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A Theranos backer invested despite warning signs

There were a few red flags in due diligence, but PFM investor Brian Grossman invested anyways.

The former Theranos headquarters in Palo Alto.

PFM investor Brian Grossman knew and acknowledged that there were risks to the investment, he said in conclusion of his testimony. He didn't expect Elizabeth Holmes being untruthful to be one of them.

Photo: Andrej Sokolow via Getty Images

PFM Health Sciences partner Brian Grossman invested in Theranos despite red flags raised during diligence, according to evidence presented Wednesday in the ongoing fraud trial of former CEO Elizabeth Holmes.

During the process of vetting the blood-testing company, a colleague asked a contact at Blue Cross Blue Shield of Illinois about Theranos, only to be told its tech didn't work. "They said they evaluated service and came to the conclusion that it does not work. They have no contract with Theranos and they did extensive diligence on the machine and came to this conclusion," a PFM team member said in an email to Grossman.

In another review on the FDA risk, Grossman was warned by an analyst that it was possible that the FDA might never grant approval to some of Theranos' tests. "My conclusion is that we have to account for risk that the FDA will decide to regulate Theranos much earlier than they think, which may slow down or derail the launch," the analysis said an email. "We also have to assume that there is a possibility that they will never be able to get certain tests approved by the FDA and they will remain venous blood draw tests (which they mentioned.)"

Even with the warning signs, Grossman went ahead with the investment, his confidence partially buoyed by a call to Stanford professor Channing Robertson who had ties to his father-in-law, Stanford professor David Brady. On Jan. 26, Grossman wrote to his partner at PFM that he was feeling better about the investment. "Valuation and terms aside, which are obviously tough to swallow, I'm feeling even better about this now. I had a mind blowing call yesterday w/ Elizabeth's professor who helped her start this," he wrote.

Still, Grossman knew and acknowledged that there were risks to the investment, he said in conclusion of his testimony. He didn't expect Elizabeth Holmes being untruthful and not disclosing the use of third-party devices to be one of them.

"Did you think one of the risks here was that the founder and CEO was not being truthful to you?" prosecutor Robert Leach asked.

"We did not think that was one of the risks," Grossman said.

Biz Carson

Biz Carson ( @bizcarson) is a San Francisco-based reporter at Protocol, covering Silicon Valley with a focus on startups and venture capital. Previously, she reported for Forbes and was co-editor of Forbes Next Billion-Dollar Startups list. Before that, she worked for Business Insider, Gigaom, and Wired and started her career as a newspaper designer for Gannett.

theranos brian grossman theranos trial
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