Blood-testing start-up Theranos has become a parable of Silicon Valley overreach. But the trial of founder Elizabeth Holmes, who was just convicted of fraud, contains broader lessons for investors. Here are five:
First, they must apply scientific skepticism to fantastic scientific claims. The starting point here must have been Theranos’ claims that it cracked the problem of drawing blood for tests from a finger. Capillary blood, unlike venous blood drawn from an arm, contains fluids from tissues and cells that make measurements less accurate.
Hype is intrinsic to Silicon Valley culture. The computer industry’s marketing inspired the term “steamware” in the 1980s. But over-promise and submission are unacceptable in healthcare, where real human misery can lead.
Second, investors need to distinguish between meaningful intellectual property protection and secrecy that is so intense that it indicates cover-up. After patents were obtained, there was no reason why Theranos did not make its own equipment available for testing by independent experts, who would have published findings in a peer-reviewed journal.
In healthcare, that kind of transparency is essential – although there is growing concern that Silicon Valley’s paranoid culture is eroding it. John Ioannidis, a Stanford professor and early skeptic of Theranos, co-authored a paper which shows that more than half of healthcare unicorns have few quotes from their work.
The third lesson is that charisma takes some bosses beyond what their abilities deserve. Holmes’ status as a rare woman in a male-dominated world combined with her self-confidence and charisma to a “Radiator effect that unbelief suffocated. Her charm and likeness were compared to those of Bernard Madoff, the American financier who committed the greatest Ponzi scheme in history.
Fourth, investors have to make their own decisions about a business, and discount celebrity endorsements. Holmes hung out with established titans like George Shultz, Jim Mattis and Henry Kissinger. She created the illusion that her technology was empowered by using the logos of pharmaceutical groups like Pfizer on Theranos documents.
The bigwigs believed by Holmes avoid a portion of aftermath blaming because of her penchant for fraud. But there was also a blatant illogality in their mistake. It was to assume major breakthroughs are just as likely in the stubborn physical world – in this case blood testing – as they are in manipulable cyberspace.
The fifth lesson is that a suggestion that seems too good to be true will generally be.
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