Theranos scandal?

Quote/Unquote

(krisanapong detraphiphat/Getty Images)

"Over the last three years, there has been a change in investor focus away from 'Can we make money on this asset?' to 'Is this asset also creating social value in the world?'"

—Jason Lee, co-founder and CEO of DailyPay, a provider of on-demand cash services that lets workers access their wages in real time.

With its excessive interest rates and debt traps, traditional payday lending has been widely criticized as predatory. But in recent years, new fintech startups have arrived on the scene, challenging payday lenders with their earned wage access products and ESG agendas. In an effort to position themselves as socially responsible investors, many venture capitalists are taking the bait.

Deal Flow

SoftBank's Vision Funds have seen an increasing number of exits in recent quarters. The first vehicle, which is now nearly five years old and has a fund life of 12 to 14 years, is no exception. While that still leaves plenty of time for the firm to further cultivate its gains, it will also need to shift its focus to managing its portfolio of public companies.

PitchBook has created a proprietary index that assesses the post-IPO record of SoftBank's portfolio companies. The Vision Funds' US-listed public holdings have performed well on a market cap-weighted basis. However, a small number of its investments are responsible for driving that growth, including 10X Genomics, Guardant Health and Vir.

How are the Japanese conglomerate's other publicly traded companies faring? Find out in our recent analyst note.

Did you know ...

(Eoneren/Getty Images)

... That in 2016, when the term "femtech" was coined, global annual VC funding for such startups barely cracked $500 million?

Capital investment for femtech startups has now crossed the $1 billion mark for the first time, according to PitchBook data.

Several factors have propelled new growth opportunities in the space, including increased representation of women in the VC industry, rising awareness and acceptance of women's health issues, and continued success of the direct-to-consumer model.

Datapoints

From a favorable risk-reward spectrum to lucrative pre-IPO rounds, venture returns have become highly appealing to non-venture investors.

Private equity firms are participating in more than half of all US venture capital deals by value, up from 36.9% just two years ago, according to PitchBook data.

Growth-focused firms Insight Partners, General Atlantic and OrbiMed are among the most active leaders in the race to grab a piece of tomorrow's public companies.

To learn more about how the world of venture capital has become increasingly attractive to private equity, hedge funds and other nontraditional investors, check out these five charts.

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This edition of The Weekend Pitch was written by Alexander Davis and Priyamvada Mathur. It was edited by Andrew Woodman, Angela Sams and Sam Steele.

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