The lessons for investors from the trial of Theranos founder Elizabeth Holmes

As Elizabeth Holmes, founder and former CEO of Theranos, goes on trial on allegations of defrauding investors and patients, her health-care start-up may be a prime example.

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

Prosecutors allege investors were swayed by misrepresentations of Theranos’ blood-testing technology.

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

“The Theranos story is an important lesson for Silicon Valley,” Jina Choi, director of the SEC’s San Francisco Regional Office, said at the time charges were filed.

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

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

Theranos isn’t the only bad apple out there, it’s just the most recent example of one.

Other black eyes for the industry include uBiome, which was investigated by the FBI for fraudulent billing, and Outcome Health, a health-care advertising company that provided misleading information to drugmakers on where their ads were showing up and how they performed.

Of course, fraud extends far beyond health care.

Corporate malfeasance comes in waves, Sherman said, from Enron and WorldCom to Bernie Madoff and now Theranos. “We are in another era that has conditions that are conducive to promoting fraud.”
How to spot a problem

“It’s important that we don’t assume that every company is like a Theranos, we just need to ask the right questions,” said Ruby Gadelrab, founder and CEO of MDisrupt, a medical diligence company for the health-tech industry, which aims to avoid making similar mistakes in the future.

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

To help investors vet health-technology companies, Gadelrab suggests first establishing if the product is clinically and commercially viable.

“Investors do technical and financial diligence using experts, in health care we need to do medical diligence using health-care experts.”

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