In early January a trial involving Elizabeth Holmes and her company Theranos ended with Elizabeth Holmes found guilty of fraud. Essentially, her product which involved taking a little blood was going to revolutionize the blood taking industry. It was a great pitch, no more needles, her machine would do the work in less time and customers would be happy. The only problem is the machine never worked or partially worked, however venture funds from the San Francisco (the Bay) area invested heavily into her company.
In an article by Erin Griffith of the New York Times News Service, Ms. Holmes was suggesting this was more than a health care company it was a tech company. Ms. Holmes used the mentorship and credibility of tech industry heavy weights Larry Ellison and Don Lucas to raise money from others. She used the startup playbook of hype, exclusivity and a few of missing out to win over later investors. (The judge in the case allowed the defense lawyers to suggest it is common in Silicon Valley for promoters to engage in overly optimistic puffery. Any statements that were not entirely truthful were about the future. It is what investors wanted to hear) Except the machine did not work.
Don Lucas was a Silicon Valley venture capitalist was on the Board of Theranos from 2003 to 2013, was involved with more than 20 investment vehicles that backed Theranos. They included his son’s venture firm, Lucas Venture Group, PEER Venture Partners and trust and foundations associated with members of his family.
Mr. Lucas introduced Hall Group, a real estate firm that put $4.9 million into Theranos. Mr. Lucas’s nephew’s firm Black Diamond Ventures invested $5.4 million. Other Silicon Valley funds were ATA Ventures, Beta Bayview, DCM, IVP, and Drapper Associates. Wealthy families such as heirs to Amway, Cox Enterprises, and Walmart invested.
For a while, the start company of Theranos was receiving money from some of the smartest people on the planet and they were seeing the value go up, except for the machine did not work.
Not everyone invested, in the book Bad Blood by John Carreyrou, he writes Bijan Salehizadeh of Highland Capital Partners decided not to invest because Ms. Holmes was unwilling or unable to answer most of his questions. For a number of years, people would say to him Theranos is the hot thing and passed the unicorn valuation of $1 billion, how could you not invest?
Linking to dividend paying stocks, sometimes there are technologies that can and do change the way we do things, however there will be many that promise to do so but do not catch on to the public. It is difficult to pick the winner, however with dividend paying stocks, you can ask how many years has the company been profitable and paying dividends? If the answer is 10 or 20 or 30 years plus, it safe to predict they will continue to pay dividends in the future. The risk of losing money is small, the reward of dividends and higher multiples on profitable stocks is high.
There are more questions than answers, till the next time – to raising questions.