The Effect of FOMO on Stakeholder Enrollment

Home , Elizabeth Holmes, Richard Kovacevich, Theranos

Susan L. Young, PhD Kennesaw State University Kennesaw, GA Ph: 470-578-4536 [email protected]

Birton Cowden, PhD Kennesaw State University Kennesaw, GA Ph: 470-578-36781 [email protected]

The Effect of FOMO on Stakeholder Enrollment

Abstract

Stakeholder theory suggests dishonest ventures would struggle with stakeholder enrollment, limiting resource access and ultimately failing. Yet cases exist where amoral entrepreneurs do enroll stakeholders through deceit. We propose “fear of missing out” on an opportunity facilitates enrollment by encouraging stakeholder acceptance of information asymmetry. To illustrate we use exemplar Theranos: a biotech firm which convinced stakeholders it would revolutionize healthcare, rising to a $10 billion valuation through 15 years of sustained deceit. We contribute to theory by demonstrating the dark side of stakeholder enrollment, where opportunism increases venture power over stakeholders, and deceit can endure long past start up.

Keywords: stakeholder theory, stakeholder enrollment, entrepreneurial deceit, fear of missing out, legitimacy

The Effect of FOMO on Stakeholder Enrollment

“Theranos had demonstrated a commitment to investing in and developing technologies that can make a difference in people’s lives, including for the severely wounded and ill. I had quickly seen tremendous potential in the technologies Theranos develops, and I have the greatest respect for the company’s mission and integrity.” (Johnson, 2015) — 4-star General Jim Mattis, U.S. Marine Corps, Retired U.S. Secretary of Defense, 2017-2019

The Securities and Exchange Commission today charged Silicon Valley-based private company Theranos Inc., its founder and CEO Elizabeth Holmes, and its former President Ramesh “Sunny” Balwani with raising more than $700 million from investors through an elaborate, years-long fraud in which they exaggerated or made false statements about the company’s technology, business, and financial performance. (Securities and Exchange Commission, 2018) — U.S. Securities and Exchange Commission press release, 2018

Imagine a technology that will provide hundreds of medical tests using only a drop of blood, for a fraction of the cost of traditional techniques. Imagine Theranos, the firm that invented it, rising from a valuation of a few hundred thousand to ten billion dollars in only 15 years, poised to revolutionize healthcare and save millions of lives. The problem: both

Theranos’s technology and its shining vision of the future were based on a lie (McKenna, 2018;

Securities and Exchange Commission, 2018). How did Theranos rise so far, for so long, without its deceptions called into question? The key lies in the phenomenon of stakeholder enrollment, and why Theranos’s stakeholders were willing to accept high information asymmetry.

Nascent entrepreneurial ventures often need resources they do not possess such as financing, marketing or product development capabilities, additional human capital, or access to important networks (Cooper, Woo, & Dunkelberg, 1989; Freeman, 1984; Rawhouser,

Villanueva, & Newbert, 2017). Stakeholders can help a start-up succeed by providing access to these resources (Alvarez, Young, & Woolley, 2020; Hite, 2005; Jonsson & Lindbergh, 2013).

While entrepreneurs may employ many stratagems to engage stakeholders (see Burns, Barney,

Angus, & Herrick, 2016; Rawhouser et al., 2017), such as simple contracts (Argyres & Mayer,

2007), times exist when a stronger affiliation is vital to induce a stakeholder to go ‘above and beyond the call of duty’ and supply key resources or evangelize for the venture (Meyer &

Herscovitch, 2001). Stakeholder enrollment is the process by which entrepreneurs create this deeper psychological bond (Burns et al., 2016), usually seen as a positive feat, to secure superior resources and legitimacy (Burns et al., 2016; Rawhouser et al., 2017; Zott & Huy, 2007).

However, less is known about the stakeholder enrollment process when the venture has amoral intentions. Much of the literature assumes that stakeholders will engage in proper due diligence about the venture (e.g. Harvey & Lusch, 1995), and that stakeholder enrollment cannot occur unless there is trust, reciprocity, and transparency between the venture and its stakeholders

(Bosse, Phillips, & Harrison, 2009; Pollack, Barr, & Hanson, 2017; Überbacher, 2014;

Venkataraman, 2002). Yet examples exist where stakeholders have built a psychological bond with a venture, even though the vision was based on half-truths or lack of technological feasibility (Baker, Miner, & Eesley, 2001; cbinsights.com, 2019). Such cases could not occur unless stakeholders were willing to accept a lying entrepreneur's words as truth. This begs the question: why are enrolled stakeholders so willing to accept entrepreneurial lying?

We use stakeholder theory to examine this dark side of stakeholder enrollment as it relates to the potential of an entrepreneurial opportunity. While this dark side can impact different types of stakeholders (i.e. investors, employees, customers, technology partners), we focus on those that financially invest in the venture in order to gain depth of understanding of this phenomenon. We argue that stakeholders’ “fear of missing out” (van Balen, Tarakci, &

Sood, 2019) on the opportunity will rise as their perception of the venture’s legitimacy and

acceptance of the entrepreneur’s lie increases, while their knowledge of the venture’s true capabilities decreases, due to information asymmetry. The greater the stakeholders’ fear of missing out, the more likely they will enroll with the venture. In turn, stakeholders are willing to accept more information asymmetry in order to stay enrolled, consequently reversing the power asymmetry between stakeholder and entrepreneur. We illustrate the fear of missing out experience by analyzing stakeholders who invested in the now defunct biotech startup Theranos.

This conceptualization extends our knowledge of stakeholder theory in several ways.

First, we establish stakeholder enrollment has a dark side, where amoral entrepreneurs can use entrepreneurial lying and opportunism to gain resources for an illegitimate venture. Second, we challenge the boundaries of stakeholder enrollment by examining the phenomenon under stakeholder’s perception of risk conditions, though the actual context is uncertain, and identify the construct of stakeholders’ fear of missing out as a previously overlooked enrollment mechanism. Third, we extend the entrepreneurial lying literature by demonstrating that entrepreneurial deceit can continue long past the pre-legitimate phase of a startup. Lastly, we contribute to research on entrepreneurial legitimacy by revealing how entrepreneurs can fabricate signals of legitimacy, which can accumulate over time, to enroll even more stakeholders.

Assumptions in the Stakeholder Enrollment and Entrepreneurial Lying Literatures

For many new ventures, acquisition of needed resources cannot occur through simple market transactions, because new firms often lack the capital and/or the legitimacy required to do so (Klein, Molloy, & Brinsfield, 2012). These ventures must induce stakeholders to form a richer psychological bond—or “enroll”—with the venture. Stakeholder enrollment is defined as “the process of getting essential groups or individuals to accept, invest, and act in ways associated with entrepreneurial efforts to advance an uncertain endeavor” (Alvarez et al., 2020, p. 289). As

research on stakeholder enrollment is in the early stages within the entrepreneurship literature, however, several key assumptions applicable to this study exist that have not been fully tested.

