Annoyingly busy and unable to post in detail until later, however two key stories in the press in the last 24 hours. First up, Theranos, where a current investor is now suing the company. Partner Fund Management LP (PFM), who invested $96 million in Theranos in Feb 2014 claim that:
“Through a series of lies, material misstatements, and omissions, the defendants engaged in securities fraud and other violations by fraudulently inducing PFM to invest and maintain its investment in the company,”
Elizabeth Holmes and a former executive deceived the hedge fund by claiming it had developed “proprietary technologies that worked,” and was close to getting regulatory approvals.
Who could have imagined a startup where the founder claims working proprietary technology, and vastly exaggerate its capabilities, when they have no such thing? Theranos, of course, plan to vigorously defend against the lawsuit.
Finally it seems someone in the VC community is acting on the best interests of their Limited Partners and looking to get their money out. It seems PFM, like me, don't believe Theranos' recent redirection has a chance of producing results and that they have better odds of recovering their investment through a lawsuit. It's a damning indictment of Theranos' plans, as looked at in purely monetary terms, PFM view the value they could ever gain as significantly less than the initial investment - lawsuits cost money and there's a less than certain chance of recovery. Essentially, they've calculated the costs of suing and chance of proving fraud are sufficient that compared to the expected value of the company it's better to sue.
Of course there's a potential cost to not suing too - it could be that the LP's are questioning PFM and there's a chance they'll sue PFM itself for not doing their due diligence in selecting the companies in which to invest. Better to prove that they were defrauded than bamboozled perhaps?
I'm trying to think of when this has ever happened before in this manner, certainly I'll be looking to see if PFM is just the first to rush for the exit to beat the stampede.
I'm hoping this is the beginning of a change where VCs take more responsibility for the companies they invest in, and as I've written in the past, they act to end the incentive for startups to act in unethical and illegal ways. Perhaps Boards of Directors will begin to take notice too?
Secondly, Energous. An interesting article on Seeking Alpha, where the author has looked through SEC documents detailing the CTO's share sales and found some interesting activity that they claim shows he's divesting his stock as much as possible. I've only read through it briefly, but will give some more commentary later on this, very damning if they are what they're reported to be.