Sometimes an investment is too good to be true.
With Theranos founder and former CEO Elizabeth Holmes on trial for fraud against investors and patients, her healthcare start-up could be a prime example.
Nearly a decade ago, investors including media mogul Rupert Murdoch, former Education Secretary Betsy DeVos, and Walmart’s Walton family poured more than $ 700 million into the company.
Prosecutors claim investors have been swayed by misrepresentations of Theranos’ blood testing technology.
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The company’s claims about its technology, 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,” said Jina Choi, director of the SEC’s regional office in San Francisco, when the indictment was filed.
“Innovators who want to revolutionize and revolutionize an industry need to tell investors the truth about what their technology can do today, not just what they hope to one day.”
“What Elizabeth Holmes knew and when she knew it is going to draw a lot of attention, but a better question is what the investment community should know and when should we know?” called Len Sherman, Professor of Business Administration at Columbia Business School.
Elizabeth Holmes (L), founder and former CEO of Theranos, leaves the courthouse with her husband Billy Evans after the first day of her fraud trial in San Jose on September 8, 2021.
Nick Otto | AFP | Getty Images
Theranos isn’t the only bad apple out there, it’s just the latest example of one.
Other black eyes for the industry include uBiome, which has been investigated by the FBI for fraudulent billing, and Outcome Health, a healthcare advertising company that provided drug manufacturers with misleading information about where their ads were running and how they were going.
Of course, fraud goes well beyond healthcare.
Corporate crime comes in waves, said Sherman, from Enron and WorldCom to Bernie Madoff to Theranos. “We are in a different era with conditions 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 care company for the health technology industry focused on Has set a goal to avoid similar mistakes in the future.
“Health care overall is complex,” said Gadelrab. “It’s probably the toughest area to invest in.”
To help investors review health technology companies, Gadelrab suggests first determining whether the product is clinically and commercially viable.
“Investors do technical and financial diligence with experts, in healthcare we have to do medical diligence with health experts.”
Spend as much time looking at what’s in your portfolio as if you were booking your next vacation.
Managing Director of Sun Group Wealth Partners
Then determine if there is any evidence to support the founders’ scientific claims.
The technology should be validated, said Gadelrab. “Show me the data.” For example, “Does it actually recognize a disease or biomarker when it’s present and not pick it up when it’s not?”
“Not all data is created equal,” she added. Good data is created externally with scientists and research laboratories, great data is published in peer-reviewed journals, and excellent data is published and replicated.
Finally, look at the team structure. “Do you have clinical experts in management positions? On your boards, as investors, in your C-suite?”
“Make sure health professionals have a seat at the table and a voice in the process,” said Gadelrab.
The secrecy of Theranos technology and the intense attention paid to its CEO were part of the mystery, according to Sherman, but also a big red flag. “I hope the next time something like this happens, someone says ‘wait a minute’.”
You can do your due diligence with every investment, advised Winnie Sun, managing director of Sun Group Wealth Partners in Irvine, California.
For starters, google the company and read consumer reviews, she said. Also, check Twitter to see how customers are reacting. “That depends on whether you want to own this company,” said Sun.
When you work with a broker or financial advisor, you have an extra layer of protection – as long as that person has a minimum level of qualifications and knowledge to work in the industry. (Verify that financial advisors are licensed or registered with a firm through the SEC’s Investment Adviser Public Disclosure website, or that the broker is listed on the Financial Industry Regulatory Authority’s resource, BrokerCheck.)
“Doing this on your own takes a little more care, especially if it’s an investment idea you’ve heard about from a friend or on the Internet,” added Sun. “Spend as much time looking at what’s in your portfolio as if you were booking your next vacation.”
Otherwise, invest in an exchange traded fund or mutual fund rather than picking individual stocks.
Most experts say that diversifying with these asset classes is the best way to manage risk and improve long-term performance.
“As an investor, it comes back to the core philosophy of diversification,” said Sun.
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