Elizabeth Holmes was found guilty this week on 4 of 11 charges against her. The jury was unable to reach agreement on the remaining seven charges against her. Multiple media outlets have reported on the verdict. They include the Verdict itself in the Wall Street Journal (WSJ); what the verdict means for Silicon Valley, in the New York Times (NYT); questions on the victims of the Theranos fraud in Bloomberg and, of course, the lingering questions or how or even will Holmes serve any time, as reported in Fortune. Others have questioned whether the guilty verdict is an indictment of the entire Silicon Valley “fake it ‘til you make it” culture, as reported in The Verge.
I had two recent podcasts on the trial, Holmes and Theranos. The first, with white collar defense lawyer Kevin O’Brien, looked at the trial itself, the prosecution and defense cases as well as whether Holmes testimony hurt or helped her defense. The second, with Exiger President Brandon Daniels, considered the types of due diligence which you should engage in when considering a major investment. Both episodes were well received, pointing to the ongoing fascination with this major fraudster and how to parse out some lessons learned for the compliance professional.
From the testimony it was clear that Holmes knew exactly what she was doing all along. As reported by The Verge, “When it came to the investors, prosecutors had Holmes dead to rights. Unlike with the patients, she was in the room. There were emails and recordings. Holmes’ ties were clearer, and what she knew was clearer, too. The easiest part of this case to prove was about money, and that was where the prosecution spent the bulk of its time. Did Holmes lie to investors? The jury thought so on three counts”. In other words, the Theranos blood testing scam never did work.
But what are the lessons for the compliance professional? Daniels made clear in his podcast there were several lessons not only for companies looking to invest but in multiple business relationships such as potential joint venture partners, funded development partners and other types of business partnerships and ventures. He pointed out one thing to look at is your potential partner’s supply chain purchases; check it and challenge it. With Theranos, if someone saw the supply chain relationships with traditional blood testing equipment, it would lead him/her to ask, “Why is that occurring?” So why would Theranos be purchasing a competitor’s equipment?
If the answer came back the equipment is for testing and development comparison, why were those purchases at scale? Why did Theranos need so much of its competitor’s testing equipment. We now know it was because Theranos was testing blood samples on the Siemens blood testing equipment and claiming it was done on Theranos equipment.  If it was for comparison purposes, you would not have expected Siemens’s equipment to have been purchased in such large numbers.
Another area for due diligence is whether the potential partner has the production capacity to build the units that they intend to achieve. This is critical when you are moving from protype to a commercial enterprise, as Theranos did with Walgreens. Of course, Walgreens not only failed to do the basic due diligence required on the Theranos blood testing machine but actually removed experts from its pre-acquisition due diligence team who raised such questions.
Another difficult area in investment due diligence is how to evaluate the founder(s) of a startup as potential post-acquisition or post-merger leadership candidates. Many startups have a leader who has a vision. Holmes did have a vision. I am firmly convinced that Holmes had a vision of a bloodless draw for testing. But often visionaries are not really execution people. They may not even be operational people, but they are visionaries.
Daniels noted, “maverick leaders, who have a unique vision, a unique idea, and then tap into a fundamental, almost primal need in a market are always going to get a lot of attention. Especially ones that are cult to personality which Elizabeth Holmes rightly has in place.” But even here, you need to ask some direct questions. Does the company really have the expertise at the very top to understand that what they are attempting to do is possible? Moreover, do they have the capacity, the expertise, the fundamental understanding of the component of the device, or the innovation that would be necessary to know if full scale production is even possible
A key step in the production process is a prototype. Is there a minimum viable product (MVP) that can be built and tested? This would help inform if key management personnel have “a fundamental understanding of how the core parts of the process work? Do they have an understanding how they lived the market need? Finally, have they prototyped the product to the point where you could actually demonstrate that it will work, even if you’re eons away from it being productized and scaling?” From there you should move on the to having a “seasoned medical professional, a seasoned medical device expert either in-house or as a company partner and the right management team to assess whether or not what they were doing is viable is so important.”
Theranos also serves as an excellent example of the mandates from the Department of Justice (DOJ) in Mergers and Acquisitions (M&A) in a best practices compliance program. You must start with pre-acquisition due diligence but that is only the starting point. The data you glean in pre-acquisition due diligence should serve as your baseline for ongoing monitoring of any company you acquire in the post-acquisition phase. It is this coupling of pre-acquisition due diligence with the post-acquisition phase in a best practices compliance program which is another key lesson from Theranos.
In investment due diligence, due diligence tends to be a point-in-time which looks at the dynamics of the business, but you need to couple due diligence on an ongoing basis because the risks you assess today may well change tomorrow. Daniels noted, “you have to continuously monitor the issues to make sure that your investments decisions in terms of production, your decisions in terms of your capabilities are sound and there is continuous monitoring.”
The Holmes verdict will be studied as a part of the overall story of Theranos. There are many lessons to be learned from Theranos for the compliance professional. But perhaps we should start with one of the most basic forms of due diligence. If it sounds too good to be true, it probably isn’t true. Or if you want to channel your inner Ronnie Reagan, “Trust but verify” even in due diligence.