Tag Archives: Theranos

FOMO: Investors’ Worst Enemy

Markets are hot. The S&P 500 sits near record highs. Venture capital funding is higher than ever before.

As hot stocks rocket upward and the best venture deals move fast, a specter is haunting investors — the specter of FOMO.

Fear of missing out has investors piling into the stocks of fraudulent companies like Nikola before they miss the rally. FOMO has venture firms writing giant checks without even the most cursory due diligence, like seeing the books or talking to customers.

This fear is the worst enemy of investors. Because we’re afraid of missing the next hot company, we gradually compromise all our standards.

Well, the price isn’t that high. This deal is moving too fast to look at the books! Surely, if so many other big names want in on this opportunity, it must be legit.

But it’s during boom times like this that frauds can hide in plain sight. And their favorite tactic to reel in suckers is to make you afraid you’re going to miss out on the next big thing.

Adam Neumann at WeWork was a master of using FOMO to vacuum up capital without diligence or oversight. Many of those investors soon lost huge sums.

Elizabeth Holmes of Theranos got giant checks from investors without them ever looking too deeply into the technology. What if they had had a team of Ph.D’s look at the device? They would have probably realized it didn’t work and would’ve saved themselves hundreds of millions of dollars.

But they never did.

And why should they? Holmes was on the cover of Forbes, for heaven’s sake! It must be real, right?

Well, we know how that turned out. If we want to avoid investing in the next Theranos, WeWork or Nikola, we have to maintain our standards.

Find out revenues. See customer contracts. Evaluate the technology.

And we need to do more diligence in a hot market, not less.

It’s hard to defraud people in a bear market. In a down market, even good stocks find few buyers. Even the strongest startups struggle to raise money.

In a hot market, it’s much easier to conceal fraud beneath thick layers of hype with a yummy FOMO topping.

But think before you take a bite.

More on markets:

Where Can We Hide in a Financial Crisis?

Will Evergrande Spark a Global Financial Crisis?

Should Anyone Own Bonds?

Photo: “Secretary Pritzker met with Elizabeth Holmes, Theranos Founder and CEO, and Billie Jean King”by CommerceGov is licensed under CC BY-ND 2.0

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How We Could’ve Known Theranos Was a Fraud

Investors lost over $9 billion on Theranos, the diagnostics testing company run by Elizabeth Holmes that was exposed as a fraud. Worse yet, patients received inaccurate test results, imperilling their health. But what if asking one simple question could’ve prevented all this?

In the book Editing Humanity, Keith Davies notes that Theranos’ technology had no foundation in peer-reviewed, published research. The always-astute John Ioannidis pointed this out as early as 2015. Theranos published a single paper in 2018, after the company was already exposed as fradulent and was near bankruptcy. Theranos made incredible claims for its technology, but without peer review by respected journal, there was no one to check if those claims were actually true. (Theranos had filed patent applications, but that doesn’t necessarily provide the same level of detail and review.)

This stands in contrast to many other biotech companies, such as several in the CRISPR area (Editas Medicine, Intellia Therapeutics, etc.) whose approach grows out of research published in major journals. Also, such companies have major scientists as co-founders, not a 19 year old unknown.

I am considering getting involved in early-stage biotech investment, so asking “What papers can you point me to that underlie your technology?” is a question I plan to ask in the future. That may be able to weed out some weaker companies and potential frauds.

For more background on Theranos, I strongly recommend the outstanding book Bad Blood by John Carreyrou. I listened to it as an Audible audiobook. It was read by Will Damron, whose voice is outstanding.

I also hear excellent things about the ABC News podcast series The Dropout, which details Holmes’ path from Stanford student to billionaire to accused criminal awaiting trial today. I haven’t listened to it yet, but I look forward to getting a chance soon!

“File:Elizabeth Holmes 2014 cropped.jpg” by Photo by Max Morse for TechCrunch TechCrunch is licensed under CC BY 2.0