In the wake of the implosion of Theranos, one of Silicon Valley’s “unicorn” companies promising a revolution in blood testing, hindsight seems to be twenty-twenty. Theranos was valued at approximately $9 billion, founded and led by Elizabeth Holmes, a leader repeatedly lauded as the next Steve Jobs and named by TIME magazine as one of the “Most Influential People in the World” in 2015. Theranos partnered with Walgreens’ wellness centers across the nation to provide laboratory testing using a less-invasive simple fingertip blood drawing process and Theranos’ innovative device. The company’s guiding motto was, “All the same tests. One tiny sample.”
However in October 2015, The Wall Street Journal released a series of investigative articles that questioned the accuracy and science behind Theranos. Subsequently, the U.S. Government and state regulators launched a number of investigations into the company. And thus, as the investigations rapidly uncovered a shaky foundation lacking in scientific accuracy, Theranos came tumbling down.
Media outlets extensively covered the dramatic fall of Theranos and its founder. Revelations came pouring out that, although several firms and investors had poured millions into the company, several had chosen not to after their own due diligence raised red flags. In a compelling op-ed in The New York Times, leading venture capital firms explained their decision not to fund Theranos and, as the article notes, “The Theranos saga shows just how well Silicon Valley does its homework, especially when considering medical technology, in which the risks of doing real harm to people are higher than those posed by the next photo-sharing app.” In the end, the backers of Theranos included real estate investors, technology investors and other firms lacking in significant biotech and life sciences experience.
The takeaway lesson is clear – due diligence is critical. A savvy business should diligently examine, understand and verify its business model, processes and/or product. A savvy investor should carefully examine every aspect of its investment, ask questions and diligently seek answers. Below are 10 starting questions for businesses and investors to keep in mind when beginning due diligence.
- Do you have all your basic corporate documents – certificates of incorporation, minute books, stock books, and confirmation of annual tax payments?
- Have you documented all your meetings of the board of directors, executive committees and shareholders?
- Are all matters involving stock and securities well documented and is there a description of all outstanding shares and the rights attached to each class of the company’s securities?
- Do you have a list of all your agreements with employees, directors, stockholders, officers and independent contractors?
- Have you accurately listed all your real and tangible property and financial assets?
- Are there any outstanding liabilities, including loan and credit agreements?
- Are all litigation and regulatory issues disclosed?
- Are all employment agreements, contracts, evaluations, disputes and complaints documented?
- Are all insurance policies up to date?
- Are there any intellectual property issues, such as issued patents, patent applications, invention disclosures, or opinions concerning the validity of a company’s processes or inventions?
Our office would be happy to guide you through the due diligence process from both the growing business and investor side. Feel free to contact us to learn more.
For more intriguing reading about the rise and fall of Theranos, check out these links:
- Bad Blood: The Decline And Fall Of Elizabeth Holmes And Theranos (Forbes, October 8, 2016)
- Theranos to Close Labs and Lay Off 340 Workers (The New York Times, October 5, 2016)
- How Theranos Misled Me (Fortune, December 17, 2015)