4 ms·

I'm consistently surprised at the low bar for due diligence in startup funding. In my personal experience, it goes something like "send us a business plan, pitc

by bsirkia 10y ago

I'm consistently surprised at the low bar for due diligence in startup funding. In my personal experience, it goes something like "send us a business plan, pitch deck, three customers (that you handpick) for us to talk to, the legal paperwork, and maybe some bank records but not usually". I always assumed investors required credentials to Google Analytics or Mixpanel or iTunes analytics or whatever to actually verify that the usage numbers are what founders say they are, yet I've never had an investor do that or even heard of it being done. It's completely baffling to me that Theranos can raise ~$700M w/o any third party testing or diligence. This article suggest it's because Holmes is "enthralling" and investors had an "exaggerated faith in the power of medical testing". Faith and charisma are very abstract concepts, but data and testing aren't, so why rely on the former instead of the latter? As Deming said, "In God we trust; all others must bring data."

joering2 10y ago
This is business! http://www.techaccent.com/bill-gates-son-in-law-joke/ http://www.techaccent.com/bill-gates-son-in-law-joke/
mbesto 10y ago
I do diligence for a living. It's just not economical to do a full diligence on every investment when you're investment thesis is a portfolio approach.
- aclements18 10y ago
  Agreed. Also there are typically legal repercussions for misrepresenting your business that are outlined in deal terms.
  - mbesto 10y ago
    Those are usually covered under "reps and warranties". From what I understand, even if you do "lie" (no one really lies, they just bend the truth...if you do legitimately lie, it's fraud and it's a big deal) there's basically insurance against it (formerly called "representations and warranties"). No VC I know of ever purchases it, but PE do from time to time.
  - azinman2 10y ago
    Exactly. If things go south, legal can uncover and if lies were presented then things can turn criminal as theranos now knows.
    - jacquesm 10y ago
      But that will not recover your investment.
      - azinman2 10y ago
        It can depending on how much capital or assets are still around. Jail is also a pretty decent incentive to make people avoid overtly lying. Unfortunately its disproportional used on the poor and minorities instead of on professionals.
- gist 10y ago
  What is the cost for something like that? Any way you can give an idea w/o giving away specifics you don't want to disclose?
  - mbesto 10y ago
    Typically there is technology, legal, and financial diligence. Each costing anywhere between $30-100k each.
    - wwwdonohue 10y ago
      Wow. How?
sib 10y ago
Some of this is actually the sign of a bubble in startup investing. When the market is tough, investors typically do much more diligence (they are more careful and they have more leverage). When the market is superheated, there's so much money chasing any deal that looks remotely interesting that any investor who wants to do real diligence is basically shut out by the investors who are willing to put up a check without it. FOMO overcomes the duty of care. It's like buying a house in a hot market; cash offers with no contingencies win out over "smart" buyers who want to know what they're getting.
- wwwdonohue 10y ago
  Was this like that? Because it seems like Theranos had a pretty tough time finding investors, or at least reputable ones. GV laughed them off. As did all the life-sciences firms.
  - sib 10y ago
    It may be a cousin to it. In this case, perhaps second-tier investors saw it as an opportunity to get into a hot sector, with some comfort (and reduced diligence) because there were investors like Tim Draper involved.
gist 10y ago
> at the low bar for due diligence in startup funding In the case of Theranos you also have how she was well know by Tim Draper (DFJ investor) apparently friends with his daughter. So he must have been smitten by her intellect possibly in comparison to his own daughter (my speculation but wouldn't surprise me). http://www.mercurynews.com/michelle-quinn/ci_26147649/quinn-meet-elizabeth-holmes-silicon-valleys-latest-phenom http://www.mercurynews.com/michelle-quinn/ci_26147649/quinn-... "Tim Draper, the venture capitalist, said Holmes, who was friends with his daughter growing up, is the first entrepreneur he knows who kept quiet about her business for so long "so that the competition wouldn't get a chance to start." "She had a winner and knew it," he said. His firm DFJ Venture was the first to invest."
bane 10y ago
In a fair world, Holmes would have to have been an absolutely remarkable 19 year old to get what she got. I mean, like Leonardo da Vinci level, once in a civilization type amazing. It turns out she's not a very remarkable person today, and wasn't as a 19 year old college dropout either. She's always come across as a bit of an odd duck, even when the bubble hadn't burst [1]. People (investors) likely read into her what they wanted and the myth of the genius who's too smart for traditional paths provided a convenient framework to hang a cool story off of and allowed laziness to creep in. Her impressive personal connections were fuel. One thing to watch and keep in mind as Theranos come unwound [2] 1 - https://www.youtube.com/watch?v=UiNFXcI9Rb8 https://www.youtube.com/watch?v=UiNFXcI9Rb8 2 - https://www.youtube.com/watch?v=hLTAFbKbC8w https://www.youtube.com/watch?v=hLTAFbKbC8w
- bsirkia 10y ago
  Right, there seems to be a big problem with pattern matching, i.e. "quirky Harvard dropout" and simply associating that with success.
tptacek 10y ago
This article isn't really about Theranos, so much as it is about the unreliability of blood testing as a diagnostic technique even when the tests are working properly.
- bsirkia 10y ago
  True, but I'd say that the unreliability of blood testing as a diagnostic technique is extremely pertinent information for investors to have when investing in a company that is built on blood testing as a diagnostic technique. My point is just that it's surprising that the journalist for this story appears to have spent more time researching the subject for this article than the investors putting in ~$700M.
  - tptacek 10y ago
    Again: the article isn't about whether Theranos was a good investment. It's about whether, even if Theranos had worked perfectly, convenient blood testing would have improved medical outcomes.
    - bsirkia 10y ago
      Yes, you've correctly identified what the article is about, and I've never disagreed or said "this article is about Theranos as an investment". I still think it's interesting to think about the article in the context of due diligence in startup investing.
marincounty 10y ago
I think, or hope this was a fluke? Or, a combination of errors in judgement on the part of investors? Investors were/are still in awe of Zuckerburg. Elisabeth was a college dropout, female, white, and from a wealthy family; you can trust her integrity? She looked the part--the black turtleneck, meticulous? She was asking for money for something, most investors only had slight knowledge of how it might work. She was essentially asking for money for a black box, but since it was tied into the medical profession, I could picture the average investor thinking, "People tied to the medical research are a cut above the rest in terms of ethics?". They wouldn't exaggerate. Remember, it's only lately have people started pay attention to side effects, or even question their doctor's wisdom. Remember how we all rushed out to cure that anxiety/depression because it's all just a chemical imbalance. Even doctors were/are fooled on that one. I don't know if Mrs. Holmes technology works, but the way she looked, the trusting nature of society towards white tech, all must have played a role in that money grab? Along with investors want big returns. Personally, I questioned her when I heard the interviews. I question anyone who claims/refers they are visionary, or a cut above the rest. I immediately think, what are they hiding? I've rarely met a brilliant person who needed to play up their intellect. They have been self deprecating, if anything. She seemed to work to hard at crafting an image? An image of the brilliant inventor. She seemed more concerned about discussing her perfect life? It all seemed so breezy. "Just an idea while in class." "I hired my chemistry teacher." That black turtleneck seemed so Jobs, so phoney, or delusional? So visionary? The medical, and Pharmacutical industries get away with too much chicanery. I guarantee, if she was black/brown/poor we wouldn't be talking about Theranos.

