Billionaire Elizabeth Holmes, founder of Theranos, has been found guilty of defrauding investors. What lessons does the Homes-saga hold for startup investors back home, this report finds out
This week, Theranos founder Elizabeth Holmes was accused of defrauding investors. Holmes now faces at least 20 years in prison.
The way she founded and sold her startup story now offers valuable lessons to investors around the world. Even to Rupert Murdoch, who was one of the investors who believed in his idea.
Startups can take heavy valuations very quickly. As venture capital and private equity firms in the US's Silicon Valley place a premium on ideas that promise disruptive innovation, new-age tech companies raise millions of dollars in funding before new-age tech companies come up with product-market fits, or some can. Cases, even a practical prototype.
However, in this dazzling world of innovations and disruptions that are waiting to happen, some founders, like Holmes, are weaving a web of lies and taking advantage of the greed of investors to follow their path to success. They exemplify the "fake it till you make it" philosophy.
Theranos was founded by Holmes, a Stanford chemical engineering dropout, when she was 19. It was once worth more than $9 billion.
And how did he pull it off?
Holmes claims to have developed tests that can help in early detection of diseases ranging from high cholesterol and high blood sugar to liver dysfunction and cancer from a couple of drops of finger prick blood drawn at any pharmacy. can.
Small amounts of blood were collected in nanotainer tubes and analyzed on a proprietary analysis machine called "Edison" in Theranos lab.
The "invention" was believed to have the potential to revolutionize healthcare and reduce diagnostic costs. Until it was revealed that Theranos' Edison machines were not giving accurate results.
The company knew this. So it was diluting blood samples and subjecting them to "traditional tests" instead of using its famous Edison machines.
Soon, issues arose with the US Food and Drug Administration. And as investors became more aware of Holmes' fraudulent pitch, many of them ended their partnership with the company.
In 2014, Holmes topped Forbes' list of America's richest self-made women, with a net worth of $4.5 billion, valuing her company at $9 billion.
At its core, the Theranos story is about a bevy of high-profile investors, from media mogul Murdoch to venture capitalist Tim Draper, not working diligently enough but to be considered "disruptive innovation." ,
The Indian startup ecosystem, now the third largest in the world after the US and China, is also maturing at a rapid pace. Some of these upstarts also have a base in Silicon Valley.
Last year 42 Indian startups entered the unicorn club.
Thresio-style Mensa brands achieved unicorn status in just six months of launch. Indian startups raised over $42 billion in 1,583 funding deals. This was more than 3 times the total funding of $13 billion raised in 2020. In fact, the total startup funding for 2021 was more than the $37 billion in funding totaled in the previous three years.
But in this rush of capital, are our venture capital and private equity investors doing their due diligence in the health of these new-age companies?
There is reason to be a little skeptical on this front. Consider cyber security. In the last two years, several Indian companies like BigBasket, Dunzo, Haldiram's, Domino's, Airtel, and Juspay faced cyber attacks that compromised their users' data.
Cyber security experts have claimed that in their pursuit of rapid growth, startups often overlook the importance of building a strong cyber security posture. So shouldn't investors include checking a company's cyber health in their due diligence?
Let's take another example. Indian edtech startups have raised over $4 billion in the last two years as compared to $500 million in 2019. The big players are getting smaller startups to build edtech super apps.
However, a recent government advisory cautioned the public against relying on "success stories" advertised by these online educational companies.
While startups clearly need to be ethical in their practices and avoid the temptation to "fake it until you make it" models, investors, for their part, also need to do their due diligence.
To understand how private equity and venture capital firms can make sure their money is safe and learn the right lessons from the Theranos episode, we spoke to Partha Gandhi, founder and chief investment officer of Bombay Capital.
Clearly, it is not easy to identify an unsecured firm or a firm involved in fraud. But as Mad-Eye Moody's favorite saying goes, "constant vigilance," is the axiom that investors should adhere to.