If you treat investing as gambling don't sue if you lose a hundred million dollars of your customers money.
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.
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.
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.
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.
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.
"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."
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.
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.
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.
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.
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.
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?
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.
If you present results that are cherry picked, or problematic in how they were obtained, how much of a practical difference is there to your example?
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.
The whole Theranos affair interests me very much from a professional point of view, I could not imagine that none of those high flying investors and funds had not done actual due diligence, it is the biggest example of the herd mentality at work that I'm aware of involving only one company.
The really big question - and it is one that will inevitably be asked - is at what point in time did Theranos/Holmes realize that their tech wasn't going to work? If that is hard to establish (and they're probably trying very hard to make that even harder) then she may get away with the whole thing. If it can be established beyond doubt that they knew prior to accepting investment then it definitely is a case of fraud and the investors may be able to recoup some of their investment but it still isn't enough to get them off the hook completely for their own role in this.
Do we know the scope of the DD that was done?
I agree that they would be negligent if they did not run DD with a scope that included a review of the Theranos platform technology and implemented devices, but it is entirely possible to do proper DD and be fooled by a skilled charlatan.
Then please provide some proof that proper DD was done. I haven't seen any, and funny enough, Theranos did not defend itself at all by saying the investors did their own proper DD, which would be the easiest way out for them.
> it is entirely possible to do proper DD and be fooled by a skilled charlatan.
Sorry, I do not subscribe to that. You don't get to cheat on physics, biology, math. This is not some kind of magical device, it is an ordinary, real world device with very specific inputs and very specific outputs. In fact, such devices already existed which gives you a control. The disruption came along one parameter only, the amount of blood required to do the test.
It is trivial to come up with a foolproof test to see whether or not Theranos has a working device.
If they did not at the time have a device then you are investing in a company that your DD partner will tell you may very well fail because a device as specified may fail to materialize. If they had a process but no device then that too could have been tested.
Yes, it is hindsight because it is after the fact, but this is how the job is normally done and that wouldn't change before or after. It's just that we happen to live after the fact that doesn't make everything automatically hindsight. Just like naming your variables properly in a piece of software can't be called hindsight if you find a project failed because of not naming variables properly. It is simply not good practice, irrespective of the timing.
If you are stating that "they [investors] failed to do due diligence", then the onus is on you to provide proof that the proper DD was done if you don't want your argument referred to as speculation. I am not drawing a conclusion one way or the other.
> The disruption came along one parameter only, the amount of blood required to do the test.
That wasn't the only disruption and I'm not sure that was the primary one: I would argue the primary disruption was regulatory (using/abusing the LDT framework and consumer-initiated testing).
> It is trivial to come up with a foolproof test to see whether or not Theranos has a working device.
I would never use the words trivial and foolproof for anything in medicine or laboratory testing: there is nothing simple about running a comparison between labs, especially for biological samples. Run an identical sample at Quest and Labcorp and the values will differ, perhaps in a statistically-significant way.
I agree in that I would expect that proper due diligence should have recommended against an investment in Theranos. Not participating in the scientific community is a giant red flag. I completely disagree that technical DD on the technology platform would necessarily reveal the flaws in Theranos.
> That wasn't the only disruption and I'm not sure that was the primary one: I would argue the primary disruption was regulatory (using/abusing the LDT framework and consumer-initiated testing).
The technology enabled that. Without the tech that failed to materialize and is not the core of the innovation that Theranos represents.
> I would never use the words trivial and foolproof for anything in medicine or laboratory testing: there is nothing simple about running a comparison between labs, especially for biological samples. Run an identical sample at Quest and Labcorp and the values will differ, perhaps in a statistically-significant way.
Yes, but if you run enough samples then you should converge at something amounting to statistical equivalence. If that doesn't happen then either one of the tests is invalid.
> I agree in that I would expect that proper due diligence should have recommended against an investment in Theranos.
ok. That's probably the most important point anyway.
> Not participating in the scientific community is a giant red flag.
As are secrecy, refusing access to labs, not providing full details on the technology under NDA, refusing to run a sufficient number of blind tests at the request of the DD team. Keep in mind that we're talking about a 100M investment, there isn't a whole lot that you won't be able to do when doing DD for a deal that size.
> I completely disagree that technical DD on the technology platform would necessarily reveal the flaws in Theranos.
If that were true that would mean they had working technology, which they did not have at all. Even for some of the most basic testing they had to fall back on equipment supplied by others and this would have definitely turned up in a real DD, barring magic I don't see how they could have gotten away with it in any realistic setting.
This doesn't tell us one way or the other if DD took place and if so, the scope.
> The technology enabled that. Without the tech that failed to materialize and is not the core of the innovation that Theranos represents.
