theranos

Brave new world in investing

It’s the Wild Wild West out there

Investor beware. With startup scene hotter than ever, retail investors have been clamoring to invest in the space. So far crowdfunding has been limited to accredited investors - generally high net worth individuals and instiutitions. So if you're not worth north of $1 million(no, your house doesn't count) or earning >$200K per annum, tough luck. Drool over angel investor success stories or laugh at those who got burned. No more.

 

The adoption of new SEC rules allowing non-accredited investors to invest in return for equity represents a major breakthrough.  Previously, crowdfunding sites like Kickstarter allowed donations, for no equity in return or Wefunder which only permitted accredited investors to access equity stakes. With the new rules, retail investors can now jump in, albeit with some limitations as summarized here.

What could go wrong? 




Venture investing remains a risky business; none of this has changed with the recent announcements. The long term returns to capital across the venture capital space remain positively pedestrian, the recent tech boom notwithstanding. For every Facebook and Airbnb, we have countless other startups muddling through or worse, going belly up.

A deeper problem lies within the ability of these retail investors to perform appropriate due diligence on prospects. The recent Theranos debacle exemplifies the difficulty this presents even for storied, well-resourced venture firms.


TL;DR: New SEC rules allow non-accredited investors to fund startups. Venture investing remains risky and may leave many burned, due to difficulty in due diligence 

Reminder that Kickstarter has a few problems of its own:

The Great Unicorn Unravelling, Hello, Theranos

Elizabeth Holmes, founder of Theranos. No doubt she is brilliant. It's not easy to get into Stanford, much harder to start a biotech company and receive $88 million+ in funding. However, questions on the relative secret nature of the company's technology(using finger pricks to conduct a wide range of blood tests) have been raising eyebrows for quite sometime. 

In particular, the decision to not subject data from the supposedly revolutionary medical device caused concern in the medical community. 

It appears that indeed, we should have been more skeptical all along about a medical device startup that only had filled its board with mostly highly influential political figures. 

The business press had initially failed to do the required due diligence required.  She was the next Steve Jobs, Inc. Magazine crooned. 

Theranos may well turn out to be revolutionary and all this brouhaha will be a small roadbump towards a brave new, needless future. Or not

Troubling signs all is not well:

  1. Partner Walgreens seems to be surprised by recent revelations is "reviewing" its relationship with Theranos. It's also halting any further expansions of testing centers.
  2. GlaxoSmithkline denies having worked with Theranos, despite assertions to the contrary by Theranos.
  3. FDA declares the company's "nanotainers" an "uncleared medical device" and blasts quality control. Finger prick technology approved for only one test. Read full FDA documents here
  4. Furious denunciations by Ms. Holmes aimed at the WSJ, without actually presenting any evidence to disprove the Journal's expose.

To Ms. Holmes credit, she finally relented on providing data for peer review. 

Worship the unicorn

Perhaps what has made this particular story so sensational was the flood of positive P.R. the media showered on Ms. Holmes. The stories seemed to feed on each other in almost an infinite positive feedback loop: each cover story gave birth to numerous other breathless articles, which led to more cover stories etc. Being the youngest female billionaire lent her a legendary, almost mythical quality in a day and age obsessed with wealth as the ultimate barometer of success. Hype seems to be the name of the game during this reign of unicorns. 

I guess the lesson I take away is to question everything: whether its a billion dollar company or that pre-launch startup.  Best to look beyond the hype and see whether everything adds up.

UPDATE:

Theranos apparently has decided to restructure the board and replace it with three! new boards: including one focused on medical component(finally!).