It was a month of strange parallels.
At December 12disgraced crypto founder Sam Bankman-Fried was arrested on fraud charges in the Bahamas, marking the dramatic end of his reign at the helm of defunct cryptocurrency exchange FTX.
His arrest came a few weeks based on former Theranos founder Elizabeth Holmes was judged to more than 11 years in prison for similar charges. Many pointed to the obvious similarities: Each founder was considered a Silicon Valley prodigy and drew media acclaim and millions of dollars in investments before a dramatic fall from grace.
The collapse of FTX was yet another indictment of the hype machine that has long fueled the rise of tech superstars and their companies. But even in 2022, the question remains: will Silicon Valley ever learn from its mistakes?
Seven years separated the fall of FTX and Theranos, but the forces behind their rise are familiar. After the success of early tech founders like Meta’s Mark Zuckerberg and Twitter’s Jack Dorsey, investors are often looking for the next big name to follow, leading to a “culture of worshiping genius”, said Yesha Yadav, professor of right at Vanderbilt University.
But with FTX scoring another blow to the cult of founders, the industry faces another judgment.
“It’s going to be very difficult now for Silicon Valley to continue to justify this cult of personality, which fuels people’s ability to fake it until they do, because it allows basic checks and balances to not be present,” Yadav said.
Historically, there has been a culture of “fear of missing out” in Silicon Valley, where investors are quick to join in supporting dynamic companies without necessarily doing due diligence. This is true in many industries, but particularly accelerated in the tech space, where investors often don’t fully understand the core products of these companies, said Nicholas A Bloom, professor of economics at Stanford. The phenomenon has been “turbo” over the past year as the interest rate climate has left investors desperate for yields, pushing them into quick trades, he added.
“It’s like buying a house without seeing it in a hot market – you can get a good deal and you can get a lemon,” he said. “If investors had done their due diligence, they would have discovered the issues, but crypto was seen as hot, so investors rushed in while they could. Turns out it was a lemon.
Many investors have admitted their naivety in throwing money at companies without researching the consequences of these fallouts. After Holmes’ conviction, Theranos investor and media mogul Rupert Murdoch said his dealings with the company were a “total embarrassment”. “I have only myself to blame for not asking many more questions,” he said. The venture capital firm Sequoia formally apologized to its investors for FTX’s losses and promised more caution going forward.
Investor scrutiny will only increase in the current financial climate, experts say. As the Federal Reserve raises interest rates and the tech industry as a whole faces a recession, there will be “much fewer cases of fraud,” said Richard Smith, co-founder of the platform. analysis of Finaic investments.
“One of the biggest factors in this spectacular level of fraud was the fact that there was so much money lying around in the system and there really wasn’t much control over where the money was ending,” he said. Now the time for easy money is behind us.
The seriousness of the charges against Holmes and Bankman-Fried may also point to a new era in law enforcement. Bankman-Fried’s downfall was even faster and more serious than Holmes’ – while it took more than two years after Theranos’ fall for Holmes to be formally charged, Bankman-Fried was indicted within a month. His bail was set at $250m (£208m), significantly higher than the $500,000 (£415,855) for Holmes.
As the app tightens up, founders can take note. While in the past entrepreneurs could make big promises during fundraising times with little evidence, they may need to be more careful now, said Jack Sharman, white-collar criminal defense expert at Lightfoot, Franklin & White LLC.
“Tech entrepreneurs are used to the reins of regulation being held loosely and therefore face a manageable risk for careless or inaccurate statements,” he said. Previously, these statements might have been seen as aggressive predictions or thoughtless “bloats”. This landscape changes and is not favorable to them.
Still, it’s too soon to tell if tech scammers are about to disappear for good, said Margaret O’Mara, a University of Washington professor and author of The Code: Silicon Valley and the reshaping of America.
“I don’t think we’ll see the end of it – whenever a lot of money flows it usually ends up in shady hands,” she said.
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