Theranos Investors Have Only Themselves to Blame

I’d like to share some perspective on Theranos while we wait for crowdfunding’s new era to begin on May 16…

You’ve probably heard that Theranos is the subject of multiple government investigations.

Its founder and CEO Elizabeth Holmes may be banned from her company for two years. Theranos itself may not survive.

Are Theranos’ investors supportive, livid or just plain bewildered? We don’t know. None of them – Tako Ventures, ATA Ventures, Draper Fisher Jurvetson (DFJ), Continental Ventures/Properties and Larry Ellison (former CEO of Oracle) – are talking.

Nothing against Larry Ellison and his colleagues, but thank goodness Theranos is their problem and not John Q. Public’s.

Due Diligence Lacking?

Don’t get me wrong. This is not something I take pleasure in. Nor am I saying that the crowd would not have been duped.

For all I know, it might have.

But things could very well have turned out differently if tougher questions were asked. Imagine a thousand prying eyes focused on Theranos’ technology and business. That’s what you get with crowdfunding.

Would they have noticed the several caution flags flapping in the wind?

The stories I’m hearing from inside Silicon Valley say that investors weren’t allowed to see the technology until they signed the term sheet and wired the money.

If true, it’s inexcusable. These investors have only themselves to blame for the mess they’re in.

Odd Way of Doing Business

And it shines a light on the deep flaws embedded in Silicon Valley’s investing playbook.

These VC and professional investors get their dealflow and signals where to invest from their network of fellow investors. They whisper into each other’s ears. Share tips. And follow each other into deals.

Want to meet a VC? You most likely need a warm introduction.

Roy Bahat (head of Bloomberg Beta) thinks this is crazy. I do too. “Show me another industry where the way you find your customers is to wait for your friends to introduce them to you,” he says.

In Theranos’ case, the initial seed money came from a reputable investor who also happened to be a friend of the founder’s family. A faulty signal with grave consequences.

Other investors followed. It snowballed from there.

A Great Opportunity at Face Value

Why not? It seemed like a great opportunity.

The idea (lab tests from a few drops of blood at unbelievably low prices) was big, even transformative.

The company had plenty of credibility. A blue ribbon board of directors and advisory board. And those VC firms that had already invested.

Soon, the fear of missing out (FOMO) took over. Investors piled in.

When Theranos reached Unicorn status, it was further proof that it and its technology was legit.

Theranos raised more than $88 million in four rounds. Its current valuation: $9 billion.

The One Thing You SHOULD Know

I wonder what Larry Ellison is saying to his colleagues.

Is he saying, “I am sure the technology works”? Or “I got fooled”?

It should not have come to this. Some things you can’t know early on.

For example, a technology may meet a need, but you can’t know for sure at what price customers will buy something to meet that need.

You can’t know if costs will go up or down as a company grows. Or if a company’s sales team can handle scaling.

But one thing you should know? THAT THE TECHNOLOGY WORKS.

It doesn’t guarantee success, but you’re removing a big risk from the table.

So do what it takes.

If you don’t understand the technology, talk to somebody who does. Test the product. Adam and I try to test products and talk to customers who have tried them out.

One example (of hundreds): HeatGenie. We spoke to the CEO. We thought his product could have nice upside. So we asked for samples.

heatgenie

We then tried the product out. Temperature-wise, the coffee started out lukewarm but got hotter. But we had trouble opening the can.

The CEO spent hours explaining the technology to us. We thoroughly understood it, but the product needed more work. We didn’t invest.

So what would have happened if Theranos were crowdfunded?

I believe there would have been a lively discussion about the technology. Perhaps an overwhelming consensus would have been reached.

The technology is real and it works. Or it doesn’t and may never work.

Or perhaps consensus is not reached. It happens. For example, startup uBeam transmits power over the air to charge electronic devices. Many technologists say the technology doesn’t work. Many say it does.

I can’t begin to have the technical expertise to make a definitive judgment. But I don’t have to. There’s enough disagreement in the technological community to keep me away from this investment.

It’s simple: If you’re not sure about a technology, don’t invest.

Listen, crowdfunding isn’t a cure-all for this sort of thing.

For one, the crowd certainly isn’t immune to greed. And it’s susceptible to FOMO.

But it has proved to be inquisitive and probing when it needs to be. Google Glass was one of many instances of the crowd deciding a technology wasn’t up to snuff or clicking with customers.

Something was fishy with Theranos very early on. I believe the crowd would have sniffed it out long before the government launched its investigations.

We’ll never know for sure. But in just a couple of weeks – May 16, to be exact – we’ll see how the crowd performs due diligence in action.

I’m betting “who you know” will recede in importance, replaced with “what you know.” And crowdfundraising startups will get the scrutiny that unfortunately Theranos never got.

Invest early and well,

Andrew Gordon
Founder, Early Investing