Holmes’ sentencing sends a clear message that the startup ecosystem must be built on good faith

Let’s start with the supposition that the venture-founder compact is built almost entirely on trust, especially early on. Sure, due diligence matters in the investment process, but lying about your capabilities can undercut the founder-investor relationship — and in extreme cases, to the detriment of the larger, global startup market.

In the wake of Elizabeth Holmes’ sentencing on Friday for defrauding investors, I’ve seen people argue that she was only guilty of messing with the wrong people — the wealthy. The implication here is that Holmes’ rich investors deserved to lose their money. I would argue what she did helped undermine the entire venture compact, and that’s why she’s going to jail.

As TechCrunch’s Amanda Silberling wrote on Friday about the company:

Holmes founded Theranos in 2003 after dropping out of Stanford. She pitched investors and partners on technology that would revolutionize the healthcare system — instead of drawing blood intravenously and waiting days for test results, her technology would prick a tiny bit of blood and instantly conduct dozens of tests on it. Soon she was the CEO of a company with a $10 billion valuation, but it turned out that the technology didn’t work.

What Holmes did was build a company by convincing investors that she could create something she knew to be a lie.

The tech startup ecosystem exists in part because investors with capital to spare are willing to risk some of that money on a founder with an idea.

These investors can be fabulously wealthy individuals. They can be athletes like Stephen Curry or Serena Williams, or entertainers like Kevin Hart or Ashton Kutcher. But they could also be larger entities like venture capital firms, investment funds or pension funds investing on behalf of people who aren’t fabulously wealthy.