by bsirkia 10y ago

joering2 10y ago

This is business! http://www.techaccent.com/bill-gates-son-in-law-joke/ http://www.techaccent.com/bill-gates-son-in-law-joke/

mbesto 10y ago

I do diligence for a living. It's just not economical to do a full diligence on every investment when you're investment thesis is a portfolio approach.

aclements18 10y ago
Agreed. Also there are typically legal repercussions for misrepresenting your business that are outlined in deal terms.
- mbesto 10y ago
  Those are usually covered under "reps and warranties". From what I understand, even if you do "lie" (no one really lies, they just bend the truth...if you do legitimately lie, it's fraud and it's a big deal) there's basically insurance against it (formerly called "representations and warranties"). No VC I know of ever purchases it, but PE do from time to time.
- azinman2 10y ago
  Exactly. If things go south, legal can uncover and if lies were presented then things can turn criminal as theranos now knows.
  - jacquesm 10y ago
    But that will not recover your investment.
    - azinman2 10y ago
      It can depending on how much capital or assets are still around. Jail is also a pretty decent incentive to make people avoid overtly lying. Unfortunately its disproportional used on the poor and minorities instead of on professionals.
gist 10y ago
What is the cost for something like that? Any way you can give an idea w/o giving away specifics you don't want to disclose?
- mbesto 10y ago
  Typically there is technology, legal, and financial diligence. Each costing anywhere between $30-100k each.
  - wwwdonohue 10y ago
    Wow. How?

sib 10y ago

Some of this is actually the sign of a bubble in startup investing. When the market is tough, investors typically do much more diligence (they are more careful and they have more leverage). When the market is superheated, there's so much money chasing any deal that looks remotely interesting that any investor who wants to do real diligence is basically shut out by the investors who are willing to put up a check without it. FOMO overcomes the duty of care. It's like buying a house in a hot market; cash offers with no contingencies win out over "smart" buyers who want to know what they're getting.

