Theranos and the Case for Due Diligence

By R. Lee Harris, iiM Managing Member

I’m sure by now that you have heard or read about the criminal trial of Elizabeth Holmes, founder of Theranos. Holmes launched the company in 2014 on the premise that technology had been developed that would provide a myriad of health screenings by testing a few drops of blood. This included screening for cancer and diabetes in rapid fashion without the need to draw multiple vials of blood. The concept was novel, and Holmes was Pied-Piper-like in the way she convinced a wide range of high-profile luminaries to sit on the Theranos board including Henry Kissinger, General James Mattis, former Secretary of State George Schultz, and former Secretary of Defense William Perry. Theranos received financial backing from Schultz, Rupert Murdoch, and the Walton family. Clearly, she cultivated her credibility through such a cast of celebrities.

Things began to unravel beginning in 2015 and the company collapsed in 2018. Holmes was charged with fraud and found guilty in January 2022, by a California jury on four of the 11 counts against her. She faces 20-years in prison. At the root of her fraud was the fact that the technology did not exist. Apparently “fake it ‘til you make it” was the company’s mantra as evidenced by using commercial machines (produced by other firms) already in existence to run most of the tests. Holmes’ was convicted for defrauding investors to whom she had a fiduciary duty. This included $38 million from PFM Healthcare Master Fund, a San Francisco-based healthcare hedge fund, and $100 million from Lakeshore Capital Management, a fund connected to the DeVos family office.

How in the world could such massive deceit happen? I believe that it all boiled down to a lack of due diligence on the part of many supposedly smart people. I understand that Holmes refused to show her technology to investors and board members alike. Assembling a board of celebrities that lacked scientific experience was a head fake on her part. Her con job would not have succeeded if there was a board that demanded to see the technology in action.

We have encountered start-up companies that were unwilling or unable to answer all our questions and provide the evidence we needed to make an investment decision. We walked away. We are fortunate to have domain experts within our investment group who thoroughly understand human health, animal health, and agribusiness. During our pitch presentations they ask tough questions and require hard, factual evidence. Our team does a deep dive into the science as well as the business basics. For example, if a founder claims a Total Addressable Market (TAM) of X, we independently verify this claim as part of our due diligence process.

The most important piece of advice we have for founders is very simple. Do not fudge the facts. Do not lie. Do not misrepresent. It’s one thing to be optimistic about the future. But do not – I repeat – do not tell us something that is not absolutely true today. We will learn the truth during our due diligence process. We will only invest in companies where the founders have been truthful and above-board.

Over the past five years, iiM, LLC has deployed approximately $5 million across 24 investments in 16 early-stage companies in the agriculture, animal health, and human health verticals. One of these portfolio companies, AgriSync (Waukee, IA), was recently acquired by Deere & Company, marking iiM’s first exit.

iiM initially invested in the workflow efficiency software company in 2016, due in part to AgriSync’s innovative leadership team, but also because of their widespread customer base. The platform seamlessly connects farmers with their trusted agribusiness advisers for on-the-job assistance and communication, making it an easy solution for its clients. Through the optimization of full workflow, team, and dashboard tools on any device, AgriSync separated itself from the competition.

After further product development, robust sales efforts, and a continued build-out of the team, AgriSync raised another funding round in 2018, in which iiM also participated. With this first exit milestone, the iiM team and investors are poised to continue deploying capital, with the goal of reaching a 30 to 40-company portfolio in the next three years.

“Our team and investors are thrilled with the outcome of the AgriSync acquisition and couldn’t be prouder of the company’s team. We are looking forward to adding even more high-performing startups to the iiM portfolio in 2022,” iiM Managing Director Lydia Kinkade stated.

Champaign, Ill. – December 20, 2021 – PhotoniCare, Inc.—a company revolutionizing frontline care with the OtoSight Middle Ear Scope that uses OCT technology to increase the objective accuracy of fluid assessment in the middle ear—announced that they have successfully completed their ISO 13485:2016 certification today.

ISO 13485:2016 is an internationally recognized quality standard that specifies requirements for a quality management system used by an organization demonstrating its ability to provide medical devices and related services that consistently meet strict regulatory and customer requirements. The Quality Management System PhotoniCare utilizes to design, manufacture, and service OtoSight Middle Ear Scopes has officially been audited and meets all ISO 13485:2016 requirements.

A Look at a Portfolio Company

We are pleased to have made 24 investments in 17 companies within the iiM portfolio with due diligence underway for additional investments. One of our more recent portfolio companies is Vytelle, with operations in Gahanna, OH.

Vytelle is a precision livestock company reshaping how cattle producers worldwide, optimize their herds with certainty. Through Vytelle’s integrated technology platform, generations of genetic gains can be made in just a few years. This allows producers to sustainably deliver more protein with fewer inputs, helping to ensure meat and milk are viable, competitive food choices for future generations.

Vytelle is the first integrated technology platform built to fast forward genetic progress across the global cattle industry. Vytelle brings together three core capabilities essential to genetic progress:Vytelle SENSE: Our accurate phenotype data capture system to identify elite performing animals with desired and balanced performance traits for reproducing.

iiM made an initial investment in Vytelle for preferred stock in September 2021.

https://www.vytelle.com/