Opinion: “Do it until you do it” is an old trick for Silicon Valley startups, but starry-eyed stock investors keep falling for it

The great British economist John Maynard Keynes wrote that entrepreneurs are necessarily optimistic, with the fear of failure “put aside as a healthy man puts aside the expectation of death.” There is, however, a big difference between optimism and quibbling. Telling yourself that you will succeed is very different from raising funds by misleading investors.

Silicon Valley has a sordid history of chicanery. Vaporware is product that is promised to be ready, or soon to be ready, and then delivered late or not at all. A Microsoft engineer coined the term – an apparent reference to selling smoke – in a 1982 description of Microsoft’s Xenix operating system. The term gained traction when Bill Gates announced that Microsoft Windows was a worthy competitor to Apple’s graphical user interface on November 10, 1983, and released a deficient “operating environment” on November 20, 1985, prompting the columnist tech Stewart Alsop to give Gates a “Golden Vaporware” award. As in this case, the intention of vaporware is often to persuade customers not to buy competing products.

A similar type of scam is the “fake-it-till-you-make-it” mantra which is used to persuade customers and investors that a company has a finished product when it does not. Customers engage by buying the product or service and the deceptive company does what it can while striving to expand what it says it already has. Investors sign on by throwing money at the company, which the company then spends trying to expand what it says it already has. In any case, the company continues to lie for as long as necessary, or until its cover is destroyed.

Theranos is a highly publicized example. In 2014, Stanford University professor John Ioannidis noticed a corporate building in Palo Alto, California named after Theranos, which intrigued him because it’s similar to the Greek word for death. , thanatos. He researched Theranos and discovered that the name was a fusion of the Greek words therapy (therapy) and diagnoses (diagnostic).

Theranos claimed to have developed a blood test device capable of performing hundreds of tests quickly and inexpensively using a single drop of blood. People could have their blood tested in supermarkets or pharmacies while shopping. wow!

Ioannidis is widely known as “the godfather of scientific reform” and he was troubled by the fact that Theranos scientists gave no details on how the device works and did not release any test results evaluated by peers. He was also concerned that millions of people are carrying out hundreds of tests that would surely generate millions of false positive signals – which could lead to unnecessary treatments that could be expensive and potentially fatal. Surely it is better to give specific tests to people with symptoms of a problem than to generate an avalanche of false positives for healthy people.

In February 2015, Ioannidis published a comment in the Journal of the American Medical Association criticizing Theranos for stealth research (making claims without any peer review by independent scientists):

He wrote: “Stealth research creates stark ambiguity about what evidence can be trusted in a mix of possibly brilliant ideas, aggressive corporate announcements and mass media hype….[U]Unless stealth research embraces more scientific transparency, investors, doctors, patients, and healthy people won’t be able to judge whether a proposed innovation is worth $9 billion, $900 billion, or only $9, and even less if the innovation will improve health and well-being. – to be individuals.

In a later interview on CNN, Ioannidis pushed harder: “We have been misled many times about innovations in medicine.” A Theranos lawyer contacted Ioannidis in an attempt to persuade him to step down, suggesting he co-write an article with CEO Elizabeth Holmes. Ioannidis politely declined.

Later that year, the Wall Street Journal published an investigative article on Theranos and the deception was quickly made clear. Once valued at $9 billion, Theranos was no longer worth $9. In January this year, Holmes was found guilty of four counts of fraud for making false statements to investors. Prosecutors argued that Theranos faked demonstrations of its blood-testing machines, added pharmaceutical company logos to validation reports that said the companies had approved the technology when they hadn’t, and at the end of 2014, he forecast $140 million in revenue that year when he had none.

Theranos, of course, pushed the fake until you take it to the darkest extreme. Yet too often, pretending until you do is an effective tactic for getting funding from Silicon Valley investors, and supposedly seasoned and savvy venture capitalists and other smart buyers keep falling in the trap.

For example, in its S-1 registration statement, Zymergen ZY,
-6.10%,
a synthetic biology company, said several customers for its product will generate significant revenue in 2021 and 10 more products are on the way. It raised over $1 billion in venture capital and went public in April 2020 with a market capitalization of $3 billion.

In August 2021, the company announced that there would be no revenue in 2021 and that it expected “product revenue to be intangible” in 2022 as well.

Zymergen’s stock plunged 69% that day, wiping out nearly $2.5 billion in market value. Shares have lost more than 90% of their value in the past 12 months, falling from an April 2021 high of $52 per share. Now lawyers are filing lawsuits and regulators are reviewing the company’s overly optimistic projections.

Then there’s the promise of lab meat, another technology that has received billions of dollars in venture capital with more than 50 startups repeatedly missing announced dates for actual product availability. Critics point to technical challenges and production costs that are still orders of magnitude too high.

A revealing 2020 article in Nature magazine traces advances in synthetic biology over the previous decade, but does not mention the impact of any actual products. The last paragraph concludes that the field is a big hit because there are huge valuations of synthetic biology startups: “If we are to seek the biggest achievement of the decade that justifies the field’s hype in 2010, then we can’t look no further than the proliferation and valuations of hundreds of synthetic biology companies around the world.

Talk about circular. Venture capitalists are investing because they think it’s a great field and scientists think it’s a great field because venture capitalists are investing. It’s hard to imagine a more enticing invitation to pretend until you do.

The social costs are far greater than a few fools with too much money parting with it. Their wasted money could be spent inventing, developing and producing real things that benefit everyone.

As Keynes also wrote, “When the development of a country’s capital becomes a by-product of a casino’s activities, the job is likely to be done poorly.”

Jeffrey Funk is an independent technology consultant and former university professor specializing in the economics of new technologies. Gary N. Smith is the Fletcher Jones Professor of Economics at Pomona College. He is the author of “The AI ​​Delusion” (Oxford, 2018), co-author (with Jay Cordes) of “The 9 Pitfalls of Data Science” (Oxford 2019) and author of “The Phantom Pattern Problem” ( Oxford 2020).

Continued: Is ‘The Dropout’ a true story? Where is Theranos founder Elizabeth Holmes now

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