Posted December 09, 2020
By Ray Blanco
How to Avoid the Next Theranos
Youve probably heard of Theranos by now.
The one-time Silicon Valley darling company has been the subject of books and documentaries. A Hollywood drama starring Jennifer Lawrence is in production.
Theranos, founded by Stanford dropout Elizabeth Holmes, was supposed to revolutionize the world with diagnostic tests that only needed a few drops of blood to perform dozens of blood tests less than a hundredth of whats required by traditional tests.
Only it didnt. Their technology didnt work, even though Holmes and company reportedly claimed it did, both to potential customers and patients, as well as investors.
Last week, we took a look at how to find the next Tesla.
Equally important is how to avoid the next Theranos.
Theranos was a private company. But its a mistake to think that publicly traded companies are immune to that sort of fraud. Chances are Theranos would have done quite well if it had gone public via a SPAC.
Its important to remember that Theranos fooled a lot of smart and influential investors and it lured famous, well-connected names to its board.
In hindsight, there were important red flags.
Theranos may have had prestigious board members, but none with expertise in biomedical engineering or medical device manufacturing. Most board members were politicians or retired military leaders. Likewise, while it attracted a spate of high-profile investors and venture-capital funds, health care-focused funds were notably absent.
They didnt want money from folks who were experts in the science of what they were trying to do.
So lesson No. 1 from Theranos is to know who youre investing alongside.
Luckily, as an investor in a publicly traded company, thats easy to do!
Large institutional investors are required to disclose their holdings and free resources like Yahoo! Finance and Morningstar.com provide holder and ownership data. Taking a look at who the major owners are is always a good move.
In general, you want the professional investors who own big stakes to be experts in that companys field
Its not uncommon for a health care fund to employ analysts with MD degrees, or energy funds to employ folks with geology backgrounds. These specialists can add a lot of context around how a small companys tech holds up to scrutiny.
Another super-important takeaway that many folks miss about Theranos is that it wasnt an outright Bernie Madoff-style fraud.
Researchers at Theranos were actively working on developing microfluidic blood tests the company was just failing miserably and misrepresenting their progress.
Thats a far bigger challenge for regular investors to spot.
And its another good reason why its so important to pay attention to who youre investing alongside as an emerging-tech investor.
My guess is thats a step that most investors never think to take. But its free and incredibly easy to check for any public company.
Jonas Elmerraji, CMT