The investor's argument is that Theranos lied. The investor believes Theranos fraudulently produced evidence that their product worked in order to fake the responses to the investor's due diligence. If that's true, and the investor can prove it, then that's not simply part of the typical risk of investing, that makes the investor the victim of a serious crime.
That's a dumb argument then. See, when you do due diligence you should assume that the company lies. That's why you go there in the first place, if you believe everything they tell you then you're going to get fleeced if they lie.
Theranos did not comply with their duty to inform truthfully, but the investors did not comply with their duty to research. Asking the company is not research, the technology being complex is not an excuse, you're going to have to do your own homework, you can't rely on the company because they have an incentive to not be truthful.
It's not as if there is accounting with double bookkeeping that was withheld from you, it's a bunch of machinery that should perform in a certain way. Bring your own samples for which only you know the outcome, have them run those through the machinery in your presence and check the results.
That this will take more than some pencil pushing is where things went wrong, they simply didn't feel that on an investment this size they needed to actually look at the technology, they basically lapped up what the company told them and forked over the cash.
FWIW I do this sort of thing for a living and I'd take it quite personal if a company lied and got away with it because I failed to properly look at their technology.
Belief doesn't enter into it.
edit:
Downvoters are invited to discuss what they think is wrong with this comment or where the disagreement lies.
This is a valid comment. Theranos' claims for their technology should have been readily verifiable. The reason for this mess is they were given money without asking enough questions. It's actually not even that complicated as having to test the machines yourself, if they had just tried asking a few more questions, it would have become pretty obvious this was a bad investment. There were many smart VCs who kept their money because they did this.
eg see here:
http://www.vanityfair.com/news/2016/05/theranos-silicon-vall...
"When I’ve asked V.C.s why they didn’t pour millions of dollars into a company that appeared to be changing the world, I was told that it wasn’t for lack of trying on Holmes’s part. She met with most top venture firms. But when the V.C.s asked how the technology worked, I was told, Holmes replied that it was too secret to share, even to investors. When they asked if it had been peer-reviewed, she insisted once again it was too secret to share—even to other scientists."
Is this common among VCs and investors in general, or was it just that Theranos' supposed technology was more complicated than what they were used to, so they couldn't accurately assess it? Or both?
Investors will invest in all kinds of stuff they personally have no knowledge of. This is perfectly ok if it is their own money and they have no responsibility to others (especially to limited partners who have no say in the matter, or, for instance in the case of a pension fund).
The way it works with such parties is that they hire people who are versed in the technology to prepare a report on the subject at hand. This is called 'due diligence', specifically, technical due diligence.
So if you cross the t's and dot the i's there will be a nice report saying 'this technology is a-ok' by some party in a drawer somewhere. If so then that party shoulders a large part of the blame. Absent such a report (and I find it hard to believe the investors did not perform due diligence, but then again, so far none of them have stepped forward to point the finger at their technical advisors) the investors themselves are far more responsible.
See, when you do due diligence you should assume that the company lies
Really? I'm not naive enough to believe that everything you get to hear during due dilligence is 100% truth but I also don't think we live in a world where everyone can get away with deception and lies. After all the civilized world has developed a constitutional state with a law that offers some level of protection.
So there is a point where business between a company and an investor is conducted in good faith. If it comes out later that the company has forged technological results to defraud investors, to me that's a very good reason to sue. Saying the investors didn't look well enough is futile as a) you could use the same argument to justify pretty much any case case of fraud and b) it's impossible to do perfect due dilligence.
When there are millions of $ on the line 'good faith' doesn't cover it any more. You have to make sure that you are spending that money on something real. That doesn't mean there can't be risk involved, it doesn't mean that companies invested in won't fail. But you owe it to yourself, your partners and those who trusted you with their hard earned money that you do everything in your power to invest wisely.
The state will protect you if you have done your own homework.
I'm not saying the investors didn't look well enough, I'm saying that if they hired some party to look at the technology that party was asleep at the switch or they didn't do due diligence at all. There is no way that outside expert in the field would have been fooled if they came prepared to look at the technology in depth.
If the investment was done before the technology was realized then they probably would have raised some issues with respect to the fact that the core tech was unproven and might very well not work for a number of reasons.
Due diligence will never be perfect, that we agree on. But to get the core issue wrong is extremely rare, first and foremost you verify each and every claim the company made. It is not a discovery process, it is a verification process and given the fact that Theranos made some pretty strong and very verifiable claims is what makes me wonder how much DD was actually done.
From the outside looking in it looks as if a whole bunch of totally clueless investors couldn't wait to fork over their money to not miss the boat without so much as a shred of doubt about the miracle machine.
When someone lies in order to convince someone to invest -- that's called fraud.
The failure to conduct diligence does not idemnify Theranos. They weren't exaggerating-- they were making claims that just weren't true -- and the knew those claims weren't true and still went to investors with the lies. That shows criminal intent and not just incompetence.
The implication of what you're saying is that it's impossible to defraud an investor because the investor is always going to be partly to blame for not doing enough work to prove a business they're putting money in to isn't scamming them.
To an extent I actually agree, but I don't think that should preclude an investor from suing. If a business went to extraordinary lengths to fake some working tech then I think it's fair for the investor to get their money back, and it should be up to a court to decide whether or not that happened and what 'extraordinary lengths' means in any given case.
