Case Study: $9 Billion Investing Scam

By Wayne Mulligan, on Thursday, June 6, 2019

Yesterday, Matt showed you a simple three-step process we use to identify and avoid investment scams.

We call it “DTP.”

Today, I’ll show you how to use this process in the real world — by applying it to a real company.

As you’ll learn, if investors had used this process a few years ago, they could have avoided losing $600 million!

$9 Billion in Market Value Erased

Based on all the media attention it’s received, you might already be familiar with the blood-testing company, Theranos.

A book and a documentary have been produced to chronicle its incredible rise and fall.

You see, after raising more than $600 million from investors and commanding a market value of $9 billion, the company was shut down.

Investors lost everything.

Today I’ll explain how this happened…

And most importantly, I’ll explain how investors could have avoided this catastrophe.

A Multi-Billion-Dollar Investment Scam

The company’s charismatic CEO, Elizabeth Holmes, had a big vision.

She aimed to create a blood-testing device that was the size of an iPhone, and could be used to test for hundreds of diseases with just a pin-prick of blood.

If she’d been successful, she could have transformed the world of medicine.

Unfortunately, the technology behind Theranos never actually worked.

Ms. Holmes had been lying the whole time.

Lessons Learned

Ultimately, Ms. Holmes was charged with fraud and taken to jail.

This is an unfortunate story. But what can investors like us learn from it?

In other words, how can we ensure that we don’t fall prey to investment scams?

Well, if investors had evaluated Theranos using the three-step process Matt showed you yesterday, they could have avoided losing $600 million!

Let me show you what I mean…

The DTP Process

To identify frauds like Theranos in advance, we’ve developed a simple three-step process.

We call it “DTP.”

And now we’ll walk through each step as we evaluate Theranos:

Step #1 – Domain Experience

The “D” in DTP stands for “Domain Experience.”

Domain Experience refers to a CEO and Board of Directors having direct and relevant experience in the company’s industry.

And as it turns out, this was the first red flag with Theranos.

Ms. Holmes might be highly intelligent. But when it comes to medical technology, she has zero experience.

Furthermore, although the Board was stacked with high-profile executives and politicians, none of them were scientists or doctors. So they didn’t have the knowledge to properly evaluate the claims Ms. Holmes was making.

Step #2 ­– Proven Traction

The “T” in DTP stands for “Traction.”

Traction is another way to describe measurable progress.

The reason it’s so important is because it’s very hard to fake.

For Theranos investors, this was another red flag that should have set off alarm bells.

You see, Theranos seemed to be making progress (for example, by securing partnerships with big companies like Walgreens), but it never generated any actual sales.

Furthermore, its device never received FDA approval.

That’s no surprise — because the device never actually worked!

Many investors were satisfied taking the CEO’s word that “everything was fine.”

If they’d only dug a little deeper, they could have saved themselves a lot of money.

Step #3 – A Clear and Simple Plan for Success

And lastly, the “P” in DTP stands for “A Clear and Simple Plan.”

A company’s plan might change over time. But having no plan — or in the case of Theranos, too grand of a plan — is a red flag.

For instance, instead of starting out by building a product that could test blood for one health condition, Theranos wanted its device to test for hundreds of diseases.

Such grand plans rarely succeed — and at their worst, they can be signs of a scam.

The more typical path to business success involves building the right foundation at the beginning, putting one foot after the other, and hitting milestone after milestone.

The Real Theranos!

Even though Theranos was a scam, there’s a “bright side” to all of this…

It proved that the market demand for a new type of blood-testing technology is enormous. That’s why Theranos rose to a valuation of $9 billion.

And that’s why we’re so excited about an investment opportunity we recently identified.

This company aims to fulfill Theranos’ vision of a game-changing blood-testing solution…

But in contrast to Theranos, its technology is entirely legitimate.

And next Wednesday, Matt will tell you all about it.

So stay tuned!

Best Regards,
Wayne Mulligan

Founder
Crowdability.com

If you enjoyed this article, subscribe to updates:

Sign-up today and you'll receive our daily insights on early-stage investing, as well as our FREE "Equity Crowdfunding Action Kit" – where you'll learn:

  • The Ins & Outs of Equity Crowdfunding
  • A step-by-step path to get started
  • Tips from dozens of Venture Capitalists
subscribe to updates

Thank you for subscribing!

Tags: Investing Scams