4 ms·

I remember reading a similar article about Hampton Creek, the food startup. How do VC's end up investing in stuff like this? That's not meant to be a rhetorica

by J-dawg 11y ago

I remember reading a similar article about Hampton Creek, the food startup. How do VC's end up investing in stuff like this? That's not meant to be a rhetorical question, I know nothing about investing. I'm genuinely interested in how very smart people end up giving millions of dollars to fund vapourware. What is the due diligence process? Don't VC's hire an independent expert in the field to audit the core technology? I guess confidentiality is an issue, but we have NDAs for that, right?

aaronbrethorst 11y ago
It started off with Elizabeth Holmes being childhood friends with Tim Draper's daughter: Timothy Draper, the well-known venture capitalist, had been a neighbor when the Holmeses lived in California. The children played together. “I gave her her first million bucks to get the business going,” Mr. Draper says. http://www.nytimes.com/2015/12/20/business/theranos-founder-faces-a-test-of-technology-and-reputation.html http://www.nytimes.com/2015/12/20/business/theranos-founder-... And it doesn't hurt that her family is ridiculously well connected, or that Holmes is obviously an incredibly intelligent person...It just seems like the technology simply didn't pan out, and she was never able to say '¯\_(ツ)_/¯ sorry guys, no dice.'
shoyer 11y ago
Smart investors know their area of expertise and audit the core technology themselves. Noteably, nobody with a specialization in healthcare invested in Theranos.
- J-dawg 11y ago
  Surely this alone should have deterred the non-specialist investors?
jacquesm 11y ago
The problem here is that if one investor is 'in' the rest will assume they did due diligence and will use this as social proof to invest as well, aka the herd mentality in investing. Quite a few VC's would never invest these kind of funds without a full process DD (legal, financial, technical, commercial), but once you're vetted by one of the top flight VCs and have received an investment from them a lesser party could easily make a whole pile of (wrong) assumptions, especially if there are links between the parties outside of the VC circuit. What should be done is definitely not always what is actually done. A simple reason for this is that if the DD fails the investor pays for the DD from their own management fees, but if the deal goes through the company invested in usually gets the invoice from all the DD parties (as per the terms sheet, this is a very common clause). This puts a weird incentive on VCs to let deals go through, they can't have too many DDs fail during the process or it can actually materially impact their ability to work. Imagine that if 2% (which is pretty much the going rate) of a small fund (say 50M) is what the VC company has to operate on for every year that it runs (so 1M) divided over all the partners and associates in the fund, renting a building in some prestigious place, travel and so on has to bear the additional load of several full process failed DDs (anywhere from 50K to 200K each) it can really hit hard if too many of them fail. So if there is a way to avoid doing DD because a larger party is already 'in' this is a quick way to validate and a very easy mistake to make. Of course - given that that is what I sell - I would very much prefer it if every round every investor would do their own due diligence but in practice you really don't see that. The most common format is that in every round there is some level of DD done (thoroughness roughly related to the size of the deal) and then all the parties involved decide to invest (or not...) based on DD done by one of them. In the Theranos case I suspect the 'big names' blinded investors, which is dumb on a very basic level. But it's their money and if they decide to throw it away on a BS project that is their right. The bit that really bothers me is how many good companies you could have funded instead of this one too-good-to-be-true unicorn.
- J-dawg 11y ago
  This is a great answer. It's amazing how VCs seem just as prone to social proof as the rest of us.
- forgetsusername 11y ago
