What the Theranos scandal can teach investors

If you read the financial sections of the newspaper, you may have come across the Theranos scandal recently. The company’s former CEO Elizabeth Holmes is facing accusations that she knowingly defrauded clients and investors. Investors in the Silicon Valley health technology company lost millions of dollars when allegations began to surface.

The case of Theranos is being closely followed in the US, but it can provide valuable lessons to investors around the world.

What happened at Theranos?

Theranos was billed as a pioneering health technology company. Led by Elizabeth Holmes, the company claimed to have created technology that could perform hundreds of tests, from cholesterol levels to genetic analysis, from a single pinprick of blood. Not only that, but the results would be delivered quickly from a handheld device.

It’s easy to see why investors would want to back such ground-breaking technology. It had the potential to deliver huge returns and change the way people are diagnosed and treated for a whole host of illnesses. The only problem was that the technology didn’t work.

Despite this, the charismatic Holmes still managed to secure more than $700 million (£507 million) from venture capitalists and private investors. At its peak, it meant the company had a valuation of $10 billion (£7.25 billion) and was known as a “unicorn” – a privately held start-up company with a value of over $1 billion.

While the company was burning through the money raised and getting no closer to achieving its aim, investors were given a much rosier picture of how the technology was progressing. Investigations by reporter John Carreyrou began to uncover efforts to mislead investors and the public about the capabilities of the technology in 2015.

It wasn’t only investors that were fooled either. US giants Safeway and Walgreens partnered with the firm to offer in-store blood tests.

The Theranos case is ongoing but it’s unlikely investors will get their money back.

Looking at the Theranos scandal now, you may think it’d be easy to spot the signs that all wasn’t as it seemed. Yet, many of those that put money into the company were experienced investors. So, what can investors learn from the case?

5 lessons to learn from the Theranos scandal

1. Don’t get sucked in by a good story

Part of Theranos’s appeal was the story behind it. Not only was the technology set to change medicine, but it was also headed by a female CEO in a male-dominated environment. Elizabeth Holmes was good at selling the story and getting potential investors and partners excited about the product. Excitement and passion can make it tempting to put your money in investments without doing the due diligence you normally would. So, don’t skip researching your investment options.

2. Understand the risks involved

Your risk profile should always play a role when you’re choosing investments. Often, start-ups can sound appealing as they aim to make waves in their sector and could deliver high returns. But along with this comes high risk, which is often unsuitable for the average investor. For every start-up that delivers, there are many more that fall short. Your investment portfolio should balance risk to suit you.

3. Don’t follow the crowd

When there’s a popular investment opportunity, it can make it seem far more attractive. For instance, Elizabeth Holmes was recognised by Forbes as the world’s youngest self-made female billionaire, and she featured in many other high-profile newspapers and magazines. It helped create a buzz around what the company was doing and the opportunity it posed. Keep in mind that what is right for another investor, may not be suitable for you. It can be difficult to block out the noise but focus on what your goals and wider investment strategy are.

4. Diversification is important

When investing, you need to accept that it does involve some risks. There will be some companies that don’t deliver the returns that you had hoped for. Diversification means that you spread your investment so that the risk is also spread. This means investing in companies with different risk profiles, geographical locations, and operating in different sectors. While one company may perform poorly, returns from other investments can help balance this out.

5. An outside perspective can be valuable

When you’re excited about a potential investment, it can be difficult to see the wood for the trees. However, some people did raise concerns about Theranos or suggest that additional due diligence needed to be taken. Sometimes an outside perspective can be valuable and help highlight potential issues.

As a financial planner, we can help you understand which investments can help you reach your goals and the level of investment risk that is appropriate. Please contact us to discuss your investment portfolio.

Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.

The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.

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