Bad blood – it’s not all fiction is it?!
For those of you who have read Bad Blood by John Carryou you will have been horrified by the true story of lies and deceit by the Theranos tech start-up company in California that raised about $700m from VC’s and private investors.
The company valuation soared to unicorn status after the company claimed to have revolutionized blood testing by developing methods that could use surprisingly small volumes of blood, such as from a fingerprick. The law eventually caught up with the founder and CEO earlier this week when she was convicted of fraud.
Are there any lessons to be learned from this? Absolutely – here are a few thoughts:
- I have occasionally met some individuals over the years who have been very intimidating, who don’t take kindly to perfectly reasonable questions being asked and who make it clear to you that the normal rules of engagement should not apply to them. If you meet someone like this then this should be a ‘red flag’ and you need to be prepared to give that person a wide berth however exciting the opportunity.
- Don’t believe everything you are told – it always pays to do your due diligence and be a healthy sceptic when companies are making extraordinary claims. Often it isn’t the idea that is the issue but whether the idea can be properly commercialized and scaled up into a successful product or service and whether it can be done within agreed timelines and budgets. It is not just about legal due diligence and you need to be prepared get your hands dirty as part of looking under the proverbial bonnet of the car – or get someone to so this for you! Clearly no-one bothered with Theranos.
- If you catch someone out in a lie, however small, then you know that is the time to take firm action and walk away or fire that person. I have had to do that a couple of times in the past and whatever the pressure you might be put under to look the other way you need to do the right thing. I think the Theranos story highlights that once you make a lie, however small, it is easy to lie again and before you know it the whole thing can completely snowball. Founders need to be very careful to give truthful and accurate information to investors and potential investors about the state of their technology developments. Don’t make the mistake that Elizabeth Holmes did and bank on your developers catching up with your pitch in the background.
- If is not just investors who need to do their diligence. Henry Kissinger, James Mattis and George Shultz all sat on the Theranos board of directors and clearly didn’t have a clue about what was going on. If you are going to act as a non-executive director then make full enquiry of the executive team. Do bear in mind that in the UK if a company is wrongfully trading then all directors are in the firing line and there are no exceptions for directors who were only acting as non-executives.
- A number of you will be reading this and thinking this sort of thing never happens. We are currently working on a US deal where one company has raised millions of funding already. We are acting for a new US investor into that company and with our support our client is the first investor to insist on warranties and other standard investor protections as part of the investment deal. No-one else who has invested before has any protections and it is unclear how much diligence, if any, has been done. That may be fine if you are making a complete punt and the sums are very modest but when the sums involve millions you would really think that certain investors should know better. So just because others have invested before it doesn’t mean you should cut corners with your own basic investor checks.
- I have had a few clients over the years tell me they are in absolutely tip top shape for going through detailed due diligence for a deal and it is only when we get into the detail of it that we pick out lots of issues that they need to fix for them before the due diligence spotlight starts to shine very brightly on them. Sometimes it has nothing to do with dishonesty and you just don’t know what you don’t know. If you are about to accept significant investment or make a significant investment, please make sure you get the right team of experts involved early on to help advise you.
- I think we are potentially going to see a lot of future blow-back on investment deals that involve crowdfunding. It’s a great way for companies to raise money, it is now completely main-stream and we help a lot of clients raise funding this way. However not every company that crowdfunds is subjected to the same rigorous diligence by sophisticated private investor groups and VC’s and there can be a lot more scope for companies to potentially “get away with things”. One of our recent blogs (see Crowdfunding and investor claims - MBM Commercial's Latest News & Blogs) flags the first known case in 2021 of the UK Financial Ombudsman taking action against a Crowdfunding platform. I am sure there will be more to follow.
- Don’t ever forget the Latin phrase “Caveat emptor”. I remember selling my first ever car privately to a individual and when he asked me what I did for a living (I said I was a lawyer) he said “ah yes caveat emptor”. I sold that car making it very clear it was “sold as seen” and although the buyer did drive the car round the block, he never bothered to look under the bonnet… All I will say is “let the buyer beware”!!
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