It was a month of mysterious parallels.
On December 12, disgraced cryptocurrency founder Sam Bankman-Fried was arrested on fraud charges in the Bahamas, marking a dramatic end to his reign as head of the now-defunct cryptocurrency exchange FTX.
His arrest comes just weeks after former Theranos founder Elizabeth Holmes was sentenced to more than 11 years in prison on similar charges. Many pointed out the obvious similarities: Each founder was considered a Silicon Valley wunderkind and attracted media acclaim and millions of dollars in investment before falling out of spectacular disgrace.
FTX’s collapse 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 learn from its mistakes?
Seven years separated the fall of FTX and Theranos, but the forces underpinning their rise are familiar. After the success of early tech founders like Meta’s Mark Zuckerberg and Twitter’s Jack Dorsey, investors often look for the next big name to back, leading to a “genius-worshipping culture,” said Yesha Yadav, a professor in law from Vanderbilt University.
But with FTX scoring yet another blow to founder worship, the industry faces another reckoning.
“It’s going to be very difficult now for Silicon Valley to continue justifying this cult of personality, which fuels people’s ability to fake it ’til it’s made, because it allows basic checks and balances not to be there,” Yadav said.
Historically, there has been a “fear of missing out” culture in Silicon Valley, where investors are quick to back flustered companies without necessarily doing due diligence. That’s true in many industries, but particularly so in the tech space, where investors often don’t fully understand those companies’ core products, said Stanford economics professor Nicholas A Bloom. The phenomenon was “supercharged” last year as the interest rate climate left investors desperate for returns, sending them into quick trades, he adds.
“It’s like buying a house unseen in a hot market – you can get a good deal and 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 ran while they could. Turns out it was a lemon.
Many investors recognized their naivety in throwing money at companies without researching the consequences of those consequences. After Holmes’ sentencing, Theranos investor and media mogul Rupert Murdoch said his dealings with the company were a “total embarrassment”. “I only have myself to blame for not asking a lot more questions,” he said. Venture capital firm Sequoia has formally apologized to its investors for the FTX losses and pledged more caution in the future.
Investor scrutiny will only increase in the current financial climate, experts say. As the Federal Reserve raises interest rates and the broader tech industry faces a slump, there will be “a lot less cases of fraud,” said Richard Smith, co-founder of investment analytics platform Finaic.
“One of the biggest enablers of this spectacular level of fraud was the fact that there was so much money flowing through the system and there really wasn’t a lot of scrutiny over where the money was going,” he said. “Now, the days of easy money are behind us.”
The gravity of the charges leveled against Holmes and Bankman-Fried may also indicate a new era in law enforcement. Bankman-Fried’s downfall was even more rapid and severe than Holmes’ – while it took more than two years after the downfall of Theranos for Holmes to be formally charged, Bankman-Fried was charged within a month. His bail was set at $250 million (£208 million), significantly higher than Holmes’ $500,000 (£415,855).
As scrutiny increases, founders can take note. While in the past entrepreneurs could make sweeping promises during low-backed fundraising periods, they may have to be more careful now, said Jack Sharman, white-collar criminal defense specialist at Lightfoot, Franklin & White LLC.
“Tech entrepreneurs are used to the reins of regulation being held loosely, and therefore face manageable risks from reckless or inaccurate statements,” he said. “Previously, these statements could have been considered aggressive predictions or thoughtless ‘fantasies’. This scenario is changing and not in their favor.”
Still, it’s too soon to tell whether tech crooks are on their way out for good, said Margaret O’Mara, a professor at the University of Washington and author of The Code: Silicon Valley and the Remaking of America.
“I don’t think we’ll see the end – whenever big money is flowing, it usually ends up in dubious hands,” she said.