  >In the Theranos case I suspect the 'big names' blinded investors, which is dumb on a very basic level. But it's their money and if they decide to throw it away on a BS project that is their right. It's funny that you yourself were very high on Theranos in early articles on this site, and specifically praised the obvious due diligence these companies must have done.
  - jacquesm 11y ago
    I wasn't high enough to invest money in them and I would not have invested money without doing DD (not that I would be let anywhere near that project anyway). The main point is that I (and many with me) are quite shocked that this amount of investment was done without anybody knowledgeable in the field apparently doing DD on the company. That there is a mechanism that explains this is what makes it interesting, especially given the size of the various investments. There are a few more cases like this that are - in my opinion at least - more interesting still because they are closer to fields that I know more about than about bloodworks. And that's one of the main take-aways for me, investors should invest in things that they understand or they should hire their own independent experts to verify that the technology is real, but in practice even if they know this they do not always do it, even at the level of Theranos (hard to imagine, but there is pretty solid proof by now). That Theranos is - at this point this seems likely - a lemon is a very good and extremely expensive lesson for anybody that wishes to invest looking at the bona-fides of the other investors already on board. That should count for exactly nothing. Good luck convincing the world of that but that is my conclusion. The way I read the Theranos story is that the dream didn't work out, that - rather than welcome inquiry and fixing of the tech. They chose to become super defensive and play silly games rather than to open up which suggests that there is a level of self deception going on. And this is where it becomes very hard to distinguish a scam from an accident and a fraud from simply one of many failed investments. If anything the level rather than the principles here are what attracts attention, you see this situation in the investment world with great regularity at lower levels of investment and usually these take much less time to play out. I wonder if at some level Theranos and its executives still believe they can 'fix' the technology or if they have actually given up on that. This will be the harder part for them, to acknowledge defeat and to own it. It's a sad story, nothing to be gleeful about but at least for me there are some very valuable lessons here. Social proof is no proof at all and each and every investor that lost (or stands to lose) money in this whole saga will have paid a very dear price to learn that lesson. Next up: uBeam.
pessimizer 11y ago
It's affinity fraud. She's part of the tribe who invested in her. Not only did they not vet her in any way (because as fellow tribe members, they assumed they knew everything necessary about her already), but she knew exactly what they needed to hear. edit: and right now, she's clearly frantically trying to come up with what they need to hear to give her even more money. I give her a 75/25 chance of succeeding if she avoids any direct mention of sexism (although slathering on heavy implication), and combines it with an Icarus narrative, a born-again redemptionist narrative (a Jimmy Swaggart speech), and tries to recast Theranos as a charity that was swinging for the fences to reduce the costs of health care to help the poor and our economy. Then, she should show a new, mostly unrealistic medical device concept that if successfully created could reduce the costs of some expensive area of health care 10x. It can't be related to diagnostics in any way, because she'll have to not contest the proposed ban, but instead embrace it. She can keep that con going long enough to get out of the ban, and go back into diagnostics, hopefully after buying a viable idea (or more than one) from someone who actually knows what they're doing. Going forward, she could still end up running the biggest company in the U.S.. It's super-awesome to be white and rich. A good partner for her would be Bill Gates, a similarly ethically empty person who has elevated themselves into secular saint status by writing checks.