wwwdonohue 10y ago
Was this like that? Because it seems like Theranos had a pretty tough time finding investors, or at least reputable ones. GV laughed them off. As did all the life-sciences firms.
- sib 10y ago
  It may be a cousin to it. In this case, perhaps second-tier investors saw it as an opportunity to get into a hot sector, with some comfort (and reduced diligence) because there were investors like Tim Draper involved.

gist 10y ago

> at the low bar for due diligence in startup funding In the case of Theranos you also have how she was well know by Tim Draper (DFJ investor) apparently friends with his daughter. So he must have been smitten by her intellect possibly in comparison to his own daughter (my speculation but wouldn't surprise me). http://www.mercurynews.com/michelle-quinn/ci_26147649/quinn-meet-elizabeth-holmes-silicon-valleys-latest-phenom http://www.mercurynews.com/michelle-quinn/ci_26147649/quinn-... "Tim Draper, the venture capitalist, said Holmes, who was friends with his daughter growing up, is the first entrepreneur he knows who kept quiet about her business for so long "so that the competition wouldn't get a chance to start." "She had a winner and knew it," he said. His firm DFJ Venture was the first to invest."

bane 10y ago

In a fair world, Holmes would have to have been an absolutely remarkable 19 year old to get what she got. I mean, like Leonardo da Vinci level, once in a civilization type amazing. It turns out she's not a very remarkable person today, and wasn't as a 19 year old college dropout either. She's always come across as a bit of an odd duck, even when the bubble hadn't burst [1]. People (investors) likely read into her what they wanted and the myth of the genius who's too smart for traditional paths provided a convenient framework to hang a cool story off of and allowed laziness to creep in. Her impressive personal connections were fuel. One thing to watch and keep in mind as Theranos come unwound [2] 1 - https://www.youtube.com/watch?v=UiNFXcI9Rb8 https://www.youtube.com/watch?v=UiNFXcI9Rb8 2 - https://www.youtube.com/watch?v=hLTAFbKbC8w https://www.youtube.com/watch?v=hLTAFbKbC8w

bsirkia 10y ago
Right, there seems to be a big problem with pattern matching, i.e. "quirky Harvard dropout" and simply associating that with success.

tptacek 10y ago

This article isn't really about Theranos, so much as it is about the unreliability of blood testing as a diagnostic technique even when the tests are working properly.

bsirkia 10y ago
True, but I'd say that the unreliability of blood testing as a diagnostic technique is extremely pertinent information for investors to have when investing in a company that is built on blood testing as a diagnostic technique. My point is just that it's surprising that the journalist for this story appears to have spent more time researching the subject for this article than the investors putting in ~$700M.
- tptacek 10y ago
  Again: the article isn't about whether Theranos was a good investment. It's about whether, even if Theranos had worked perfectly, convenient blood testing would have improved medical outcomes.
  - bsirkia 10y ago
    Yes, you've correctly identified what the article is about, and I've never disagreed or said "this article is about Theranos as an investment". I still think it's interesting to think about the article in the context of due diligence in startup investing.

marincounty 10y ago

I think, or hope this was a fluke? Or, a combination of errors in judgement on the part of investors? Investors were/are still in awe of Zuckerburg. Elisabeth was a college dropout, female, white, and from a wealthy family; you can trust her integrity? She looked the part--the black turtleneck, meticulous? She was asking for money for something, most investors only had slight knowledge of how it might work. She was essentially asking for money for a black box, but since it was tied into the medical profession, I could picture the average investor thinking, "People tied to the medical research are a cut above the rest in terms of ethics?". They wouldn't exaggerate. Remember, it's only lately have people started pay attention to side effects, or even question their doctor's wisdom. Remember how we all rushed out to cure that anxiety/depression because it's all just a chemical imbalance. Even doctors were/are fooled on that one. I don't know if Mrs. Holmes technology works, but the way she looked, the trusting nature of society towards white tech, all must have played a role in that money grab? Along with investors want big returns. Personally, I questioned her when I heard the interviews. I question anyone who claims/refers they are visionary, or a cut above the rest. I immediately think, what are they hiding? I've rarely met a brilliant person who needed to play up their intellect. They have been self deprecating, if anything. She seemed to work to hard at crafting an image? An image of the brilliant inventor. She seemed more concerned about discussing her perfect life? It all seemed so breezy. "Just an idea while in class." "I hired my chemistry teacher." That black turtleneck seemed so Jobs, so phoney, or delusional? So visionary? The medical, and Pharmacutical industries get away with too much chicanery. I guarantee, if she was black/brown/poor we wouldn't be talking about Theranos.