The first key assumption is that actual stakeholder enrollment, rather than simple stakeholder engagement (e.g. through contracts), more typically occurs under conditions of uncertainty than under conditions of risk (Alvarez et al., 2020; Burns et al., 2016; McBride,

Thiel, & Wuebker, 2014). Under conditions of risk, potential results of an opportunity can be probabilistically determined prior to its exploitation (Alvarez & Barney, 2007; Knight, 1921), such as the cost to bring the opportunity to market, likely competitors and market demand

(Young, Welter, & Conger, 2017), if not yet actual financial returns (Burns et al., 2016). Under conditions of uncertainty, however, potential outcomes cannot be probabilistically pre- determined, and context conditions related to the opportunity are ambiguous at best (Alvarez &

Barney, 2007; Knight, 1921; Young et al., 2017). Due to the experimental nature of opportunities developed under conditions of uncertainty, when stakes and outcomes are unknown ex ante

(Knight, 1921), research has assumed a deeper bond is required to encourage stakeholders to aid the venture’s success (Burns et al., 2016), and they must more fully participate in value creation.

Under conditions of risk, however, stakeholders may also bond with the opportunity

(Burns et al., 2016), because enough information is available for them to determine probable outcomes and successful rates of return. Opportunity development under conditions of risk, paired with stakeholder engagement with the opportunity (Shane & Venkataraman, 2000), has been well explored in the literature, but few have taken a stakeholder enrollment lens. However, what if the context is only perceived as knowable by stakeholders, but the reality is actually much less known? What if stakeholders enroll, assuming they are operating under conditions of risk, but deceit and opportunism on the part of the entrepreneur means these stakeholders are

actually operating under conditions of uncertainty? This scenario has yet to be studied.

This brings us to the second key assumption: that if entrepreneurs do lie to stakeholders, the majority of the lying occurs during the startup's pre-legitimacy phase (Rutherford, Buller, &

Stebbins, 2009; Steverson, Rutherford, & Buller, 2013). For any venture, the process of finding its path to feasibility, while also trying to communicate with and enroll stakeholders, is a challenging task. In order to gain resources and survive an entrepreneur must tell a story that appeals to stakeholders, even if that story is not completely true (Lounsbury & Glynn, 2001).

This act of entrepreneurial lying is defined as "an entrepreneur's intentional misrepresentation of the facts in an effort to encourage stakeholders to deem them a legitimate entity" (Rutherford et al., 2009, p. 954). Entrepreneurs are able to bend the truth because they have the advantage of information asymmetry; outsiders have less information about the reality of the venture's operations than the entrepreneur (Janney & Dess, 2006). It is assumed, however, that lying will no longer be necessary, and therefore decrease, once legitimacy has been achieved because (a) a pre-legitimate startup may lie just to survive, and (b) there are repercussions for lying in more mature firms (Steverson et al., 2013). Research has thus far been scarce in determining if entrepreneurial lying can persist in ventures past their initial start, and if so, how.

Following the first two assumptions, the third assumption is that entrepreneurial lying will not lead to long-term enrollment: that is, stakeholders will engage in proper due diligence regarding the venture (Harvey & Lusch, 1995), and will uncover any untruths. Whether the stakeholder is first attracted to the opportunity or the entrepreneur, enrolled stakeholders are said to evaluate both to some extent in order to derive a psychological bond (Burns et al., 2016). In much of entrepreneurship literature, it is assumed that this evaluation involves due diligence regarding the opportunity and the entrepreneur (Cable & Shane, 1997; Harvey & Lusch, 1995).

Most would surmise that potential stakeholders would perform due diligence before getting entangled in the venture, as well as after, and not willfully ignore evidence that something is amiss. In fact, "lying to an investor (a crucial stakeholder) can provoke moral outrage that results in retaliation, revenge, or avoidance. It follows that entrepreneurs who lie to investors should receive reduced value from the relationship and risk venture failure" (Pollack &

Bosse, 2014, p. 2). However, this presumes that stakeholders are properly performing their task of evaluating and monitoring the venture (Freeman, Carroll, & Hannan, 1983). Scholars have not yet fully explored what biases stakeholders' place in this process and how these biases derive action (Cassar, 2010), that might preclude proper due diligence from occurring.

Thus, according to current assumptions in the literature, a venture based on deceit such as

Theranos should not have happened. If these assumptions held true, the deceptions would have been caught much earlier through stakeholder due diligence, and the venture certainly would not have been able to continuously enroll new stakeholders for such an extended period of time. Yet the facts stand: Theranos enrolled many crucial and distinguished stakeholders over 15 years and reached a valuation of over $10 billion, all based on a narrative of misrepresentation and deceit.

This study takes a stakeholder lens to the extreme case of Theranos to examine how the stakeholder enrollment process can persist despite prolonged entrepreneurial lying. Specifically, we assess assumptions regarding the nature of the opportunity context and explore stakeholders’ perception of risk versus uncertainty. We examine the role stakeholders play in protracted entrepreneurial deceit, and why they may possess a willing tolerance for information asymmetry.

To sufficiently capture all of these elements, we selected a case that provided rich data from multiple sources that would provide reliability and validity to our research pursuit

(Campbell, 1975; Gibbert, Ruigrok, & Wicki, 2008). While there are a few major cases of startup

fraud (cbinsights.com, 2019) and more examples are coming to light (e.g. Luckin Coffee and

WeWork), we selected Theranos, as its deceit and subsequent outcomes are well documented.

The resultant high valuation and longevity of the deception manifested the phenomenon we are studying (Dyer Jr & Wilkins, 1991). Because of the size and tenure of this venture, this illustrative example offers many interactions between the venture and its stakeholders, specifically its investors.

The Theranos Story

The Opportunity. In 2003, Elizabeth Holmes dropped out of Stanford University at age

19 to pursue an idea she developed while working with a professor as a chemical engineering student. Her pursuits ultimately led to the creation of Theranos, a Palo Alto-based health care company that promoted a supposed proprietary “finger stick” technology for blood diagnostic testing. The proposed methodology would have allowed the company to offer hundreds of blood tests for a fraction of the cost of traditional testing techniques, requiring only a drop of blood.

