What Can The Dropout Teach Investors?

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I’ve been riveted by The Dropout lately. Amanda Seyfried’s portrayal of the notorious Elizabeth Holmes transfixes me, from the baritone to the awkward dancing.

I particularly loved the scenes on Sand Hill Road when Holmes is pitching venture capitalists. Luckily for them, most passed.

Since I invest in startups, I wondered, how do we avoid the next Theranos? And what lessons can this flame out give us about investing in general?

Here is my current thinking:

1) If you don’t show it, you don’t have it. Beware any startup founder who won’t show you their tech or disclose financial information.

They may claim they’re protecting secrets from competitors, but more likely they’re covering up their problems.

I find the most successful founders are very open with investors. They want to share their awesome progress!

2) Beware unqualified teams in deep tech. Holmes made much of the fact that she was a college dropout, like Steve Jobs or Mark Zuckerberg.

But she obscured a critical point: Theranos was not a software company.

You can learn the basics of coding on your own in a few months. The same isn’t true for biology.

To pull off a revolution in blood testing, Holmes would’ve likely needed a PhD from a top school like MIT, Harvard, etc.

3) Don’t let big names on the board influence you. Henry Kissinger and General James Mattis sat on the board of Theranos.

Both are heavyweights in politics and government, but what’s their expertise in biotech? Uhh, they don’t have any.

Don’t just ask if the advisors and investors of a company are prominent. Ask if they’re qualified to do this exact job.

4) Founders who react badly to being challenged are bad founders. Both Holmes and Balwani surrounded themselves with sycophants and came down hard on anyone who questioned them.

They refused to hear about problems, so the problems only got worse.

If a founder can’t handle you or their team challenging them, they have no business in the job.

5) No FOMO. Holmes expertly used the fear of missing out to close investors and customers like Walgreens.

After all, we can’t let CVS have it first, can we?

Frauds from Adam Neumann of WeWork to Bernie Madoff were experts at leveraging this fear to override people’s better judgment.

Don’t give into it. You don’t have to hit every great investment opportunity to be a success.

In fact, you only have to hit one.

More on tech and finance:

The True Story Behind WeCrashed

The Lean Startup

FOMO: Investors’ Worst Enemy

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Photo: “Fortune Global Forum 2015” by fortuneglobalforum is marked with CC BY-NC-ND 2.0.

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