by J-dawg 11y ago

aaronbrethorst 11y ago

It started off with Elizabeth Holmes being childhood friends with Tim Draper's daughter: Timothy Draper, the well-known venture capitalist, had been a neighbor when the Holmeses lived in California. The children played together. “I gave her her first million bucks to get the business going,” Mr. Draper says. http://www.nytimes.com/2015/12/20/business/theranos-founder-faces-a-test-of-technology-and-reputation.html http://www.nytimes.com/2015/12/20/business/theranos-founder-... And it doesn't hurt that her family is ridiculously well connected, or that Holmes is obviously an incredibly intelligent person...It just seems like the technology simply didn't pan out, and she was never able to say '¯\_(ツ)_/¯ sorry guys, no dice.'

shoyer 11y ago

Smart investors know their area of expertise and audit the core technology themselves. Noteably, nobody with a specialization in healthcare invested in Theranos.

J-dawg 11y ago
Surely this alone should have deterred the non-specialist investors?

jacquesm 11y ago

The problem here is that if one investor is 'in' the rest will assume they did due diligence and will use this as social proof to invest as well, aka the herd mentality in investing. Quite a few VC's would never invest these kind of funds without a full process DD (legal, financial, technical, commercial), but once you're vetted by one of the top flight VCs and have received an investment from them a lesser party could easily make a whole pile of (wrong) assumptions, especially if there are links between the parties outside of the VC circuit. What should be done is definitely not always what is actually done. A simple reason for this is that if the DD fails the investor pays for the DD from their own management fees, but if the deal goes through the company invested in usually gets the invoice from all the DD parties (as per the terms sheet, this is a very common clause). This puts a weird incentive on VCs to let deals go through, they can't have too many DDs fail during the process or it can actually materially impact their ability to work. Imagine that if 2% (which is pretty much the going rate) of a small fund (say 50M) is what the VC company has to operate on for every year that it runs (so 1M) divided over all the partners and associates in the fund, renting a building in some prestigious place, travel and so on has to bear the additional load of several full process failed DDs (anywhere from 50K to 200K each) it can really hit hard if too many of them fail. So if there is a way to avoid doing DD because a larger party is already 'in' this is a quick way to validate and a very easy mistake to make. Of course - given that that is what I sell - I would very much prefer it if every round every investor would do their own due diligence but in practice you really don't see that. The most common format is that in every round there is some level of DD done (thoroughness roughly related to the size of the deal) and then all the parties involved decide to invest (or not...) based on DD done by one of them. In the Theranos case I suspect the 'big names' blinded investors, which is dumb on a very basic level. But it's their money and if they decide to throw it away on a BS project that is their right. The bit that really bothers me is how many good companies you could have funded instead of this one too-good-to-be-true unicorn.

J-dawg 11y ago
This is a great answer. It's amazing how VCs seem just as prone to social proof as the rest of us.
forgetsusername 11y ago
>In the Theranos case I suspect the 'big names' blinded investors, which is dumb on a very basic level. But it's their money and if they decide to throw it away on a BS project that is their right. It's funny that you yourself were very high on Theranos in early articles on this site, and specifically praised the obvious due diligence these companies must have done.
- jacquesm 11y ago
  I wasn't high enough to invest money in them and I would not have invested money without doing DD (not that I would be let anywhere near that project anyway). The main point is that I (and many with me) are quite shocked that this amount of investment was done without anybody knowledgeable in the field apparently doing DD on the company. That there is a mechanism that explains this is what makes it interesting, especially given the size of the various investments. There are a few more cases like this that are - in my opinion at least - more interesting still because they are closer to fields that I know more about than about bloodworks. And that's one of the main take-aways for me, investors should invest in things that they understand or they should hire their own independent experts to verify that the technology is real, but in practice even if they know this they do not always do it, even at the level of Theranos (hard to imagine, but there is pretty solid proof by now). That Theranos is - at this point this seems likely - a lemon is a very good and extremely expensive lesson for anybody that wishes to invest looking at the bona-fides of the other investors already on board. That should count for exactly nothing. Good luck convincing the world of that but that is my conclusion. The way I read the Theranos story is that the dream didn't work out, that - rather than welcome inquiry and fixing of the tech. They chose to become super defensive and play silly games rather than to open up which suggests that there is a level of self deception going on. And this is where it becomes very hard to distinguish a scam from an accident and a fraud from simply one of many failed investments. If anything the level rather than the principles here are what attracts attention, you see this situation in the investment world with great regularity at lower levels of investment and usually these take much less time to play out. I wonder if at some level Theranos and its executives still believe they can 'fix' the technology or if they have actually given up on that. This will be the harder part for them, to acknowledge defeat and to own it. It's a sad story, nothing to be gleeful about but at least for me there are some very valuable lessons here. Social proof is no proof at all and each and every investor that lost (or stands to lose) money in this whole saga will have paid a very dear price to learn that lesson. Next up: uBeam.

pessimizer 11y ago

It's affinity fraud. She's part of the tribe who invested in her. Not only did they not vet her in any way (because as fellow tribe members, they assumed they knew everything necessary about her already), but she knew exactly what they needed to hear. edit: and right now, she's clearly frantically trying to come up with what they need to hear to give her even more money. I give her a 75/25 chance of succeeding if she avoids any direct mention of sexism (although slathering on heavy implication), and combines it with an Icarus narrative, a born-again redemptionist narrative (a Jimmy Swaggart speech), and tries to recast Theranos as a charity that was swinging for the fences to reduce the costs of health care to help the poor and our economy. Then, she should show a new, mostly unrealistic medical device concept that if successfully created could reduce the costs of some expensive area of health care 10x. It can't be related to diagnostics in any way, because she'll have to not contest the proposed ban, but instead embrace it. She can keep that con going long enough to get out of the ban, and go back into diagnostics, hopefully after buying a viable idea (or more than one) from someone who actually knows what they're doing. Going forward, she could still end up running the biggest company in the U.S.. It's super-awesome to be white and rich. A good partner for her would be Bill Gates, a similarly ethically empty person who has elevated themselves into secular saint status by writing checks.