Raising Capital. Using a narrative of bettering the lives of patients, she raised her initial seed round of $500k from DFJ in June 2004. DFJ was a well-known venture capitalist (VC) group co-founded by Tim Draper, a Holmes family friend (Brunder, 2019). With the help of

Draper and a network of other early backers, in March 2005, Holmes convinced new investors to stake $6 million, raising Theranos’s valuation to about $27 million (Crunchbase.com, 2018).

As Theranos began to build buzz with insiders of Silicon Valley, more wealthy investors became interested in Theranos and Holmes. Oracle founder, Larry Ellison, became both an investor and Holmes’ mentor. As the investor network grew, so did the firm’s valuation. By July,

2010, a mere 5 years later, Theranos’s was worth $1 billion (Tun, 2019). Other investors were swayed by Theranos's claim that its device could complete 99% of needed lab tests from a single

finger-stick, with many tests running simultaneously. All of these claims meant that financial projections for Theranos were extremely favorable, encouraging more investors to enroll. By

2014, Theranos's valuation had reached $9 billion, and in a year it hit $10 billion (Tun, 2019), bolstered by investment from the Walton family, the chairman of Cox Enterprises, the owner of the New England Patriots, and the majority investors in Fiat Chrysler (Carreyrou, 2018a).

Technology-based Partnerships. More traditional investors expected to see some element of progress in product development, or even initial market entry. With mounting pressure from these investors and to keep the vision alive, Theranos searched for key partners that would allow this technology to be introduced to patients. One was the grocery giant,

Safeway (Carreyrou, 2015a), which in 2012 invested over $350 million to create clinics in 800 of their locations, intending of offering Theranos's blood tests to their customers (Wasserman,

2015). The company invested $40 million directly in Theranos itself (Cohan, 2016). Pharmacy giant Walgreens came on board in 2013, agreeing to use the firm’s product in 40 locations, intending to eventually roll it out to all its pharmacies (Abelson & Pollack, 2016).

Dealing with Regulatory Pressures. Before existing businesses could pilot the test,

Theranos needed to overcome certain hurdles with regulatory authorities. Luckily for Holmes, the diagnostic tests fell into a regulatory grey area (Weaver & Carreyrou, 2017). From a regulatory standpoint, the two main federal entities that oversee medical testing are the Federal

Drug Administration (FDA), which determines policies regarding diagnostic equipment, and the

Centers for Medicare and Medicaid Services (CMS), which supervise clinical laboratories.

Theranos found loopholes in both FDA and CMS protocols by categorizing its tests as

“laboratory-developed.” This label means a laboratory is creating its own methods of medical testing, a gray area that neither the FDA nor the CMS directly oversee (Gottlieb, 2016).

The Beginning of the End. In October, 2015, after two years of near universal praise, a

Wall Street Journal exposé questioned the validity of Theranos’s tests and kicked off a series of negative stories about the firm (Carreyrou, 2015b). After the flood of bad press, the FDA did a surprise inspection of Theranos and found deficiencies in the firm’s processes for monitoring quality, vetting suppliers, and handling customer complaints (FDA, 2015). The final straw was when the CMS issued a ban on all Theranos blood tests for two years (Carreyrou, Siconolfi, &

Weaver, 2016). Theranos was forced to void tens of thousands of tests results, and correct the results of others (Abelson & Pollack, 2016). Walgreens terminated their partnership and sued for breach of contract (Abelson & Pollack, 2016; Cohan, 2016), and Holmes’ personal net worth, once estimated at $4.5 billion by Forbes Magazine, was adjusted to zero (Herper, 2016).

It was ultimately proven that the scientific basis for Theranos’s technology was not feasible; Theranos was forced to dissolve in 2018 as part of a Securities and Exchange

Commission fraud charge (Carreyrou, 2018b). Investors and corporate partners incurred significant financial consequences, losing $600 million after the dissolution of the company

(Carreyrou, 2018c), with many investors and partners suing Theranos for fraud. In 2020, Holmes was charged with criminal and civil fraud, and awaits trial (Clark, 2019; Maidenberg, 2020).

Theory Development: Stakeholder Enrollment, Fear of Missing Out and Entrepreneurial Lying

The Effect of Fear of Missing Out on Stakeholder Enrollment

From the stakeholders’ point of view, there are several attributes that can entice stakeholders to enroll in a new venture. These may include the stakeholders’ perception of the venture’s legitimacy (Suchman, 1995; Überbacher, 2014), prior or newly established trusting relationships with the entrepreneur (Aldrich & Fiol, 1994; Burns et al., 2016), the entrepreneur’s charisma (Dobrev & Barnett, 2005), belief in the vision or mission of the venture (van Balen et

al., 2019), identity alignment with the venture's mission (York, O'Neil, & Sarasvathy, 2016), and an advantageous cost-benefit ratio of affiliating with the venture (Hoffmann & Post, 2017).

While not all are required for stakeholder enrollment to occur, checking most of these boxes will more likely encourage stakeholders to enroll, with legitimacy one of the most compelling.

Legitimation Strategies of the New Venture. New start-ups typically experience significant challenges, chiefly due to their resource constraints and uncertainty regarding the market potential of the opportunity they wish to develop (Aldrich & Fiol, 1994; Shepherd,

Douglas, & Shanley, 2000). Legitimacy has been viewed as a solution to “liability of newness” problem suffered by nascent firms (Stinchcombe, 1965). Legitimacy is, therefore, considered imperative for venture survival, as a prerequisite for access to resources and continued support of the nascent firm’s stakeholders (Ahlstrom & Bruton, 2001; Aldrich & Fiol, 1994; Busenitz,

Gomez, & Spencer, 2000; Pfeffer & Salancik, 1978). Legitimacy is “a generalized perception or assumption that the actions of an entity are desirable, proper or appropriate within some socially constructed system of norms, values, beliefs, and definitions” (Suchman, 1995, p. 574).

One strategy used by nascent entrepreneurial firms to establish legitimacy is storytelling

(Aldrich & Fiol, 1994; Lounsbury & Glynn, 2001; Rawhouser et al., 2017). Storytelling is a way to frame the narrative for the new venture so that it is perceived as legitimate, and explain the value of the promised results for stakeholders (Di Domenico, Haugh, & Tracey, 2010). These narratives are most effective when entrepreneurs convey the distinctiveness of their opportunity

(Martens, Jennings, & Jennings, 2007; Navis & Glynn, 2011), and highlight important accomplishments such as “patents, credentials, innovations, ideas, key personnel, social connections, etc.” and/or “emphasizes an entrepreneur’s successful track record or prior performance history” (Lounsbury & Glynn 2001, pg. 556). Controlling the narrative also allows

entrepreneurs to pivot and revise their stories when they do not meet stakeholders’ original expectations (Garud, Schildt, & Lant, 2014). Beyond storytelling, entrepreneurs can also acquire legitimacy with stakeholders using analogies and metaphors (Cornelissen & Clarke, 2010), symbols (Zott & Huy, 2007), or through exemplifying their readiness to move forward during oral pitches for resources (Pollack, Rutherford, & Nagy, 2012). In all of these types of communication, entrepreneurs appeal to the interests of stakeholders to improve their chances for acquiring the resources they need (Van de Ven, Sapienza, & Villanueva, 2007), characterizing their story with a message that conforms to stakeholder expectations (Rawhouser et al., 2017).

