Elizabeth Holmes was sentenced to more than 11 years in jail earlier this week for fraud.
What actually played out in the Theranos situation and why is it bound to happen again? What are the commonalities between the Beyond Meat, Peloton and this Elizabeth Holmes fraud? The answer is: the “story stock”.
Here, the Silicon Valley dropout story, the ESG crowd’s quest for female leaders and funds’ dry powder are at cause.
The Theranos business story is a cautionary tale about the dangers of taking shortcuts in business.
Theranos was a startup that promised to revolutionize the blood-testing industry with its new technology. However, it turns out that the technology didn’t work as well as promised. The company ended up fined and shut down.
This story is often used as an example of why it’s important to make sure your product or service is actually viable before starting to promote it.
On the investment side, it highlights the dangers of not conducting proper due diligence.
Dry Powder: Capital Was Flowing
Dry powder is a term used in the financial world to refer to liquid assets that can be quickly converted into cash. It’s a way of measuring how much “ammunition” a company or investor has available to invest or buy new assets.
In the Theranos reality, there was a lot of dry powder available, meaning that companies and investors had a lot of money to spend. This is why we were seeing (and in some cases still seeing) such high valuations for tech companies up to the latter part of 2021.
Female Leaders And The ESG Crowd
There is a lot of discussion these days around the concept of “ESG” or “Environmental, Social, and Governance.” This refers to the idea that companies should not only be focused on making money, but also on doing good in the world.
Many people believe that women leaders are especially important in this area, because they tend to be more focused on social issues and have a more collaborative leadership style.
The Silicon Valley Dropouts
There is a long-standing culture in Silicon Valley of respecting “dropouts” or people who have left traditional paths in order to pursue their own entrepreneurial ventures.
This is because Silicon Valley is all about innovation and taking risks, and dropouts are seen as embodying that spirit.
Some of the most successful people in the tech world are dropouts, including Bill Gates, Steve Jobs, and Mark Zuckerberg.
Dropouts are often highly respected in Silicon Valley because they have taken risks and pursued their dreams, even if that means going against the grain.
Lets not forget that there is immense survivorship bias in these stories. We have never heard about the many dropouts that bombed and didn’t get anywhere.
Due Diligence Is Even More Important For Unicorns
A unicorn is a startup company that has achieved a valuation of over $1 billion. Unicorns are rare and highly coveted, because they have achieved what most startups only dream of. Some examples of unicorns include Airbnb, Uber, and Pinterest.
Due diligence is the process of investigating a company before making an investment. This involves looking at financial statements, talking to employees and customers, and doing other research to make sure the company is a sound investment.
When it comes to investing in unicorns, due diligence is even more important than usual. This is because these companies are often unproven and have high valuations, so it’s important to make sure they are actually worth the investment.
The Bottom Line
Unfortunately, history is bound to repeat itself. It is likely that one of these story stocks will defraud investors again. These are the risks of investing. Let the Theranos tale be a reminder that due diligence is critical. If a smart and knowledgeable investor can’t understand a business model, he would be wise to pass. There are a myriad of good, understandable businesses out there that can provide great returns over time.
