To some, Theranos lawsuit shows scary side of buying stock in private companies

Discussion in 'Wall St. News' started by dealmaker, Dec 8, 2016.

  1. dealmaker


    AP Photo/Jeff Chiu/File
    FILE – In this Nov. 2, 2016, file photo, Elizabeth Holmes, founder and CEO of Theranos, speaks at the Fortune Global Forum in San Francisco. Theranos was hit with a rare pre-IPO securities class action lawsuit Monday. (AP Photo/Jeff Chiu, File)
    PUBLISHED:December 8, 2016 at 12:00 am| UPDATED:December 8, 2016 at 10:30 am
    PALO ALTO — Removed from the volatile world of the public stock markets, private startups are usually safe from the investor lawsuits that plague Silicon Valley companies every time their shares plunge.

    But in a rare case, embattled blood-testing startup Theranos was sued last week by investors claiming that the Palo Alto company conned them out of hundreds of millions of dollars.

    The securities class action, filed before Theranos has even hinted at plans for an initial public offering, highlights the increasingly risky legal environment private companies must navigate and showcases the dangers investors face when dealing in private securities. Theranos is an egregious example — shareholders accuse the company of lying and knowingly peddling a product that didn’t work — but experts say more startups could face these types of suits as the market for private securities continues to expand.

    “What you’ve seen over the last four or five years — particularly around the unicorn phenomenon — is people buying shares in these companies with little to no information, largely driven by hype and hope,” said Robert Ackerman Jr., founder of Allegis Capital, a venture capital firm with offices in San Francisco and Palo Alto. “And then, when the facts reveal themselves, or when they get more information, they’re surprised.”

    Buoyed by floods of venture capital money that have poured in over the past few years, startups such as Uber and Airbnb are putting off IPOs while simultaneously tempting investors with valuations reaching tens of billions of dollars. Meanwhile, employees at these companies have bills to pay, so they’re cashing out by selling their shares on largely unregulated private markets. And investors, excited by the “unicorn” hype — the glowing aura that seems to surround private companies with valuations of $1 billion or higher — are snapping up those shares.
  2. dealmaker


    Their due diligence was, other VCs and well known angel investors had invested before them...
  3. classic example of blind leading the blind
  4. Venture Capital Fund= Throw some shit at the wall, and see what sticks.
  5. The fact that Theranos grew as much as it grew before the truth came out is incomprehensible to me. Were there no independent peer reviews of the tests they did?
  6. S2007S


    Look at Snapchats valuation on the secondary market....

    Another fools paradise.....
    $20+ billion for a lame app that kids use....
  7. Sig


    It's actually their stated model and it works pretty well. The herd mentality is definitely strong in that industry, which is funny since they all see themselves as so cutting edge. But by and large the model works, you don't see any funds that were particularly hurt by this because they build in the idea that most if their investments are going to fail.
    ironchef likes this.
  8. Sig


    I agree that Snapchat is overvalued, but beware when you start disparaging things simply because kids use them. That way leads to grumpy old man syndrome always yelling about "kids these days" while missing out on everything developed after whatever date one decided to check out on keeping up.
  9. This sort of thing escapes detection, I suppose, due to the cycle in the marketplace...Most of the famous cases of fraud occur AFTER the major bull market and during the 'scapegoat phase' of the cycle..i.e. the Enron's, Worldcom's and of course Madoff and other assorted stuff that is "uncovered" when the sentiment shifts to assigning blame for the sudden plunge in market prices...

    The "bull market" hides all of the skeletons in the closet.
    mlawson71 likes this.
  10. Pekelo


    So what is the point of this thread (beside being an interesting theme), are we supposed to feel bad for poor VC?
    #10     Dec 10, 2016