In a column published today at MarketWatch, Jeffrey Funk and Gary Smith talk about that unpleasant subject, the shady side of Silicon Valley. They’re not looking at the unicorns naively chasing rainbows but rather the cases of apparently deliberate deception. One of them is vaporware— announcing a product that won’t really exist any time soon (perhaps in the hope of dissuading potential buyers from investing in a competitor’s product). Another is “fake it until you make it,” the topic of today’s column.

Investors sign on by throwing money at the company, which the company then spends trying to develop what it said it already has. Either way, the company keeps lying as long as necessary, or until its cover is blown.

Jeffrey Lee Funk and Gary N. Smith, “‘Fake it till you make it’ is an old trick for Silicon Valley startups, but starry-eyed stock investors keep falling for it” at MarketWatch (March 7, 2022)

That’s what happened in the now-famous Theranos case, which Funk and Smith go on to discuss. Theranos claimed an innovation by which it could run hundreds of blood tests quickly and cheaply, using a single drop of blood, perhaps collected at a plaza while the patient shopped. A great innovation — if it were true. Theranos grew to a $9 billion business.

The curious silence that followed — including the absence of peer-reviewed test results — attracted the attention of Stanford’s well-known medical reformer John Ioannidis. Intriguingly, Ioannidis was just as worried if the innovation were legitimate as if it were moonshine:

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.

Jeffrey Lee Funk and Gary N. Smith, “‘Fake it till you make it’ is an old trick for Silicon Valley startups, but starry-eyed stock investors keep falling for it” at MarketWatch (March 7, 2022)

It wasn’t long, in their telling, before the Wall Street Journal was on the case too and fraud charges followed. On January 3, 2022, CEO Elizabeth Holmes was found guilty on four of 11 of the fraud charges.

But Theranos is only the most dramatic example, Funk and Smith note. Among other suspected fake-its are efforts at lab-based meats:

Then there is the promise of 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.

Jeffrey Lee Funk and Gary N. Smith, “‘Fake it till you make it’ is an old trick for Silicon Valley startups, but starry-eyed stock investors keep falling for it” at MarketWatch (March 7, 2022)

Significantly, they report, the lab-based meat field is identified as promising at the eminent science journal Nature precisely because of the capital investment it attracts. But surely, that attraction has more to do with the political correctness of meat alternatives than with whether a product is viable or market-ready.

It’s worth noting that politically correct values may have played into the investor excitement around Elizabeth Holmes and Theranos as well Holmes was regarded as a sort of female Steve Jobs (she even copied Jobs’s style of dress). Some prominent people, such as Silicon Valley executive Ellen Pao, have portrayed her as a victim of sexism.

Funk and Smith prefer to just say that the money investors waste on “fake it till you make it” startups “could be spent on inventing, developing and producing real things that benefit all of us.”

You may also wish to read: Detecting BS data: If it’s too good to be true, it probably is. A recent Wall Street Journal article shows a near-perfect link between inflation and money. But a link that near-perfect raises suspicions. Precise predictions of human behavior are implausible and rarely match up to the far more complicated reality (Gary Smith)

and

Why do today’s tech startups disappoint investors? Jeffrey Funk: Only 14 of the 45 recent Unicorns showed increases larger than those of the Nasdaq generally. Companies we hear a lot about, like Zoom and Beyond Meat, are not profitable compared to an earlier generation of tech startups.