Lessons for Investors in the Trial of Theranos Founder Elizabeth Holmes

Sometimes an investment is too good to be true.

While Elizabeth Holmes, founder and former CEO of Theranos, is on trial for allegations of fraud against investors and patients, its implementation in health can be a good example.

Nearly a decade ago, investors, including media mogul Rupert Murdoch, former Secretary of Education Betsy DeVos and the Walmart-famous Walton family, allocated more than $ 700 million to the company.

Prosecutors alleged that investors were influenced by distortions of Theranos blood testing technology.

According to the Securities and Exchange Commission, the company’s claims about its technology, as well as its business and financial performance, were exaggerated or false.

“The history of Theranos is an important lesson for Silicon Valley,” Jina Choi, director of the SEC’s San Francisco regional office, said at the time of filing the charges.

“Innovators who want to revolutionize and disrupt an industry need to tell investors the truth about what their technology can do today, not just what they expect it to do someday.”

“There will be a lot of attention to what Elizabeth Holmes knew and when she knew it, but a better question is what should the investment community know and when should we know?” dit Len Sherman, professor of business at Columbia Business School.

Theranos isn’t the only bad apple out there, it’s just the latest example.

Other black eyes for the industry include uBiome, investigated by the FBI for fraudulent billing, and Outcome Health, a healthcare advertising company that provided misleading information to drug manufacturers about where their ads were displayed and how they worked. .

Of course, fraud extends far beyond health care.

Sherman said that from the corporate malfunction, from Enron and WorldCom to Bernie Madoff and now Theranos. “We are in another era that has conditions that favor the promotion of fraud.”

“It’s important that we don’t assume that all companies are like Theranos, we just have to ask the right questions,” said Ruby Gadelrab, founder and CEO of MDisrupt, a medical diligence company for the healthcare technology industry. which aims to avoid making similar mistakes in the future.

“Health care, in general, is complex,” Gadelrab said. “It’s probably the hardest area to invest.”

To help investors look for healthcare technology companies, Gadelrab first suggests establishing whether the product is clinically and commercially viable.

“Investors do technical and financial diligence through experts, in healthcare we have to do medical diligence through health experts.”

Next, determine if there is evidence to support the scientific claims of the founders.

The technology should be validated, Gadelrab said. “Show me the data”. For example, “does it actually detect a disease or biomarker when it is present and not pick it up when it is not?”

“Not all data is created equal,” he added. Good data is done externally with scientists and research labs, excellent data is published in peer-reviewed journals, and excellent data is published and reproduced.

Finally, look at the structure of the team. “Do they have clinical experts in senior positions? On their advice, as investors, on their C suite?”

“Make sure health experts have a seat at the table and a voice in the process,” Gadelrab said.

According to Sherman, the secrecy surrounding Theranos technology and the intense attention paid to its CEO were part of the mystique, but it was also an important red flag. “I hope the next time this kind of thing happens, someone will say ‘wait a second.'”

With any investment, you can do your due diligence, advised Winnie Sun, CEO of Sun Group Wealth Partners in Irvine, California.

For starters, Google read the company and read consumer reviews, he said. Also, check out Twitter to see how customers respond. “This will take into account if you want to own this company,” Sun said.

If you are working with an agent or financial advisor, you have an extra layer of protection, as long as that person meets a minimum level of credentials and background to work in the industry. (Verify that financial advisors are licensed or registered with a company through the SEC Investment Adviser’s public disclosure website or that the broker appears on the appeal of the financial industry regulatory authority, BrokerCheck) .

“If you’re doing it on your own, you need to do a little more due diligence, especially if it’s an investment idea you’ve heard about from a friend or online,” Sun added. “Take as much time looking at what you have in your wallet as you book the next vacation.”

Otherwise, invest in a fund or mutual fund traded on stock exchanges instead of selecting individual stocks.

Most experts say that diversifying with these asset classes is the best way to manage risk and improve long-term performance.

“As investors, it goes back to the basic philosophy of diversification,” Sun said.