Yes, an investor is always partly to blame if they get scammed.
It's fair for them to sue but I think the court will ask them why they didn't do any independent verification of the technology to make sure it actually worked. That's pretty much the bar for anything that's labeled 'revolutionary' or that you perceive to be 'too good to be true'.
If it were a much more normal product with proven tech then I'd be more inclined to let them get away with 'belief', but in this case (and uBeam, to name another) you really want to see the technology for yourself and you want to verify that it works.
Short of stage magic they shouldn't be able to get away with this.
One of the most interesting DD's I ever did was a company that tried to rig a demo, they didn't get away with it because I went in assuming it was a rigged demo and I figured out how they did it. What makes it interesting is that today what was 'magic' in the 80's is actually quite normal... But back then you'd have to be doing something quite impossible with the technology available in the day to be able to give that demo unless you rigged it.
As far as I followed the story, there was basically double bookkeeping in the technology department. Like the fact that they used classic technology while pretending the results came from their own new tech.
There are lies, and there are illegal lies. If you go to the IRS and put in writing a different number, you go to jail. If you go to the bank and get a loan, but you use photoshop to prove your colateral is worth 1 million, you'll also go to jail, albeit the process will take longer.
Here I expect the process to take longer still, but for this degree of lying, jail is definitely on the table.
> As far as I followed the story, there was basically double bookkeeping in the technology department. Like the fact that they used classic technology while pretending the results came from their own new tech.
This is why I suspect that nobody of the DD team ever went to the lab to have an actual sample (or preferably several of them) tested in their own presence. Which in this case would seem to be the minimum level required for satisfaction given the radical departure from the standard of the time.
Given that Theranos claimed their tech was too secret to share or be peer reviewed anybody that lost money (theirs or others) should look in the mirror for the cause.
> That's a dumb argument then. See, when you do due diligence you should assume that the company lies.
I would agree that a certain amount of healthy...embellishment is to be expected from a company when talking to investors. Maybe I'm just naive since I don't play in the VC games, but if our first interaction as businesspeople is a lie, you aren't getting anything from me.
Bending the truth is one thing: evidence shows that Theranos at the direction of Holmes herself outright fabricated evidence to show their testing worked, knowing damn well it didn't.
I honestly don't understand what is taking so long. Everyone involved in this companies board should be behind bars for the remainder of their life. This wasn't some fucking ordering food app that went wrong, this was thousands of people's medical decisions. This shit matters but it gets the same kid gloves treatment that everyone worth more than a few million can count on from our pathetic justice system.
>See, when you do due diligence you should assume that the company lies. That's why you go there in the first place, if you believe everything they tell you then you're going to get fleeced if they lie.
Even doing due diligence, you rely on their information, expertise and record-keeping. Lying or misleading is unacceptable.
This whole story is messed up. I still detect a bit of apologism on these boards, even though it looks like fraud was committed. Assume everyone lies? Really? What sort of world are you doing business in?
Yes, lying or misleading is unacceptable. And this should lead to the deal being terminated before it is closed. There is no reason the company should get away with this prior to the deal being closed, assuming everybody plays their assumed role. But in this case I suspect that the investors did a slipshod job of their duty to inspect. After all, what the company said doesn't really matter, what matters is what the investors themselves determined to be the truth based on the evidence provided to their technical team and what the technical team did to ascertain this evidence was correct.
As for what world I'm doing business in: I work hard to keep the money of my clients safe by detecting mistakes/fraud/omissions/issues before the deal is consumed and I have a hard time believing anybody competent signed off on the Theranos deals from a technical point of view.
It's a fact of life that when you're an investor every now and then someone will attempt to take you for a ride, this is why investors perform due diligence to begin with, to make sure that they have covered their responsibility towards those whose money they manage.
That they are still picked by the company. That makes them suspect to begin with.
Let me give you one sample of what DD entails:
If you're going to buy a factory with a warehouse in another town you could believe they have a warehouse in another town, or you could go there to look at the warehouse, make sure it's up and running and that there is stock roughly in accordance with what you were told. You check the ownership of the lot and the building if the company claimed it is their property. You count the number of employees, how many trucks there coming and going during your visit and what got loaded / unloaded.
Of course 99% of the time you'll find that everything is in order and that any errors are accidental or immaterial. But that 1% (actually, probably more than 1% but never mind) of the time where things are not as they should be you realize what DD is for.
It's not a rubberstamp, it is a verification that the picture the company painted was error free and complete.
Asking the company what the address of the warehouse is would in my opinion not be enough, even though you could assume that all is as it should be.
I've had the weirdest stuff surface during DD's, and I've had a few eyebrows raised for stuff like 'ok, I'll visit your warehouse tomorrow please alert them' (or other stuff in that vein) but for real companies with actual products and honest management this is never any problem, at most an inconvenience. Whenever there is significant pushback to such a request you can bet there is trouble and it usually doesn't take long after that to find something really bad (which typically signals end-of-deal).
Letting the company pick the examples or the results in the case of a company that provides test equipment is not an option, you'd want to walk in with your samples have them analyzed on the spot and follow the whole chain from entry to results and then you'd compare those results to a control that you possess. Anything less would not do.
Otherwise, why do DD at all? If you're going to go on what the company provided then you may as well skip DD and become a true believer.
