Elizabeth Holmes
Photo: Michael Kovac/Getty Images for Vanity Fair

What investors can learn from the Theranos trial

Protocol Pipeline

Happy Thanksgiving everyone! I'm grateful as always for your readership. Pipeline will be taking a break next week for the holiday, but we'll be back in December. This week: Fred Wilson thinks the math doesn't add up, Chamath Palihapitiya is confused by the markets, and due diligence goes on trial in the Theranos case.

Due diligence is on trial in Theranos case

Elizabeth Holmes is on trial, but so is investor due diligence. As I wrote for Protocol's Source Code Friday, one of the many themes of Holmes' defense is that investors are supposed to be the sophisticated ones and acknowledge the risk of investing in startups.

Some Theranos investors were clearly FOMO-fueled, relying on word of mouth and endorsement from their peers to invest.

  • Lisa Peterson, who represented the DeVos family office, testified that she had never visited a Walgreens lab or had her blood drawn during the diligence process. Instead, her team relied on the financials and information Theranos gave to them, and invested to the tune of $100 million.

But some investors did run thorough due diligence processes, and still invested in the company.

  • Brian Grossman's firm, PFM Health Sciences, had a four-person diligence team and spoke to outside sources at companies. His firm sent long lists of questions to the Theranos team, visited labs and even had team members get their blood drawn.
  • Still, he ignored some of the red flags raised along the way, like concerns from insurance companies and competitors that the tech didn't work and delays in receiving the test results despite a promised four-hour turnaround time.
  • Even though it tried to run a full process, the risk analysis hadn't accounted for Holmes lying to the fund. "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.

Silicon Valley's venture community has been quick to dismiss Theranos as a one-off that was easy to spot from a mile away.

  • "We looked at it a couple times, but there was so much hand-waving — like, 'Look over here!' — that we couldn't figure it out," then-GV investor Bill Maris said in 2015, shortly after the first reports of problems with Theranos' tech. "So, we just had someone from our life-science investment team go into Walgreens and take the test. And it wasn't that difficult for anyone to determine that things may not be what they seem here."

But would the same thing have happened today? One refrain I've heard over and over again in this hot funding environment is how fast deals are getting done.

  • Speed is now seen as a badge of honor with some firms handing out term sheets in less than 48 hours.
  • Of course, diligencing a SaaS startup versus evaluating a biotech firm dealing with patient blood samples are two very different processes. But Holmes isn't the only founder out there to lie about company progress and face prosecution. Headspin's founder Manish Lachwani was charged with overstating revenues after an investigation found that the actual revenues were much lower than what had been presented to investors.

Theranos will always remain an exception for many reasons, but that doesn't mean there aren't lessons that apply to venture capitalists as a whole (even the ones who passed). In today's environment where due diligence has become a meme of its own, VCs run the risk of not uncovering red flags in the name of moving fast on a hot deal. As I sit watching the Theranos trial, I keep picturing covering another trial a few years from now and listening to VCs explain that they had 24 hours to make a call simply because Tiger had entered the funding round, diligence be damned.


"Garry Tan is a moral canary in a coal mine. When people hate on Garry Tan, they out themselves as either evil or stupid, because in fact Garry is as close to a 100% good guy as you get," tweeted Paul Graham in defense of Initialized's Garry Tan, who has been the subject of much debate and targeted harassment for his support of the recall of San Francisco's district attorney.

Even Chamath Palihapitiya doesn't know what to make of the markets right now. Despite all the green lights, he's seeing friends take billions off the table and doesn't know what to make of it: "It leaves me wondering what this all means and what I should be doing, if anything?" One answer: Selling 15% of his stake in SoFi, which he took public via a SPAC this year.

Pay your goddamn taxes, writes Joanne Wilson in a not-so-thinly-veiled screed against the relocation of VCs to Florida: "If you can afford a second home, you can afford to pay your taxes in areas you live."

A startup founder's day goes like this: "7 a.m.: I take out my retainer. My dentist says I grind my teeth at night but he doesn't get that the grind never stops." Roshan Patel shares the hilarious (and satirical) day in the life of a startup founder.


Developing an employee's digital and technical skills is an attractive way for employers to generate capabilities that will be vital for the future. Also, levelling up employee skills can be felt beyond the company's physical (and remote) walls.

