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Lessons to Be Learned From Theranos: Follow Your Gut. Want to invest wisely? Follow your gut, not the crowd, and do your homework. Elizabeth Holmes and her bogus blood-testing company Theranos show what happens when intelligent investors act like they’re dumb. Part of that may be they ignored their gut instincts.
Investors threw $945 million at Theranos’ fraudulent blood-testing technology that didn’t completely work. Millionaires and billionaires wanted to get “a piece of the action” and “on the ground floor,” though Theranos lacked audited financial statements. Lies were swallowed whole, and due diligence took a back seat to the desire to get involved in the latest and greatest company, which Holmes started when she was too young to legally buy a beer.
She founded Theranos in 2003 after dropping out of Stanford University to start a company that could perform many blood tests from one drop of blood. Fifteen years later, after being valued at about $9 billion, the company shut down. In January, a jury convicted Holmes in a San Jose federal court of four fraud-related changes. She faces possibly 20 years in prison, $1 million in fines, and sentencing in September.
What are Gut Instincts?
Gut instincts, or intuition, are a valuable tool when making decisions on personal, professional, and business matters. According to Psychology Today:
- Past experiences and the current knowledge they provide shape your intuition. The more experienced you are in the subject matter, the more helpful and accurate your intuition will be
- Your intuition is like a web stretched across your brain. It connects your rational, thinking mind to your emotions and body. What you think and how you feel in response triggers physical reactions like excitement, nervousness, or fear
Though not 100% right at predicting the future, Gut instincts shouldn’t be ignored.
Why Did Potential Theranos Investors Say No?
The list of investors is almost a Who’s Who of wealthy individuals and families, but not everyone signed on. Maybe the smart ones looked clearly at the situation, found worrying signs, and followed their gut instincts. Those who passed on Theranos’ hot, once-in-a-lifetime opportunity include:
- Pfizer: Shane Weber, a Pfizer director, in 2008 looked into Theranos and found their responses to his technical questions were “oblique, deflective or evasive,” according to a memo used as evidence during Holmes’ trial. He recommended Pfizer stop working with Theranos, according to the New York Times
- Google Ventures: Bill Maris, Google Ventures’ founder, told Business Insider in 2015, “We looked at it a couple times, but there was so much hand-waving — like, Look over here! — that we couldn’t figure it out…So, we just had someone from our life-science investment team go into Walgreens and take the test. And it wasn’t that difficult for anyone to determine that things may not be what they seem here.”
- Schering Plough: During Holmes’ trial Constance Cullen, a former company director at this pharmaceutical company, stated she evaluated Theranos’ technology in 2009. The New York Times reports she felt “dissatisfied” with Holmes’ answers to her technical questions, calling them “cagey” and indirect
- Found Theranos focused on getting attention
- Theranos’ answers to their questions were oblique, indirect, deflective, evasive, and cagey
- Discovered for themselves the technology didn’t work as promised
What would your gut tell you if you were in their situation?
Feed Your Gut Instincts a Diet of Due Diligence
Unlike others who were defrauded, these people and corporations did their due diligence and decided not to invest in Theranos. Due diligence means making a comprehensive appraisal of a potential investment. It’s not something you just check off your to-do list when you’re done.
Don’t go through the motions of due diligence when looking into a company, then ignore red flags, inconsistencies, and evidence the investment won’t be as good as it may appear. Many Theranos investors were denied access to critical financial information (Holmes claimed they were trade secrets) but still spent millions anyway.
If you’re considering an investment, buying a company, or creating a joint venture, and you can’t access needed information, your gut should tighten, and your brain should be telling you something’s wrong. If a non-disclosure agreement isn’t enough to satisfy a party’s fear of disclosure, walk away. They may not trust you, this financial information doesn’t exist, or it’s more damaging than the party wants to admit.
Tony Liu and Your Gut Instincts Can Help You Make the Right Choices for Your Business
The better outcomes will probably result when you’re more confident in your gut instincts because you have a stronger background in the topic. Some of the most essential things your intuition can tell you when an investment’s at issue is to slow down, get more information, analyze it, ask questions until you’re satisfied and more confident in your choice. If the other party wants a decision fast and won’t tell you more, you should feel queasy.
If you’re in Southern California and have questions about due diligence, entering a contract, purchasing a business, or other company issues that keep you up at night, call attorney Tony Liu at (714) 415-2007 to schedule a free consultation.