Welcome to Watch This Space, a new way for me to deliver K2 Integrity’s high-level expertise and share meaningful perspectives in the marketplace with you. Twice a month, I will highlight a few recent assignments which, I believe, will help reveal emerging risks, trends, technologies and anything our team thinks is important for you to know.

Silicon Valley execs didn’t invent “fake it 'til you make it”—that credit may go to Paul Simon on Bookends—but they certainly have been working hard to perfect it. With that aphorism as an ethical north star, the tech industry has uniquely embraced, even celebrated, projecting a false sense of confidence in both products and people.

The problem is that faking it can very easily cross over into fraud.

On Monday, former Theranos CEO Elizabeth Holmes was convicted on four counts of wire fraud and now faces a lengthy prison sentence. This Cinderella story—Stanford dropout Holmes became the youngest female self-made billionaire—quickly devolved into a cautionary tale. Holmes was found guilty of duping investors into thinking her blood-testing technology was going to revolutionize healthcare. But the product never worked and, worse, put people’s lives at risk, providing consumers with incorrect data about their well-being.

Holmes’s fall from grace has emerged as the decade’s most profound reversal of fortune and the ultimate “how not to” case study of investor due diligence. Some of the most respected leaders of our time—including Henry Kissinger and George Shultz (whose family was nearly torn asunder when he sided with Elizabeth instead of his own grandson, Theranos whistleblower Tyler Shultz)—funneled money into a void. Several of the company’s investors and board members, such as the DeVos (as in Betsy) family, admitted they never bothered to try and understand the technology. The family’s investment advisor, Lisa Peterson, testified that she didn’t ask questions for fear of upsetting Holmes and being cut out of the deal.

Over the course of her trial, Holmes deflected blame for the company’s bust onto its investors. In a very narrow sense, she’s right. Every financing decision carries a certain amount of risk, and it’s incumbent upon investors themselves to conduct their own thorough research. Any known blind spots, including the allure of a cult of personality, must be checked and balanced by actual, concrete, 360-degree due diligence.

Robert Brenner, global co-managing partner of K2 Integrity, says, “Too often investors follow a herd mentality rather than doing their own homework (i.e., assuming since a friend or some other high-profile person invested, they must know something). These folks don’t necessarily have the technical understanding to vet the company or product, and may be hesitant to challenge outlandish claims for fear of revealing their ignorance. We saw this happen with loan derivatives during the housing bubble. Even sophisticated investors had little understanding of the mechanics of the collateralized loan portfolios they were investing in and the risks entailed, but they saw an opportunity for growth and just went for it. In the case of Theranos, it appears that few of the big-time investors had a background in medicine or biology. Instead, they bought into an idea and the hubris around it without asking the right questions.

As an investor, you must engage in holistic due diligence and look at the target company from every angle: the technology, the founders, the sources of revenue and funding, the social media presence(s), and more. The approach should involve deep dives into the legal, financial, and reputational backgrounds on every aspect of the business and its leadership. Only this way can you make decisions based on truth and transparency.”
One of Holmes’s favorite lines in promoting Theranos, usually delivered to a gaggle of awestruck journalists, was, “First they think you’re crazy. Then they fight you. Then you change the world.” At K2 Integrity, our experts help you make smart, informed, vigilant, and careful decisions about who and what you support financially—products and services that hopefully will change the world for real.

As always, I welcome feedback, comments, questions, or just a chance to talk. Please reach me at jeremy.kroll@k2integrity.com or via LinkedIn.

Best,

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