The Entrepreneur as Visionary. Entrepreneurs can use storytelling to gain legitimacy with stakeholders by establishing themselves as visionaries, and therefore the right persons to bring the opportunity to fruition. Leadership is context specific (Fiedler, 1967; Plowman et al.,

2007), and two preferred leadership types have been identified in the literature, dependent on the nature of the context: charismatic, and expert (Alvarez & Barney, 2007). Charismatic leaders are more likely to enroll stakeholders in uncertain contexts by transmitting a convincing vision of a successful opportunity (Alvarez & Barney, 2005), while under conditions of risk, a person who has expertise stemming from extensive knowledge of the market or industry in which the opportunity is housed is more ideal (Alvarez & Barney, 2007; Shane & Venkataraman, 2000). If the stakeholder believes—convinced by either the entrepreneur’s charisma or expertise—that the entrepreneur has the appropriate vision to shepherd the opportunity to success, then the stakeholder may bestow legitimacy unto the entrepreneur and the venture. This legitimacy may then attract other stakeholders to support the endeavor (Tornikoski & Newbert, 2007).

The feasibility of new and untried technology is often difficult for stakeholders such as

VCs, technological partners and customers to assess. New entrepreneurial firms may therefore

project a sense of believability by associating with affiliates viewed by investors as suitable

(Wry, Lounsbury, & Jennings, 2014), which can convey a sense of legitimacy on the firm. Many firms derive their identity from their stakeholder associations (Scott & Lane, 2000), and these associations can be used as shortcuts for other stakeholders to categorize the venture as legitimate and/or deem worthy (Tornikoski & Newbert, 2007).

Ventures are typically seen as legitimate if they have surpassed a certain threshold of size, age, and revenue (Rutherford, Tocher, Pollack, & Coombes, 2016). If a venture is able to enroll these stakeholders, then it is typically assumed that these stakeholders have gone through a proper due diligence process to validate the venture. However, stakeholders enrolled in a new venture are in an evolving situation, where collaboration and obligation go hand in hand (Forbes,

Borchert, Zellmer–Bruhn, & Sapienza, 2006). These enrolled stakeholders are enmeshed in interactions and activities with the new venture, often without fully comprehending the opportunity costs that may befall them, since the prospective benefits of the opportunity are unknown in the early stages (Alvarez et al., 2020). Therefore, stakeholders typically engage in knowledge-seeking behaviors prior to committing themselves to involvement with the venture.

Stakeholder Knowledge of the Venture. Stakeholders gain knowledge on a new venture in disparate ways. Informal efforts, such as gaining knowledge through conversations or personal observation, or formal efforts, such as focus groups, or surveying or interviewing potential customers of the venture’s products (Christensen, Anthony, & Roth, 2004; Timmons, Spinelli, &

Tan, 2004), may help stakeholders evaluate the venture. Some stakeholders may have past experience in a specific industry or market (Johnson, 1986; Shane & Venkataraman, 2000; Von

Mises, 1949), or proficiency developing previous entrepreneurial opportunities (Praag & Ophem,

1995), which may also aid in determining the potential of the current opportunity. Other external

sources, such as government reports on regulatory changes, industry and trade associations, may provide additional information (Timmons et al., 2004). Biases and heuristics can be used to fill in information gaps and allow effective decision-making regarding enrollment, when more standard decision making models are not applicable (Busenitz & Barney, 1997; Kahneman, Slovic,

Slovic, & Tversky, 1982). For example, one standard model is staged financing, where the venture gets some portion of the total investment at certain milestones; otherwise an investor can walk away with the rest of the expected funding (Wang & Zhou, 2004). Investors also seek to limit information asymmetry by holding board positions in the venture (Fried, Bruton, & Hisrich,

1998), where they can oversee and monitor activity from inside the firm (Zahra & Pearce, 1989).

However, stakeholders may accept a venture's legitimacy through storytelling because they perceive some benefit that aids their self-interest (Wolfe & Putler, 2002), such as social clout, monetary gain or savings, or fulfilling a deep sense of connection to their identity (York et al., 2016). When self-interest aligns with a story of surface-level signals of legitimacy (e.g. financial forecasts, contract discussions, quality board members, or product benefits), stakeholders can find it fairly easy to utilize heuristics to enroll and become venture advocates

(Saxton, Wesley, & Saxton, 2016). This begins the process of the psychological bond necessary for enrollment. For some stakeholders, this bond may fill them with urgency to create and maintain a relationship with the venture (Scholz, 2019), resulting from a fear of missing out.

Fear of Missing Out. The fear of missing out is defined as "the pervasive apprehension that others might be having rewarding experiences from which one is absent" (Przybylski,

Murayama, DeHaan, & Gladwell, 2013, p.1841). Research shows that "investors skip due diligence too quickly to fund uncertain projects at high valuations because they rationally fear missing out" (Buchak, 2017, p. 1), particularly if the opportunity signals game changing

possibilities, strong signs of legitimacy, and acceptance by reputable individuals. Too much time spent on due diligence may put the stakeholder at risk of losing out on the opportunity, who may then give such efforts short shrift, accepting minor signals of legitimacy as a sufficing measure.

A stakeholder's desire to benefit from, and fear of missing out on, perceived potential of an opportunity may undermine traditional, safer due diligence efforts (Xie, 2015), resulting in stakeholders with a high-level understanding of the venture’s goals and vision, but not the appropriately detailed background or knowledge to recognize if the opportunity itself is viable.

In summary, we suggest that a stakeholder’s receptiveness to a venture’s opportunity, heightened by the stakeholder's fear of missing out, will result in the stakeholder utilizing other, weaker, signals of legitimacy rather than acquire knowledge through proper due diligence.

Though ill-informed on how the venture actually creates value, the stakeholder will still become increasingly psychologically bonded to the venture. This brings us to our first proposition:

P1: As a stakeholder’s fear of missing out on an entrepreneurial opportunity increases:

a) The stakeholder's belief in the legitimacy of the venture increases; and b) The stakeholder's psychological bond with the opportunity and/or the entrepreneur increases; and c) The stakeholder's knowledge of the venture's actual capabilities decreases;

resulting in increasing stakeholder enrollment in the venture.

