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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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The True Story Behind WeCrashed

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This weekend, I burrowed into the couch and turned on WeCrashed, the fascinating new series on WeWork’s rise and fall. I’m actually in an upcoming episode as an extra; more on that in another post. 🙂

Jared Leto’s energy and Anne Hathaway’s icy poise make for great television. But what about the real Adam Neumann?

I recently finished the book The Cult of We: WeWork, Adam Neumann, and the Great Startup Delusion. This entertaining and incisive volume gives a great inside view of the startup’s rise and fall.

Neumann conjured WeWork out of almost nothing. He convinced the landlord of his baby clothes business to sublease him a floor in a building the landlord owned, a clever strategy to start a company with little capital.

It took off immediately, filling with young creatives. Not satisfied with his early success, Neumann’s dissembling started early.

Tours of the offices with investors were faked. If a WeWork floor was empty, employees were told to move there and make it look busy.

Neumann’s erratic behavior also quickly surfaced. He offered shots of tequila to prospective investors and landlords, even in the morning.

Still, by 2011, WeWork was growing fast and close to profitability. That year, it raised a series A from Benchmark, one of the world’s best venture capital firms.

As the company’s success grew, so did Neumann’s avarice. He used some of Benchmark’s money to pay rent in buildings he owned personally, a highly suspect move.

Neumann also put himself ahead of his employees. He sold shares at better prices than they could. And after he banned meat in the company cafeteria, he was frequently seen eating it.

By 2017, many of the rents WeWork was paying had doubled as the real estate market strengthened. Losses ballooned, but Neumann kept expanding.

Two years later, WeWork reached the end of its rope. A huge financing with Softbank fell apart, leaving the company forced to go public just to raise enough capital to avoid bankruptcy.

But the public markets weren’t buying it, turned off by big losses and an erratic CEO. The IPO fell apart.

As WeWork faced bankruptcy, Softbank agreed to save the company. Its price: a valuation of just $8 billion, down from $47 billion in the last financing round.

The board forced Neumann out soon after and he and his family left for Israel.

In a final humiliation, they flew coach.

So what did I learn from this, as an angel investor? Here are a few of my takeaways:

1) Avoid self-dealing founders
2) Beware FOMO. Both Neumann and Elizabeth Holmes of Theranos were experts at leveraging it.
3) Focus on unit economics. You can’t “lose money on every one, but make it up in volume.”
4) Don’t value an old economy business like a software business.

Neumann may be plotting his return. He has acquired more than $1 billion worth of apartments in recent years.

I don’t know what his angle is, but I’m pretty sure he has one.

More on tech:

FOMO: Investors’ Worst Enemy

How Startups Can Dominate the Elevator Pitch

The Top 3 Startup Pitch Mistakes

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Photo: “TechCrunch Disrupt NY 2017 – Day 1” by TechCrunch is marked with CC BY 2.0.

If you found this post interesting, please share it on Twitter/Reddit/etc. This helps more people find the blog! 

Save Money on Stuff I Use:

Fundrise

This platform lets me diversify my real estate investments so I’m not too exposed to any one market. I’ve invested since 2018 and returns have been great so far.

More on Fundrise in this post.

If you decide to invest in Fundrise, you can use this link to get your management fees waived for 90 days

Misfits Market

My wife and I have gotten organic produce shipped to our house by Misfits for over a year. It’s never once disappointed me.

Every fruit and vegetable is super fresh and packed with flavor.

I thought radishes were cold, tasteless little lumps at salad bars until I tried theirs! They’re peppery, colorful and crunchy!

I wrote a detailed review of Misfits here.

Use this link to sign up and you’ll save $10 on your first order.