Theranos whistleblower warns of new fraud risks in AI boom

The shadow of Theranos

The recent documentary "You Can See Everything" has reignited a national conversation about Elizabeth Holmes and the collapse of Theranos. The film captures Holmes' final weeks before she began serving an 11-year prison sentence. While the movie focuses on her personal narrative, it serves as a reminder of the massive fraud that occurred at her company.

Theranos claimed to have revolutionary blood-testing technology, but the company never actually produced working machines. Instead, the firm outsourced many tests to third-party equipment while maintaining a peak valuation of around $10 billion. This deception allowed the company to raise significant capital from high-profile individual investors rather than traditional venture firms.

Tyler Shultz was one of the primary whistleblowers who exposed these dangers. He first worked at Theranos out of college and eventually blew the whistle on the company's inaccurate devices. His experience provides a unique perspective on how easily a charismatic founder can manipulate the investment landscape to hide a lack of functional product.

The AI due diligence gap

Shultz argues that the current AI boom presents a significant opportunity for new types of deception. He believes that the difficulty of performing due diligence on artificial intelligence is a major concern for the current investment climate. Unlike physical hardware, it is often harder to verify the underlying uniqueness of a software model.

One of the primary challenges Shultz identifies is distinguishing between a truly unique innovation and what he calls a "ChatGPT wrapper." A wrapper is a simple interface built on top of an existing AI model rather than a new, proprietary technology. This lack of transparency makes it easier for dishonest actors to secure funding by promising more than their software can actually do.

Shultz suggests that the model Holmes used to scale her fraud is still very much alive today. He notes that the days of securing massive funding through simple personal connections should be over. However, he fears that the complexity of AI might lead investors to overlook the same red flags that eventually brought down Theranos.

The power of angel funding

A major theme in Shultz's warning is the immense power granted to founders when they receive large sums of capital. He believes that what Holmes achieved was essentially the biggest angel round of funding in history. When individuals put that amount of money into the hands of a single person, they are granting that person tremendous influence.

Theranos was able to avoid many top venture capitalists because the company refused to share scientific evidence or data. They cited concerns about protecting trade secrets, which effectively blocked the rigorous scrutiny that professional firms usually provide. This allowed the company to rely on high-net-worth individuals who may not have had the resources to conduct deep technical audits.

Shultz warns that investors need to recognize this power dynamic regardless of the size of the investment. Even at smaller levels, giving someone a large amount of money creates a responsibility to ensure that money is being used honestly. He advocates for a return to prioritizing due diligence to prevent the repetition of the Theranos era.

Holmes' second act

Despite her conviction and imprisonment, Elizabeth Holmes remains a figure of significant interest in the tech and investment worlds. The documentary suggests she is intentionally crafting a narrative of pity to potentially benefit her future endeavors. This strategy is part of what Shultz describes as her "second act" as she prepares for life after prison.

Reports indicate that Holmes and her partner, Billy Evans, are currently working on a new diagnostics company called Haemanthus. The company, which they refer to as "Theranos 2.0," has reportedly already raised about $20 million in funding. This development highlights the ongoing interest in her brand and the continued ability of such figures to attract capital.

Shultz expressed a sense of unease regarding what might come next for Holmes and her new ventures. He points out that while the film glosses over her crimes, the history of her targeted harassment of whistleblowers remains a stark reality. The situation serves as a warning that the tactics of the past are being adapted for the new technological landscape of the present.