The Effect of Fear of Missing Out on Stakeholder Enrollment in the Theranos Case

The Theranos case provides an illustration of the relationships in proposition 1. Theranos deliberately used signals of legitimacy to attract more investors, especially those with a deep connection to its mission, beyond the supposed financial gain. However, many lacked expertise regarding the technology, and accepted Theranos’s assurances at face value. It is in this context these stakeholders developed the fear of missing out, resulting in stakeholder enrollment.

Theranos’s Legitimation Strategy. A new venture’s reserves of cultural and symbolic capital can influence its ability to acquire legitimacy and distinguish it from its rivals (De Clercq

& Voronov, 2009). Theranos built this legitimacy by leveraging notable investors, board members and other outlets, such as awards and media attention. As more signals of legitimacy were visible for Theranos, the fear of missing out on such an opportunity became powerful. All of the elements of Theranos’s legitimation strategy were instrumental in psychologically bonding the investors to the opportunity during the stakeholder enrollment process (Burns et al., 2016).

Enrolling high-status stakeholders such as prestigious strategic partners or VCs (Stuart,

Hoang, & Hybels, 1999), or other prominent stakeholders (Zott & Huy, 2007), is key to improving access to resources from investors, as each provides a signal of legitimacy. In the beginning, Holmes focused on enrolling important VCs, people known to be savvy in the investing world, and building a board of directors that would indicate clout and connection to important factions in government. Later, she targeted strategically significant firms in industries such as pharmaceutical and grocery/retail in order to develop tactical technological partnerships.

First-rate affiliations can often suggest the legitimacy and/or feasibility of the new opportunity, which may in turn motivate other stakeholders to devote their resources to the new firm (Rawhouser et al., 2017). When a known VC firm invests, this signals potential value to other investors (Shepherd & Zacharakis, 2001). Based on rough science and the hope to be involved in a venture going after a billion-dollar industry, Draper's VC firm, DFJ, invested in

2004, which provided a signal to other investors that Holmes might be on to something.

Investors were also drawn to the notable board members. Enrolling esteemed individuals to the board can expedite access to superior social capital (Certo, 2003), among other resources.

In 2014 Fortune magazine described the Theranos board as "what may be, in terms of public

service, the most illustrious board in U.S. corporate history" (Loria, 2015). Holmes built a board around elder prominent men with government ties, including former secretaries of state such as

George P. Shultz and Henry A. Kissinger, General James Mattis, and a few high-powered CEOs such as former CEO of Wells Fargo, Richard Kovacevich (Ramsey, 2015).

Since new ventures may convey credibility by allying with partners considered suitable

(Wry et al., 2014), Holmes also pursued collaborations with large pharmaceutical firms such as

Pfizer and well-known, respected retail corporations including Walgreens and Safeway. The

Theranos technology was both unproven and unfamiliar to the end-user customer, i.e. the actual patient having the tests done. Walgreens’ endorsement gave plausible validity to the unknown firm’s capabilities (Abelson & Pollack, 2016).

Theranos also used the media to send signals of legitimacy. An editorial showcase in the

Wall Street Journal led to an explosion of media attention and accolades for Holmes and the firm, including all major news outlets and major publications like Fortune and Forbes. Time

Magazine named Holmes one of the 100 most influential people in the world in 2015, President

Obama appointed Holmes as a U.S. ambassador for global entrepreneurship, and she received an invitation to be on the board of fellows at Harvard Medical School (Carreyrou, 2018a).

Holmes as Visionary. How entrepreneurs convey informational material in storytelling efforts is key to influencing stakeholders. In particular, framing a new opportunity as a chance to help others has been found to be more effective than framing it as a straight-forward business prospect (Allison, Davis, Short, & Webb, 2015). As signals of legitimacy continued to grow,

Holmes developed a narrative that aligned with the investors' deeper level goals: be part of revolutionizing healthcare. For instance, General Mattis was “convinced that [Holmes’] invention will be a game-changer” (Johnson, 2015), and Kermit Crawford, then Walgreens’

president for pharmacy, health and wellness, declared, “This is the next step in Walgreens’ efforts to transform community pharmacy, giving our patients and customers convenient access to the comprehensive care they need right in their communities” (Abelson & Pollack, 2016).

Stakeholders also forged the psychological bonds necessary for enrollment with Holmes, seen as an entrepreneurial leader who could achieve the Theranos vision. A person’s perception, expressiveness, competence and adaptability in social situations improves their ability to obtain resources from stakeholders (Baron & Tang, 2009), and Holmes was quite accomplished at these. Both VC Tim Draper and board member George Shultz viewed Holmes as a visionary similar to Steve Jobs or Bill Gates (Rago, 2013). Safeway’s CEO Steve Burd was “starry-eyed” about Holmes and the innovative technology, which matched his own vision of preventive health

(Carreyrou, 2018a, p. 167). Per Ken Auletta at The New Yorker, many of the board “were really impressed with her. They were talking about her as if she were Beethoven, as if she was this rare creature that maybe one in a century or two in a century come along who really can change the world” (Ramsey, 2019). General Mattis was notably impressed: “She is really a revolutionary in the truest sense … both technical and scientific, but also focused on human rights in the most classical sense of what human rights are about” (Ramsey, 2019), and “she has probably one of the most mature and well-honed sense of ethics—personal ethics, managerial ethics, business ethics, medical ethics—that I've ever heard articulated” (Carreyrou, 2018a, p. 313).

Stakeholders’ Knowledge of Theranos. While due diligence is traditionally integral in evaluating a venture's worthiness, often quite intensive (Harvey & Lusch, 1995), Theranos's investors seem to rely primarily on weaker signals of legitimacy to approve of the firm and pursue enrollment. For example, Walgreens did not sufficiently vet the technology before partnering with Theranos, relying instead on the "expertise" of Dr. Rosan, head of Walgreen's

Innovation Team and internal champion for Theranos. (Abelson & Pollack, 2016). Board member George Shultz vetted the firm only through conversations with well-respected friends in the medical field, who claimed the technology would revolutionize medicine. He also viewed

Kissinger as the smartest man he knew, who therefore could not be wrong about Theranos.

Likewise, Rupert Murdoch, owner of News Corporation and one of the biggest investors during

Theranos's later rounds (Abelson & Thomas, 2018), relied on conversation with the Cleveland

Clinic’s CEO, who liked the company and had engaged in initial talks with Holmes about a partnership. Impressed by Holmes's vision, Murdoch also believed the inflated projected returns.

