February 19, 2019

What Bad Blood Can Teach Us About Evaluating Investment Opportunities

Please read important disclosures HERE

You may be presented with a hot new investment opportunity at some point in your life. Perhaps you have a friend with a great new business idea, a family member who has invented a new technology, or a business colleague who wants to flip a real estate property with you. You’re committed to a long-term and diversified investment plan but this opportunity is just too exciting to pass up. Thoughts of being an early investor in Amazon or Google run through your head. You envision slapping high fives with your friends at a cocktail party to celebrate your success.

Before you pull out your checkbook, you might want to consider reading John Carreyrou’s fascinating book Bad Blood: Secrets and Lies in a Silicon Valley Startup that details the rise and fall of Theranos, a now defunct private health technology company. Theranos, and its founder, Elizabeth Holmes, promised to revolutionize the medical industry with a machine that would make blood testing faster and easier. Backed by huge investors and a powerful board that included former Secretary of State George Schultz, Theranos sold shares to private investors that valued the company at $9 billion. When it became clear that the technology didn’t work and that Holmes had misled investors, the company collapsed, and Holmes was indicted on federal wire charges.

Bad Blood Invest Opportunities

Warning Signs

How did these investors get it so wrong and how can you prevent something like this from happening to you? Needless to say, there were likely many smart investors in Theranos who routinely evaluate business opportunities. Many of them likely performed extensive due diligence on the company before investing. Nonetheless, many were still fooled. Were there any warning signs that could have prevented them from making a bad investment? The following are a few signs that may also be applicable to other investment opportunities:

  • A strong fear of missing out (FOMO) feeling is present. For example, the investment is in a hot industry where there is tremendous pressure to get in early before the value increases
  • A charming, charismatic, and persuasive leader who is passionate about the company’s future
  • Overly optimistic financial projections
  • Powerful and reputable backers or board members and an inclination to trust them without doing your own due diligence
  • Leadership that lacks the necessary business or technical expertise
  • The product is shrouded in excessive secrecy

A Mental Checklist

Although our firm believes strongly in a long-term, diversified, and prudent investment approach, our clients are sometimes presented with outside opportunities that they must consider. Here are a few suggestions to consider when evaluating these opportunities:

  1. Be skeptical: Optimism is a great virtue but it can sometimes be more useful to start with a pessimistic view on the opportunity. How can things go wrong? What if the projections are not as favorable in reality? Is what you are hearing really true and accurate?
  2. Do your homework: In addition to reading the company materials, analyzing projections, and reviewing legal agreements, consider talking to people who have extensive knowledge about the company. Ask a lot of questions. Have people you trust review the opportunity too.
  3. Go into it with the expectation of loss: Don’t invest more than you are willing to lose – no matter how good the opportunity sounds. If the investment becomes worthless, how will it affect your plans or ability to spend going forward?
  4. Consider your opportunity costs: What else could you be doing with this money? Investing in a new opportunity means you are taking away funds that could be invested in something else. Will you have to pay taxes to come up with money for the investment? Are there ongoing costs? Will you have to put more money in? Consider all of the costs associated with the new investment.
  5. Consider the impact on you personally and your relationships: If this investment goes bad, will it impact your relationships with friends or family? Will you be able to handle failure?

Hot investment opportunities can be invigorating to think about. However, making a good decision requires a careful and thoughtful approach. Please consider B|O|S as part of your team as you evaluate these types of decisions. We may not necessarily have direct expertise in the investment you are considering but we may be able to highlight some things for you to consider as well as evaluate how the investment might impact your overall financial plan.

Filed under: Investing

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