The technology is orthogonal to their regulatory machinations. They could have developed an in-house ELISA (or whatever, something more conventional) and made similar regulatory plays as they did with their microfluidics system.
> Yes, but if you run enough samples then you should converge at something amounting to statistical equivalence. If that doesn't happen then either one of the tests is invalid.
That handwaves over the complexity of the study, which goes to my point that your trivial and foolproof experiment is neither. A proper one probably needs a CRO. For a sizable investment it could be worthwhile, but I think you've underestimated the scope of your proposal.
> As are secrecy, refusing access to labs, not providing full details on the technology under NDA, refusing to run a sufficient number of blind tests at the request of the DD team.
Some of that in context isn't outside the behavior of other medical technology companies. It would be negligent to allow someone that wasn't with the government to walk through my lab without making some sort of arrangement ahead of time, and certainly under no circumstances unsupervised. I also have withheld key technical details to someone running DD despite having an NDA because NDAs cost money I didn't have to enforce if needed. The last item about testing is certainly a huge red flag, but [citation needed] if you're saying that Theranos did it (I find it possible to believe, but I haven't read that until your comment).
> If that were true that would mean they had working technology, which they did not have at all.
That might be an overstatement? I've followed this case closely, and I've had a very difficult time understanding what was claimed to work and did, what was claimed to work and didn't, what wasn't claimed by Theranos but is rumor transmuted into fact by the internet, etc. I've been operating under the assumption that the technology did work under controlled conditions and had problems when scaling up, but that is speculative on my part. I'm not aware of any scientific or medical reasons to believe that their platform cannot work, I am however aware of medical reasons to expect challenges to overcome (off-hand, sample volume, collection site), have violent disagreement as to the importance of consumer-intiated testing, etc. Unlike uBeam, there doesn't seem to be fundamental reasons to believe that Theranos' platform could not work and microfluidics being known to the art is supportive. If there are fundamental reasons that the technology cannot work, or if you have good hard sources for what Theranos had working and when, please do share!
> Even for some of the most basic testing they had to fall back on equipment supplied by others and this would have definitely turned up in a real DD, barring magic I don't see how they could have gotten away with it in any realistic setting.
"That's a great observation. It's true we do use conventional equipment for some basic tests and we are up front about that with our strategic partners, and it's simply because it's cheaper to run basic tests on the conventional equipment than on the Edison 1.0. Rather than waste money by insisting all testing run on Edison 1.0, we actually take the savings from running the basic tests on the conventional equipment, and roll that into the development budget for Edison 2.0 which we project will handle 98% of our full panel. Being intimately familiar with conventional equipment has other benefits: it's an important element of our development process to help us to better understand how we can deliver value-based differentiators on Edison 2.0." (or something like that) If they're willing to lie, they can spin a nice yarn and back it up with phony data. It won't fool everyone, but they don't need to fool everyone.
At that point they could stall, pretend the machine isn't currently working (ok, I'll be back later), that processing samples and preparation takes a really long time (ok, I'll wait) (which would be dissonant with the turn around time for the results claimed in their publications, see 'breakthrough in instant diagnosis') and so on.
At some point the rubber will have to meet the road and they'll have to stick a sample into their machine and give up the results and that really is all you need.
As for unsupervised access to the labs, that wasn't what I intended to say with 'access', just access, to verify that what they claim their processes are are indeed the processes as practiced.
> Unlike uBeam, there doesn't seem to be fundamental reasons to believe that Theranos' platform could not work and microfluidics being known to the art is supportive.
Agreed, maybe it could work, but there is no proof that it ever did work, and the company has admitted the results were invalid:
http://www.zerohedge.com/news/2016-05-18/elizabeth-holmes-ad...
And that's a huge difference. For uBeam the physics just isn't there, for Theranos there was a lot of skepticism about sample variability when you are using that little fluid drawn in that particular way.
But if any or all the components in that chain don't work then the chain won't work and the impression Theranos has made to the world is that it all worked.
> If there are fundamental reasons that the technology cannot work, or if you have good hard sources for what Theranos had working and when, please do share!
Yes, of course I have that, but you're going to just have to believe me, after all, why hold me to a higher standard than Theranos ;)? This is too secret to share, even with fellow participants on message boards and I'm not even asking for your money.
Kidding aside, what Theranos had working (if anything was working at all, my assumption based on their own admission is that it did not work at all beyond the simplest proof of concept) and when they had this on a timeline with their messaging to both investors, customers, employees and board members besides Holmes is a document that their investors would kill for right now. Some of that information is public or known to specific parties but it would take an insider leak or something to that effect to fill in the blanks.
Theranos has done a lot of damage to other companies trying to improve the world of medical diagnostics, that's an aspect that is far worse than any funds lost by investors.