Fear of Missing Out on the Theranos Opportunity. With the signals of legitimacy, the growing psychological bond with both the opportunity and Holmes, and lack of proper due diligence on the venture's claims, stakeholders quickly enrolled into the venture for fear of missing out on being a part of the Theranos vision. Many notable independent investors were rarely able to invest directly in such a venture, often needing to go through VC firms to access high-growth startups and only receiving a fraction of potential returns. Groups that initially passed on Theranos, considering it too risky, invested a few years later after seeing which high- powered people had invested and how the financial projections had grown. These investors were upset with themselves, having lost out on the investment growth rate to date (Carreyrou, 2018a).

Also not wanting to be left out of the possible healthcare revolution, Safeway and

Walgreens both agreed to invest hundreds of millions of dollars to roll out Theranos technology within clinics in their retail sites across the U.S. (Wasserman, 2015). In particular, Walgreens hoped to pick up some of the cachet of being associated with a cutting-edge Silicon Valley startup (Abelson & Pollack, 2016). Even when concerns about the technology were raised internally,

Renaat Van Den Hooff, head of the Walgreens Pilot Study, commented, "We can't pursue [these

concerns]. We can't risk a scenario where CVS has a deal with them in six months and it ends up being real" (Carreyrou, 2018a, p. 135). The same was true for Safeway: in the face of potential red flags, the grocery chain was still hesitant to walk away. It did not want to spend the next decade regretting passing on the technology in case it was a game-changer (Carreyrou, 2018a).

The Effect of Fear of Missing Out on Venture Opportunism

Stakeholders’ fear of the missing out on an opportunity does not automatically lead to entrepreneurial lying and opportunism on the part of the venture. However, stakeholders’ willingness to accept weaker signals of legitimacy and their lessened efforts at due diligence as a result of their fear of missing out creates a setting that increases the potential for entrepreneurial bad behavior. More specifically, stakeholders’ acceptance of information asymmetry and the resulting power asymmetry provide the pathway for lying and opportunism.

Information asymmetry. Information asymmetry happens when one party possesses more information than another party during an exchange (Arthurs & Busenitz, 2003; Williamson,

1985). Stakeholders can resort to several due diligence methods to try to determine the potential of an opportunity and the venture trying to develop and exploit it (Timmons et al., 2004).

However, untried new ventures and their potential stakeholders interact with information opaqueness, e.g. stakeholders’ inability to judge the quality of the new venture and the information it is providing (Rutherford et al., 2009). While stakeholder research typically assumes stakeholders would not accept information asymmetry when evaluating the potential of an opportunity (e.g. Dutta & Folta, 2015), the fear of missing out might prevail over this concern for stakeholders considering enrollment. Fear of missing out engenders an urgency in the stakeholder to enroll, causing the stakeholder to rely on limited information and heuristics, instead of a full due diligence inquiry, to make that decision in the interests of time (Xie, 2015).

When stakeholders fear missing out on an opportunity, they may not fully vet a venture prior to enrolling, or even after. In this situation, the lack of information—or even changing information, such as when entrepreneurs pivot and revise their stories (Garud et al., 2014)—may not matter to the stakeholder, nor waver their commitment to the venture. In psychology, such a phenomenon is known as continued-influence effect (Lewandowsky, Ecker, Seifert, Schwarz, &

Cook, 2012), where individuals still act on information they originally accepted as true, even if new information negates this truth. Thus, by committing to the psychological bond with such eagerness, the stakeholder will, and perhaps must, accept information asymmetry.

Power Asymmetry. Stakeholder-firm power asymmetry leads to outcomes that may favor one party over the other (Tang & Tang, 2012). Researchers have customarily argued that stakeholders should possess the upper hand in the relationship, due to their ownership of (or access to) resources the venture vitally requires in order to succeed or survive (Frooman, 1999).

In exchange, the venture may offer a “stake” in the venture to the investor—literal power within the company—maintaining the stakeholder’s clout in the relationship. However, when a stakeholder fears missing out on an opportunity, the balance of power may tip more fully in the venture’s favor, allowing it to utilize this power for its own gain (Barney, 2018). Less power in the relationship may mean the stakeholder must accept more information asymmetry or possibly be disengaged from the venture, thus confirming the fear of missing out. Power is derived from the stakeholder now being more dependent on the venture than the venture is on the stakeholder.

Similarly, a venture developing an opportunity perceived as highly value creating often has the option to choose among many stakeholders (Venkataraman, 2002), possibly engendering a fear of missing out within several possible suitors. Once a stakeholder with a fear of missing out has been chosen and enrolled by the promising venture, the stakeholder may feel relieved,

grateful, or even obliged towards the venture (van Balen et al., 2019). This sense of indebtedness for being a part of the opportunity exploitation can also tip the balance of power towards the venture. With an increase in power, a venture can keep its stakeholders at bay as it tries to exploit the opportunity; with a decrease in power, yet committed to the venture, stakeholders must pin their hopes on the venture to accomplish what it has promised.

Entrepreneurial Lying. When entrepreneurs intentionally misrepresent facts through deceitful techniques (e.g. exaggeration or misinformation) to convince stakeholders their venture is legitimate (Rutherford et al., 2009, p. 954), research has assumed this mainly occurs during the early stages of the start-up process. At this point, the venture is highly reliant on stakeholders’ access to resources and stakeholders hold the power in the relationship (Freeman et al., 1983).

However, as it gains legitimacy and resources, a venture employing deceit beyond this stage can derive power asymmetry over their stakeholders from continued use of information opaqueness.

Power asymmetry, coupled with a deep psychological bond, provide the potential for the venture to take advantage of stakeholders with few repercussions. Although stakeholders provide the resources, they may have limited power or knowledge over how the venture utilizes those resources. Entrepreneurs can also use persuasion to change stakeholder perceptions, especially regarding the value of the resources stakeholders provide in the development of the opportunity, as well as the worth of the assured outcome due the stakeholder (Di Domenico et al., 2010).

Venture Opportunism. Information opaqueness can lead to acts of venture opportunism against the stakeholder, such as adverse selection and moral hazard (Rutherford et al., 2009).

Adverse selection happens when a venture overstates its actual capabilities to stakeholders (i.e. overpromising and under-delivering), while moral hazard occurs when the entrepreneur gains personal benefit by taking higher than normal risk with the stakeholder's resources (i.e. acting in

bad faith because the stakeholder will incur any resultant cost) (Rowell & Connelly, 2012;

Williamson, 1985). The entrepreneur may engage in these types of opportunistic acts due to information asymmetry rooted in information opaqueness, where the venture possesses more information than its stakeholders (Arthurs & Busenitz, 2003), such as the entrepreneur's true intentions or the venture’s actual—versus reported—progress. Thus, opportunism can arise where the entrepreneur takes action that is not in the best interest of the stakeholder.

