Once the start-up darling of Silicon Valley, US biotech firm Theranos, claimed its technology could revolutionise the way blood was tested - by just a prick on your finger.
At its peak, it even had a USD$10 billion valuation, and over USD$700m was invested in the vision of its charismatic (now disgraced) young founder and former CEO, Elizabeth Holmes.
Theranos eventually dissolved in September 2018, with Holmes now in court facing up to 20 years in jail for fraud after a web of lies revealed the product's actual capabilities, along with numerous reports of a hell-like work culture.
Investigated by Wall St Journal Reporter, John Carreyou, the Theranos story is covered in his book Bad Blood: Secrets of a Silicon Valley Start-up, which is based off his original reporting that brought down the company.
In light of the cannabis green rush that has reached New Zealand, there are some key lessons that Kiwi investors looking at early stage medical technology opportunities can learn from Theranos' blow up.
Who is following who
Theranos had a spectacular line-up of investors and directors who came from all manner of successful backgrounds. Rupert Murdoch - head of Fox News, Henry Kissenger - former US Secretary of State, Larry Ellison - CEO of Oracle, the Walton Family - heirs to the Walmart fortune, and the sixth wealthiest person on earth - Mexican telecom tycoon Carlos Slim.
Despite all of this accumulated wealth and power, one crucial element was missing - expert Silicon Valley healthcare investors, who actually passed on numerous opportunities to invest in the firm.
While blindly following investors is never advisable, being aware of your fellow investors' expertise is a good thing to consider as part of the due diligence process.
In Theranos' case, the negative effects were twofold as it resulted in a board without healthcare technology expertise, who were therefore unwilling to confront Holmes about this facet of the business.
Secretive shareholder communications
Theranos was able to keep investors and customers in the dark by playing up the top secrecy of its products and technological breakthroughs.
Most companies will try to present their information in the best possible light, and some strategies are actually best kept under wraps until more information is available, but overly secret communications with shareholders are unlikely to be a good indicator of success.
Nowadays, plenty of company information is available in the public realm, whether it be in social feeds, hiring figures on LinkedIn, or reviews on sites like Glassdoor. A company willing to share their successes and failures honestly is always a positive sign to an investor - as no company is going to be great without some speed bumps along the way.
Don't take my word for it
Carreyou's explosive book is cultivated around rigorous interviews conducted with former Theranos staff, customers, competitors and investors. Although in this case Theranos had put significant legal gags on these individuals to stop the truth getting out, it's important investors know they can pick up the phone to get another perspective.
Talking to involved parties can help investors build a better picture of the company's current state and how members of its leadership team are regarded in the industry. Given the high staff turnover and lack of any actual Theranos customer testimonials, this helped draw Carreyou's attention to the prospect of a bad egg.
The here and the where
In all early-stage businesses, there's an element of selling the dream of where the company can go. Products need to be made before they can be sold, and with new or emerging markets, there's always a degree of uncertainty about whether goals can be achieved.
Theranos consistently took its storytelling to a fraudulent level. From the efficacy of tests, to revenue contracted and product developments, Theranos repeatedly lied to investors and potential customers.
Fabrication even went as far as claiming their tests were used in the Afghanistan war zone. Investors should always aim to not only get the story on where the business is going, but also ascertain what the products look like in its current state. This will allow better assessment of what realistically needs to be achieved for the company to get into the market and begin to build revenue. Considerations could equally be the likes of regulatory roadblocks, along with the aforementioned product development issues.
Early stage medical technology investment can be highly lucrative for investors due to the massive potential markets for the products being worked on.
But, this financial reward does not come without taking on some significant risks, given the issues with developing technologies, regulatory approval and the need for large amounts of funding before a company generates revenue.
The lessons from Theranos are helpful in ensuring that investors are taking on the right kinds of risks in this space - rather than missing important red flags when the opportunity to invest is presented.
- Simeon Burnett, CEO and co-founder, Snowball Effect