Lessons for investors from the trial of Theranos founder Elizabeth Holmes

Sometimes an investment is too good to be true.

While Elizabeth Holmes, founder and former CEO of Theranos, is on trial on allegations of investor and patient fraud, her healthcare startup may be a prime example.

Almost a decade ago, investors including media mogul Rupert Murdoch, former Education Secretary Betsy DeVos and the Walton family of Walmart invested more than $ 700 million in the company.

Prosecutors allege that investors were influenced by false claims about Theranos’ blood testing technology.

The company’s claims about its technology, as well as its business and financial performance were either exaggerated or false, according to the Securities and Exchange Commission.

“The story of Theranos is an important lesson for Silicon Valley,” said Jina Choi, director of the SEC’s regional office in San Francisco, as the charges were laid.

“Innovators looking to revolutionize and disrupt an industry need to tell investors the truth about what their technology can do today, not just what they hope it might do one day.”

“There’s going to be a lot of attention on what Elizabeth Holmes knew and when did she know it, but a better question is what the investment community should know and when should we know?” noted Len Sherman, professor of commerce at Columbia Business School.

Theranos isn’t the only bad apple, it’s just the most recent example.

Other industry black eyes include uBiome, which has been investigated by the FBI for fraudulent billing, and Outcome Health, a healthcare advertising company that has provided misleading information to drug manufacturers on the location of their advertisements and their performance.

Of course, fraud extends far beyond healthcare.

Corporate malfeasance comes in waves, Sherman, Enron and WorldCom told Bernie Madoff and now Theranos. “We are in another era which has the right conditions for the promotion of fraud.”

“It’s important that we don’t assume that every business is like a Theranos, we just need to ask the right questions,” said Ruby Gadelrab, Founder and CEO of MDisrupt, a medical diligence company for the technology industry. health, which aims to avoid making similar mistakes in the future.

“Healthcare, as a whole, is complex,” Gadelrab said. “This is probably the most difficult area to invest in.”

To help investors control health technology companies, Gadelrab first suggests determining whether the product is clinically and commercially viable.

“Investors do technical and financial diligence using experts, in health care, we need to do medical due diligence using health care experts.”

Next, determine if there is any evidence to support the founders’ scientific claims.

The technology should be validated, Gadelrab said. “Show me the data. For example, “Does it actually catch a disease or a biomarker when it is present and not detect it when it is not?” “

“Not all data is created equal,” she added. Good data is produced externally with scientists and research labs, great data is published in peer-reviewed journals, and great data is published and replicated.

Finally, look at the team structure. “Do they have clinical experts in leadership positions? In their boards of directors, as investors, in their C-suite? “

“Make sure health experts have a seat at the table and a voice in the process,” Gadelrab said.

The secrecy surrounding Theranos technology and the intense attention given to its CEO was part of the mystique but also a major red flag, according to Sherman. “I hope the next time this stuff happens, someone says’ wait a sec. “”

With any investment, you can do your due diligence, advised Winnie Sun, managing director of Sun Group Wealth Partners in Irvine, Calif.

To get started, search for the company on Google and read consumer reviews, she said. Plus, check out Twitter to see how customers are responding. “This is going to determine if you want to own this business,” Sun said.

If you work with a broker or financial advisor, you get an extra layer of protection, provided that person has a minimum level of qualifications and experience to work in the industry. (Verify that financial advisers are licensed or registered with a firm through the SEC’s Investment Advisors Public Disclosure website or that the broker is listed on the Financial Industry Regulatory Authority’s resource, BrokerCheck.)

“If you’re doing it yourself, you need to do a little more due diligence, especially if it’s an investment idea that you heard about from a friend or on the internet,” Sun added. “Spend as much time looking at what’s in your wallet as you would book your next vacation.”

Otherwise, invest in an exchange traded fund or mutual fund rather than picking individual stocks.

Most experts say that diversification with these asset classes is the best way to manage risk and improve long-term performance.

“As investors, it comes down to the basic philosophy of diversification,” Sun said.