In summary, we suggest that stakeholders’ fear of missing out increases the stakeholders’ willingness to disregard information asymmetry, due to the urgency that drove them to enroll with the venture. By accepting this information asymmetry and feeling grateful for being a part of the opportunity, stakeholders essentially tip the balance of power to the venture’s favor. When this power goes unchecked, stakeholders can become more susceptible to entrepreneurial lying, as they neither know the truth about the venture, nor have the power to find out. Therefore:

P2: As a stakeholder’s fear of missing out on an entrepreneurial opportunity increases:

a) The stakeholder's willingness to accept information asymmetry from the venture increases; and b) As power asymmetry in the venture’s favor increases; and c) The stakeholder's susceptibility to entrepreneurial lying increases;

allowing the venture to engage in escalating opportunism against the stakeholder.

The Effect of Fear of Missing Out on Venture Opportunism in the Theranos Case

Elements of the Theranos case also help illustrate the relationships in proposition 2. The stakeholder's fear of missing out allowed information asymmetry, which effectively reverses the expected direction of power asymmetry. With the control of information and power, Theranos was able to lie to gain resources and take advantage of those that invested.

Theranos Ensured Information Asymmetry. Theranos practiced information asymmetry

to ensure information opaqueness (Rutherford et al., 2009), keeping stakeholders in the dark about its actual activities and motives. The firm also put a lot of effort into maintaining secrecy: investors and board members were only given approved narratives and financial projections, never actual contracts or receipts of the venture's business, and were never allowed to see the labs or interact with prototypes. However, stakeholders did not help matters by not properly vetting the venture and monitoring its actions.

Technology partners were also kept in the dark. Any demonstration of a prototype was prerecorded to portray consistent and reliable results from the technology. In the face of information opaqueness, stakeholders excited about the opportunity filled in the gaps in their knowledge with their own concocted information on Theranos’s potential. For example, Rosan evangelized the product beyond even Theranos's own claims: "Imagine detecting breast cancer before the mammogram" (Carreyrou, 2018a, p. 126). Such tales only aided Theranos’s mystique; the fear of missing out on such an opportunity only grew as its legend did.

Theranos Exploited Power Asymmetry. As the fear of missing out can increase information asymmetry, likewise information asymmetry can beget power asymmetry between stakeholder and venture—in the venture’s favor, allowing it to take advantage of the stakeholder

(Barney, 2018). Theranos used this power in part to increase information opaqueness (Rutherford et al., 2009), keeping stakeholders ignorant of the firm’s deceitful practices. Only a select few had access to complete information, with Holmes leading the interactions with each stakeholder.

In this way, Theranos ensured stakeholders could not share information and take action together.

While investors were drawn to Theranos by the illustrious board members, they were unaware of what little power the board actually had. Holmes arranged to have any board member asking too many questions or delving too deeply into operational details asked to leave the group

and threatened with lawsuits (Say, 2016). When Holmes’ revenue projections were viewed as

“not based on reality” in early 2008, four board members voted to remove her as CEO—only to reverse their decision when she convinced them that she was still the right visionary for the firm.

In December 2013, Holmes persuaded the board to approve a resolution giving her 99.7% of the voting rights; she could then in effect do whatever she wished (Carreyrou, 2018a).

Holmes also managed to manipulate matters to her advantage within the stakeholders’ firms as well. Knowing Rosan was her champion at Walgreens, she let him sing Theranos’s praises, but disinvited any other Walgreens employees who asked pressing questions. At

Safeway, Holmes appreciated Burd’s faith in her and used it to her benefit, only communicating updates through Burd. His conviction was so strong that even when Safeway employees raised red flags about Theranos test results (such as a false positive for prostate cancer), Burd assured them Theranos's technology was valid (Carreyrou, 2018a).

Holmes as Entrepreneurial Liar. Though entrepreneurial lying is considered most common in the pre-legitimacy phase (Rutherford et al., 2009), Theranos managed to maintain its deceit for nearly 15 years due to the presence of a strong psychological bond. Once a stakeholder is firmly enrolled, the fear of being disenrolled from the opportunity makes it extremely difficult for stakeholders to accept any new information that contradicts the original story given to them by the venture (Lewandowsky et al., 2012). For example, when board member George Shultz’ grandson Tyler was hired to test the efficacy of Theranos's devices, he discovered that his results drastically conflicted with the Theranos reports and questioned the firm’s ethics in a debate with his grandfather. The elder Shultz refused to believe him, siding with Holmes instead, and tried to convince his grandson to sign non-disclosure and confidentiality agreements in a meeting with company lawyers. Shultz told his grandson, "They're trying to convince me that you're stupid.

They can't convince me that you're stupid. They can, however, convince me that you're wrong and in this case I do believe that you're wrong." (Carreyrou, 2018a, p. 299).

In an attempt to gain medical legitimacy, Holmes invented falsehoods that would satisfy investors. For example, when investors requested outside validation of the technology, Holmes provided them with excerpts from a report she claimed came from scientists at Johns Hopkins

Medical School. Though scientists had met with Holmes to discuss benefits of such technology, no one at the school had actually been given a device to evaluate (Weaver & Carreyrou, 2016).

Even as Theranos failed to prove its value with actual technology, the firm used the folklore about the venture to enroll more investors. Buzz about Theranos was building in Silicon

Valley, as the "facts" about the company appeared very lucrative. One investment group member tried to persuade the rest that Theranos had “signed contracts and partnerships with very large retailers and drug stores as well as various pharmaceutical companies, HMOs, insurance agencies, hospitals, clinics and various government agencies," and been "cash flow positive since

2006" (Carreyrou, 2018a, p. 269). Most of this was false, but the group did invest.

When the media began revealing Theranos’s problems, Holmes relied on the narrative once more to shore up the psychological bond with enrolled stakeholders. She tried to spin the story by playing the Silicon Valley entrepreneur card: "First they think you're crazy, then they fight you, and then, all of a sudden, you change the world" (Baram, 2018). Enrolled stakeholders ignored the claims of the media and continued to praise Theranos’s mission to change the world.

Some investors even loaned Theranos additional funds to continue its mission after being banned by CMS. In a way, some stakeholders doubled down on their bond with Theranos.

Theranos Embraces Opportunism. Entrepreneurial deceit paired with information asymmetry results in power asymmetry. This dark equation provides an easy pathway for

opportunism, where a venture can take advantage of stakeholders' resources without the stakeholder’s knowledge (Barney, 2018). Holmes used this to her advantage when recruiting useful people for the board. For example, Mattis joined the board hoping that Theranos's technology would be a game changer for the army (Yglesias, 2018). However, Holmes recruited

Mattis for his connections, to gain early warning about regulatory visits and individuals that had complained to regulators about the firm (Carreyrou, 2018a).

