Theranos lessons by Gray Matter Group
Updated: Apr 11, 2019
For those of you unfamiliar with the name Fangtasia, it was the brand name of the blood substitute featured on the hit HBO show Tru Blood. In the show, vampires could drink this faux blood concoction in lieu of drinking the blood of an animal, like humans.
This is the first thing that came to mind with the sudden explosion of news surrounding Elizabeth Holmes and the fraud blood-testing company she founded, Theranos. There have been numerous articles, TV shows, etc. about her cosmic rise and fall, but no doubt, the release of the highly anticipated documentary by Alex Gibney on HBO called The Inventor: Out For Blood in Silicon Valley has everyone talking about this all over again.
Much of what has been brought to light has been the work of one really tough investigative journalist at The Wall Street Journal, John Carreyrou. The must read book by Mr Carreyrou, Bad Blood: Secrets and Lies in a Silicon Valley Startup, does a wonderful job laying out the case against Elizabeth Holmes and Theranos. Really excited to see how much additional information is added by the HBO documentary, if any.
The Theranos story wreaks of red flags and one really sits back and wonders, how the heck did the "smart money," with nearly unlimited resources invest in such a fraud? To begin, the "smart money" made the investment with not doing very much due diligence. Audited financial statements are where any form of serious due diligence should begin. The fact that audited financial statements were not even requested is simply amazing and truly unbelievable.
Complacency leads to very bad judgement and mistakes. Having an independent third-party comb through every deal, no matter how big or small, is not just good business/investing practices, it can save A LOT of money.
Let us take a look at who invested in Theranos, and how much they lost.
Walton Family (heirs of Walmart) = $150mm
Rupert Murdoch (21st Century Fox/News Corp) = $121mm
Cox family (media, telecomm, etc.) = $100mm
Carlos Slim (media investor ) = $30mm
Andreas Dracopoulos (Greek shipping magnate ) = $25mm
Oppenheimer Family (ex-De Beers owners) = $20mm\
Riley Bechtel (Bechtel Corp.) = $6mm
Daniel L. Mosley ( Cravath, Swaine & Moore) = $6mm
Having independent third-party due diligence conducted on such an investment would have cost a single digit percentage point of loss amounts listed above. The truly priceless aspect is saving yourself or your firm the negative attention and embarrassment such an event brings.