Learn more

Inside track

Last week, I wrote about the crazy high valuations and how investors are uncomfortable but handing over the cash anyways. This week, USV's Fred Wilson crunched the numbers about seed rounds being done at $100 million post-money valuations and after modeling it out, "the numbers just don't add up."

"Solo capitalists are gaining on traditional venture capital firms," according to new AngelList Venture data from Abe Othman.

It's not quite a Black Swan memo, but Lux Capital's LP letter, shared by Josh Wolfe, shows how the firm is investing in times when "excess is in excess."

If you want to become a better leader, you need to learn how to become a feedback magnet, writes Ascend CEO Shivani Berry for First Round.

Need to know

Grammarly is worth $13 billion. That's not a typo. It raised $200 million from Baillie Gifford and some BlackRock funds. Wholesale marketplace Faire also became a decacorn after raising $400 million at a $12.4 billion valuation.

Instacart delayed IPO plans as it faces more competition from Uber and DoorDash on the grocery delivery front.

Investors are now requiring sustainability clauses. Startups have to commit to carbon reduction as terms of the deal.

A crypto group tried to buy the Constitution. Its bid ultimately failed, but it forced a lot of investors to quickly read up on what a DAO is. In a move some are taking as a swipe at the WallStreetBets crowd, Citadel's Ken Griffin bought it instead.

Startups are spending money again. Food delivery is in, but bulk office snack orders are out.

Peter Thiel has some new neighbors after he paid $13 million for the D.C. mansion he bought from Wilbur Ross. It's a sliver of a Marc Andreessen mansion, but area residents include Kellyanne Conway and Steve Mnuchin. Here's the Zillow listing for those who'd like to peruse.

New fund alerts: Paradigm re-upped with $2.5 billion for its next crypto fund. Dave and Brit Morin launched a new $100 million fund called Offline Ventures. Ali Partovi's Neo raised $150 million for its second fund.

Making moves: Jonathan Lai and James Gwertzman are new partners at a16z where they will be focused on gaming startups. Atomic added Hadley Wilkins, Marian Pond, Ran Wei, Phil Liu and Sharon Winter to help it launch companies.

On Protocol: It's easier to invest in an NFT than a startup. Party Round wants to change that.

Your weekend reading: Is Tiger Global as disruptive to venture capital as a16z was? The Generalist breaks down "venture capital's winning machine" and how "founders may be sick of 'hands-on' investors."

Five questions with… CapitalG's Derek Zanutto

Derek Zanutto specializes in investing in enterprise, data and security startups for CapitalG, Alphabet's independent growth fund. His investments include Collibra, Armis and Databricks.

What product or service are you totally, even irrationally, loyal to?

I'm a huge fan of podcasts. My favorites are probably the Economist's Editor's Picks and Money Talks, which do a great job of recapping the most important news of the week. In terms of services I'm totally addicted to, I'd have to say coffee bean subscription services like Caffe Luxxe. I love trying new beans to see which will give me the energy I need to keep up with my three young kids in the morning.

What problem do you want to see a startup solve?

On the personal side, I'd love to see an all-in-one, hassle-free, yet customized personal travel platform. I want to be able to hit a button and magically have a vacation fully booked and calendared for my family — flights, hotels, activities, meals, the whole works — all personalized for our interests. On the professional side, we see amazing startups every day coming up with novel approaches to help enterprises capture, store, manage, analyze and access their data while helping a broad range of employees make better, faster decisions.

What book do you think every startup founder should read?

"Sapiens: A Brief History of Humankind," by Yuval Noah Harari. It's a good reminder of how important building a set of beliefs or vision is for motivating large groups of people to work together on big, hairy, audacious goals.

What's a piece of advice you were given that you're glad you ignored?

I started my career in investment banking, where I was advised to "have a sharp edge in meetings to get your point across." That approach never resonated for me. I've always believed that it's better to be authentic to your own personality and style. In my case, I much prefer collaboration to combativeness.

Aliens visit Earth and you can only show them one movie. What would it be?

"The Big Lebowski." I think the aliens will probably appreciate a good laugh after the long trip to Earth.

Correction: An earlier version of this newsletter actually had a typo. Grammarly's valuation is now $13 billion, not $10 billion. I apologize for the error.
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