She also used deceit to prey on wealthy investors. Due to the shaky nature of the science behind her technology, Holmes targeted affluent individuals unfamiliar with the biotech industry and avoided traditional VC firms more likely to engage in proper due diligence, such as Google

Ventures (Carreyrou, 2018a). She sought out private investors seeking the next billion-dollar idea: “big picture” idealists who believed healthcare needed to change but lacking scientific proficiency, such as Murdoch, Ellison, and the Waltons (McKenna, 2018). According to SEC filings, those involved lost $600 million when Theranos dissolved (Carreyrou, 2018c).

DISCUSSION

Most entrepreneurship research suggests that stakeholder enrollment more typically occurs under conditions of uncertainty, with both parties objectively aware of that condition

(Alvarez et al., 2020; Burns et al., 2016). We examine an alternative scenario: how stakeholders are enrolled under a perceived condition of risk created by entrepreneurial deceit, when in actuality, they are operating under conditions of uncertainty. We propose that stakeholders’ fear of missing out on an opportunity provides an alternative mechanism for enrollment, specifically arguing that fear of missing out increases stakeholders’ acceptance of information asymmetry regarding the viability of the opportunity and/or the entrepreneur’s capabilities. Further, this information asymmetry tips the balance of power towards the venture, even though stakeholders

"own" the provided resources (Tang & Tang, 2012). Thus, this context can embolden persistent entrepreneurial lying and venture opportunism. The Theranos case allows us to examine this phenomenon and exemplify the dark side of stakeholder enrollment.

We first demonstrate how stakeholder enrollment can occur via deceit, wherein ventures convince stakeholders that the conditions under which the opportunity is being developed and exploited are risky rather than uncertain. The perception of risk is preferable because under conditions of uncertainty, stakeholders are less inclined to enroll based on the opportunity’s potential (Burns et al., 2016). Ventures can use signals of legitimacy, information asymmetry, and deceit to make investors perceive that the context is risky, rather than uncertain, as long as the venture has enough money and resources to take its technology to market. They can thus take advantage of stakeholders' fear of missing out, as the subsequent loss of power hinders stakeholders from challenging the entrepreneur’s claims. Stakeholders must rely on the venture’s goodwill and honesty to reach negotiated outcomes.

Secondly, we illustrate the dark side of stakeholder enrollment. The finding that enrollment can occur with deceit calls into question whether actual trust, reciprocity, and transparency are required for stakeholder enrollment (Bosse et al., 2009; Pollack et al., 2017), or if these elements only need to be perceived by the stakeholder. Theranos only needed stakeholders to believe it could be trusted and that it was doing what it had promised; it did not have to deliver on that promise. Stakeholders' own fear of missing out and acceptance of information asymmetry provided a pathway for Theranos to enroll additional stakeholders for years through practiced deceit. While this may not always be the case, the presence of these two elements greatly increased Theranos’s power, allowing it to behave unethically for 15 years. A venture can use the stakeholder’s fear of missing out to its advantage by manufacturing false

signals of legitimacy and trust that stakeholders will not only accept, but also develop deep psychological bonds with the venture. Bypassing the morality assumption to stakeholder enrollment unearths a loophole for ventures with power to create shortcuts (Phillips, Freeman, &

Wicks, 2003), in order to gain legitimacy and resources.

Thirdly, we challenge the literature’s assumption that entrepreneurial lying only occurs in early-stage startups (Rutherford et al., 2009). As we see with Theranos, entrepreneurial lying can extend well past this pre-legitimate phase when allowed to do so. When certain conditions exist—namely a stakeholder’s fear of missing out and acceptance of information asymmetry, paired with an entrepreneur’s desire to engage in opportunism, even with allies—ventures can use the dark side of stakeholder enrollment to grow through deceit. Many new ventures use storytelling, hoping to gain resources (Garud et al., 2014), and truth may be exaggerated to place a venture in a more positive light (Martens et al., 2007). Such lying has a limit, however; if the story does not meet stakeholder expectations, a loss of legitimacy can result (Garud et al., 2014).

This limit can be greatly extended by taking advantage of a stakeholder's fear of missing out.

Finally, we add to the entrepreneurial legitimacy literature by exposing shortcomings of the legitimation process. While different firm types have varied thresholds to be deemed legitimate (Rutherford et al., 2016), legitimacy is mainly perceptual: legitimacy is in the eye of the stakeholder (Aldrich & Fiol, 1994). When stakeholders fear missing out on an opportunity, they may accept weaker signals of legitimacy. In the Theranos case, not all potential stakeholders engaged in proper due diligence. Instead they used heuristics to evaluate the firm (Busenitz &

Barney, 1997), basing their judgments on the status of current stakeholders and/or the venture’s stories about grand future expectations. If these judgments align with stakeholders’ beliefs and desires, in their view the venture crosses the legitimacy threshold (Rutherford et al., 2016).

Interestingly, once Theranos was deemed legitimate, enrolled stakeholders retained their belief of legitimacy even when new facts surfaced of the venture's illegitimacy. This suggests more research is needed to fathom how ventures may use pretext to skirt the legitimacy process.

Additionally, the entrepreneurial lying literature focuses primarily on the entrepreneur’s wrongdoing, with little recognition of any stakeholder responsibility for the lie’s existence. In fact, due to the assumption of a moral dimension in traditional stakeholder literature (Phillips et al., 2003), stakeholders are typically viewed as the victims of the lie. However, stakeholders also bear the responsibility of holding the venture accountable by conducting their own due diligence

(Fassin, 2012). Regarding Theranos, a chain of irresponsible stakeholders ultimately allowed the venture to deliver false medical results to patients, engendering financial, emotional and physical harm (Carreyrou, 2018a). These stakeholders bear responsibility for their inaction. By playing a role in perpetuating the lie, they caused painful ramifications not only for themselves, but also their own network of stakeholders (Rowley, 1997).

A practical implication of this research, therefore, is that stakeholders bear an important responsibility to conduct proper, thorough due diligence regarding relationships with new and untested ventures. When such efforts are given short shrift, stakeholders can cause not only a higher potential of harm for themselves by engaging with the venture, but may also provide a false signal of legitimacy to future stakeholders that the venture has been successfully vetted. As the collection of stakeholders increases, each stakeholder brings along a network of their own stakeholders (Frooman, 1999), vastly increasing the potential harm an unassessed firm can do.

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