“Things gained through unjust fraud are never secure,” wrote the famed Athenian playwright Sophocles. This timeless observation has been much in evidence of late in Silicon Valley.
The pervasive “fake it until you make it” culture has come crashing down on one-time luminaries such as Elizabeth Holmes of Theranos to Sam Bankman-Fried of FTX. (It turns out the world outside of “the Valley” occasionally cares about investor fraud and financial mismanagement.)
Keystone financial institutions, including Silicon Valley Bank, have recently come crashing down, forcing regulators to scramble to mount a rescue. It failed because executives ignored the bank’s own risk model to drive short-term profits. Its collapse has created a drag on smaller banks across the country.
Leading firms in America’s tech sector are laying off workers on a massive scale. Politically, the tech industry is under attack by both parties like never before. States are passing new laws while the federal government noodles over what to do. In short, it feels like the end of an era when money was plentiful, regulatory scrutiny was light and tech was the darling of Washington and Wall Street.
While it may be momentarily chastened, Silicon Valley will remain for now at the heart of the U.S. innovation ecosystem. After all, “disruption” is the Valley’s mantra – and with it comes an ability to remake oneself.
Yet, in the “new Silicon Valley'' to come, the carelessness that has characterized tech leadership must be addressed. Over time, this phenomenon can degrade the vitality of this extraordinary ecosystem.
To develop solutions, let us first look at a representative case that exemplifies the challenges.
Long before the term was invented, Hewlett-Packard (HP) was one of the original “unicorns.” The company is, of course, now a global company, and this year, it found itself in a British court. At the heart of the case was the 2011 sale by British tech entrepreneur Mike Lynch of Autonomy, the company he founded, to HP for $11.7 billion.
U.S. authorities recently extradited Mr. Lynch to the United States. The Justice Department alleges that he “engaged in a scheme to defraud purchasers and sellers of Autonomy securities, including [HP], about the true performance of Autonomy’s business, its financial condition, and its prospects for growth.” HP has also sued Mr. Lynch in Britain for fraud. He denies all claims against him.
This transaction continues to resonate because HP acquired Autonomy at a steep premium, one that many HP shareholders found exorbitant. HP later pinned a $8.8 billion write down on Autonomy, claiming the company had committed “serious accounting improprieties” to mislead shareholders.
However, this is not a case of an innocent American company being duped by smooth-talking Brits. HP, one of the originators of Silicon Valley culture, bears significant responsibility for this eleven-figure investment gone awry.
HP’s then-CEO Léo Apotheker admitted in court that he did not read KPMG’s due-diligence reports on Autonomy, or even the company’s quarterly financial statements, before purchasing it. Its then-Chief Financial Officer admitted that she did not read the documents either.
HP’s fumble of Autonomy was accentuated by the company’s preceding years of scandal, other failed acquisitions, and a tumbling share price.
The mantra of Silicon Valley has long been “move fast and break things.” Yet, when alleged fraud meets a desire for speed over all else, the results can be catastrophic.
In Silicon Valley’s remake, ethics, due diligence, and sound financial management must be rewarded. Moreover, business leaders need to develop a healthy skepticism of the soaring claims that pervade the pitch sessions and acquisition conversations across the Valley.
It is easy to want to change the world. Those that accomplish this are lauded in Silicon Valley. Yet, to succeed, one must be able to chart a strategic vision that delivers true innovation. Rigor – not speed – must become the hallmark of leadership in the Valley in the years ahead.
