Fake it till you make it’ is an old trick Silicon Valley startups use to get money

jeffrey lee funk
5 min readMar 11, 2022

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 chicanery. Telling yourself that you will succeed is very different from raising money by lying to investors.

Silicon Valley has a sordid history of chicanery. Vaporware are products that are promised to be ready, or ready soon, 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 Microsoft Windows as a worthy competitor for Apple’s graphical user interface on November 10, 1983, and released a flawed bare-bones “operating environment” on November 20, 1985, prompting Stewart Alsop to give Gates a Golden Vaporware award. As in this case, the intent of vaporware is often to persuade customers not to buy competing products.

A similar type of chicanery is the mantra fake-it-till-you-make-it that is used to persuade customers and investors that a company has a finished product when it doesn’t. Customers sign on and the deceitful company does what it can while scrambling to develop the product it said it already had. Investors sign on by throwing money at the company that it spends trying to develop products it said it already had. Either way, the company keeps lying as long as necessary, or until the lies are revealed.

Theranos is just one recent example. In 2014 Stanford professor John Ioannidis noticed a corporate building with the name Theranos, which is similar to the Greek word for death, thanatos. He googled Theranos and discovered that the name was a merging of the Greek words therapeía (“therapy”) and diágnos (“diagnosis”).

Theranos claimed that it had developed a blood-testing device named Edison that could run hundreds of tests quickly and cheaply using a single drop of blood. People could have their blood tested in supermarkets or pharmacies while they shop. Wow!

Ioannidis is widely known as “the godfather of science reform” and he was disturbed by the fact that Theranos’s scientists gave no details about how the device worked and did not publish any peer-reviewed test results. He was also concerned about millions of people doing hundreds of tests which would surely generate millions of false-positive signals — which could lead to unnecessary treatments that might be expensive and could be fatal. Surely it is better to give specific tests to people exhibiting symptoms of a problem than to generate an avalanche of false positives for healthy people.

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

stealth research creates total ambiguity about what evidence can be trusted in a mix of possibly brilliant ideas, aggressive corporate announcements, and mass media hype….[U]nless stealth research adopts more scientific transparency, investors, physicians, patients, and healthy people will not be able to judge whether some proposed innovation is worth $9 billion, $900 billion, or just $9 — let alone if the innovation will improve the health and well-being of individuals.

In a CNN interview, Ioannidis pushed harder: “We have been misled many times about innovations in medicine.” A Theranos lawyer contacted Ioannidis in an effort to persuade him to pull back, suggesting that he co-author an article with CEO Elizabeth Holmes. Ioannidis politely declined.

Later that year, the Wall Street Journal published an investigative article on Theranos and the fakery was soon clear. Once valued at $9 billion, Theranos wasn’t worth $9. Holmes was eventually convicted on four counts of fraud for making false claims to investors. Prosecutors argued that Theranos faked demonstrations of its blood-testing machines, added pharmaceutical company logos to validation reports indicating the firms had endorsed its technology when they hadn’t, and in late 2014 projected $140 million in revenue that year when it had none.

The Walton family, the Cox family, Rupert Murdoch, and Betsy DeVos all presumably have top-tier financial advisors, yet each lost $100 million or more in Theranos. Lisa Peterson, who handles investments for the DeVos family, said that she did not visit any of Theranos’ testing centers in Walgreens stores, call any Walgreens executives or hire any outside experts in science, regulations or legal matters to verify the startup’s claims.

Theranos is hardly an isolated example. Even though fake-it-till-you-make-it is common knowledge, supposedly seasoned and savvy venture capitalists keep falling for chicanery.

In its S-1 statement, Zymergen, a synthetic biology company, said that multiple customers for its product would generate significant revenue in 2021 and that ten other products were on the way. It raised more than $1 billion in venture capital and went public in April 2020 with a market capitalization of $3 billion. In August it announced that there would be no revenue in 2021 and that it expected “product revenue to be immaterial” in 2022 as well. Zymergen’s stock plunged 69% that day, wiping out nearly $2.5 billion in market value. Lawyers are suing and regulators are scrutinizing the company’s overly optimistic projections, as its share price continues to slide, losing 70% of its value since the plunge in August.

Gingko Bioworks is facing similar allegations including the use of a web of shell companies to generate phony revenue. When valuations are naively based on multiples of revenue, there is an incentive for related companies to sell things to each other, thereby increasing revenue for each and generating profits for none. Gingko’s share price is down 2/3 from its high last November.

Then there is lab-based meat, another technology that has received billions in venture capital funding with more than 50 startups repeatedly missing announced dates for when real products will be available. Critics point to the technical challenges and the production costs that are still orders of magnitude too high.

A revealing 2020 article in Nature traced the advances in synthetic biology during the previous ten years, but does not mention the impact of any real products. The last paragraph suddenly concludes the field is a great success because there are huge valuations of synthetic biology startups:

if we’re to look for the single biggest achievement of the decade that justifies the hype of the field back in 2010, then we can look no further than the proliferation and valuations of the hundreds of synthetic biology companies around the world.

Talk about circular! The venture capitalists invest because they think it is a great field and the scientists think it is a great field because the venture capitalists invest. It is hard to imagine a more enticing invitation to fake-it-till-you-make-it.

The social costs are far larger than a few fools with too much money parting with some of it. Their wasted money could be spent on inventing, developing, and producing real things that benefit all of us.

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

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