Due diligence - blood, sweat and tears required?

Over the last few months I have been following updates to the trial of Elizabeth Holmes (former CEO of Theranos) in "The Drop Out" podcast. Theranos was medical technology start-up based in Silicon Valley which claimed to have developed a revolutionary blood testing technology that could perform hundreds of blood tests on a single drop of blood. Over a period of around ten years, Theranos was able to raise hundreds of millions in investment until an explosive report in the Wall Street Journal revealed that many of their claims on the technology were false and the company was dissolved in 2018. Holmes is now on trial for wire fraud and conspiracy charges.

In recent weeks the trial has seen a number of former investors take the stand and this week's podcast episode has focussed on them.

Whilst the outcome of the trial is far from certain, what has struck me is the failures in the due diligence process that must have accompanied some of these investments. Many of the major investors appear to have been private family investors rather than other major players in the med tech industry and they appear to have relied heavily on representations made by Theranos rather than carrying out their own independent checks into the technology and the claims being made.

It is a matter of course that any major investment should be accompanied by a proper due diligence process. This should involve a team of people looking at various aspects from the technology, finances, business governance and also the intellectual property. 

We work very closely with clients on due diligence projects on both sides of the fence. From an investor perspective, we will carefully review patent portfolios to tick off that very basic question - do the patents provide coverage for the product? Are there any other red flags in terms of ownership or validity? For those clients looking to attract investment, we work to help them gear up for that fundraising round - with a good knowledge of the process, we can help them prepare the answers to the IP questions before they are asked.

In this case, a due diligence that involved a thorough review of the IP held by Theranos, coupled with a more in-depth analysis of the technology itself, would likely have put off many investors.