The startup world has always been a competitive one, with the rapid rise in success stories and behemoth companies. Now that technology is becoming more accessible to everyone, it creates an environment where people can fail without facing as much consequence. With investor confidence at all-time highs, startups have never had the opportunity to grow larger than they are now. However there are still some major risks created by this age of entrepreneurship including financial instability and moral corruption among others
The “Elizabeth Holmes today” is a new article that talks about the many changes in the startup industry. There has been a lot of controversy surrounding Elizabeth Holmes and Theranos, but the article says that despite all of this, founders have more power than ever. Read more in detail here: elizabeth holmes today.
The criminal trial of Elizabeth Holmes has come to a close, bringing the complicated story of Theranos to a close. Meanwhile, founders’ control over businesses is only increasing, for better or worse.
Ms. Holmes was found guilty of four charges of fraud and conspiracy against investors in Theranos, the once-famous blood-testing firm that she created and drove to ruin.
Theranos’ journey from a firm worth more than $9 billion and seen as revolutionizing blood testing under the leadership of an apparently visionary wunderkind to a debacle that squandered over $1 billion in investor funds and jeopardized patient health is now complete. Ms. Holmes stated that she had complete authority over Theranos at all times.
While the Theranos saga is unique in many ways, including the fact that it ended in criminal charges, many observers see it as an example of startup-founder worship gone wild, in which investors and other stakeholders bestow enormous power and responsibility on entrepreneurial Svengalis who promise the next big thing.
Travis Kalanick, the ride-hailing company’s CEO, was fired following a series of controversies.
Bloomberg News/Bloomberg/Michael Short
Uber’s Travis Kalanick was expelled from the ride-hailing business following a series of controversies; WeWork’s Adam Neumann quit his company after substantial reporting by the Journal on dubious actions he took in advance of the company’s scheduled public offering.
Trevor Milton, the creator of Nikola, an electric truck manufacturer, is now facing allegations of securities fraud, to which he has pled not guilty. His firm is attempting to recoup $125 million from him in order to pay a fine owed to the Securities and Exchange Commission.
Despite these instances, it has become the standard to give startup founders near-total control of their firms, typically in the form of shares that give them many more votes than a regular share.
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“Founders have as much authority as they have ever had in the [Silicon] Valley environment,” says Adam Epstein, a corporate governance counsel to CEOs and their boards.
Why? For many in the startup community, Theranos and its ilk are the exceptions to what they perceive as the rule: that founder control is necessary for the dynamism and creativity associated with American capitalism.
Founder-led and -controlled businesses, which have become a trademark of the startup ecosystem, have grown to be some of the largest and most revolutionary businesses in history. They’re altering the transportation sector (see how Tesla has expedited worldwide EV adoption) and empowering small companies (think of the many payments and point-of-sale startups launched in the past decade). Tesla is now worth more than $1 trillion. Stripe has a market capitalization of approximately $100 billion, Snap has a market capitalization of over $70 billion, and Spotify has a market capitalization of over $40 billion.
Tesla has sped up the electrification of worldwide automobiles and is now worth more than $1 trillion.
Bloomberg News/Bloomberg News/David Paul Morris
Investors’ willingness to give founders so much latitude in the early days, even years, of a startup’s development has undoubtedly contributed to the United States’ position as the global leader in the commercialization of a wide range of innovations. As a result, the nation has become a massive exporter of intellectual property, software, and business models, selling both physical and intangible outcomes of the system.
The rationale for so much founder control is, at its heart, a matter of supply and demand: As huge investors seek locations to make a return on their investment in a world of near-zero interest rates, more money is pursuing startups than ever before. In the third quarter of last year, global venture capital expenditure reached a new high of $158 billion, more than double what it was in the same time in 2020. This statistic, which covers just three months, is larger than or equal to the entire amount of VC deal flow in each of the years from 2010 to 2016.
“Biggest shift in the venture sector now: There are no VC firms with price discipline,” veteran venture investor Keith Rabois tweeted in July. “We’ve all given in.”
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“I firmly feel that with the influx of funds into VC, and Zoom-based investment, that the combination has led to considerably less scrutiny on average per business,” he remarked when I asked him to elaborate.
In the past, due diligence in venture capital meant spending days or even weeks investigating a firm, its founders, its competitive set, and the difficulties and opportunities of the industry in which it planned to operate.
With so many organizations willing to write checks—not only conventional venture capital firms, but also family wealth management offices, huge banks, sovereign wealth funds, and others—investors must now decide whether to participate in a company in a matter of hours, according to Mr. Rabois.
Mr. Rabois and Mr. Epstein both said that pandemic lockdowns had switched investment discussions from in-person to virtual, using Zoom and its variants. They note that evaluating an entrepreneur, their team, their product, and the reality of their statements from afar is significantly more challenging.
As a result, investors looking for the next Steve Jobs or Elon Musk are shaping corporate executives who have significant power over their organizations and are therefore essentially unaccountable. In many situations, these CEOs have complete authority over their boards of directors.
All of this flexibility enables firms like Theranos to grow and expand in an atmosphere where the only constraints on the founders’ authority come years later, after they have collected millions, if not billions, in investment and violated commitments to consumers and partners.
So-called “dual-class” stock structures were not invented by IT businesses. When Ford Motor Company went public in 1956, its stock was structured in such a way that the company’s founding family would have disproportionate voting power. However, the contemporary age of tech founder control began in 2004, when Google went public with a structure that keeps the company’s two founders in charge to this day. The trend continued with Facebook’s IPO in 2012, when Mark Zuckerberg became the company’s lone captain. (The Wall Street Journal’s publisher, News Corp, has a dual-class ownership structure.)
When Ford Motor Company went public in 1956, the stock was designed such that the company’s founders would have disproportionate voting power.
Bettmann Archive/Getty Images photo
The trend accelerated in the late 2010s, and supervoting shares became the de facto norm for hot tech IPOs. Mr. Epstein relates it to SoftBank’s $100 billion Vision Fund, which began investing in startups like WeWork in 2017 and has since injected money into them.
These founder kings and queens are aided by venture capitalists in the hopes that they will take the types of risks that will pay off handsomely. And they often do, at least in the eyes of their investors.
Putting more money into the global startup ecosystem, if seen in simply mechanical terms, is akin to pouring more energy into any other closed system. Adding money to a pot of water brings it from a simmer to a rolling boil, just as adding heat to a pot of water brings it from a simmer to a rolling boil.
Four of the 11 criminal-fraud counts against Theranos founder Elizabeth Holmes were found guilty by a federal jury. Each offense carries a potential penalty of 20 years in jail. Sara Randazzo of the Wall Street Journal presents highlights from Holmes’ testimony. The Wall Street Journal’s Josh Edelson took this photo.
On the one hand, this may imply that even as you read this, more Teslas and Apples are being born. On the other side, all this wealth floating about, as well as the resulting lack of due diligence, may lead to additional Theranoses.
In a Silicon Valley culture where speed is valued, failure is not a mark of shame, and finance is practically inexhaustible, even a spectacular failure like Theranos—and Ms. Holmes’ criminal conviction—might be inescapable.
“The benefit of giving the entrepreneur greater authority is that they can accomplish things quicker,” says Nikhilesh Sinha, an economics and finance professor at London’s Hult International Business School. “Decision making is substantially less expensive in any system where you have autocratic power—but there may also be a far higher disadvantage.”
Christopher Mims can be reached at [email protected]
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