Due diligence is a recurring theme on this blog. That's why we're building Avogadro One. And of course, Theranos comes up every now and then. Today I want to share a tweet by a Professor of Chemistry and Chemical Biology:
1 billable hour at $400/hour for consultation with actual scientist (essentially any actual scientist on planet) would have avoided $700 M con by freshman-year-dropout fraudster,
— Richard H. Ebright (@R_H_Ebright) March 15, 2018
The purpose of my quoting this is to illustrate two points:
- It is important to check if a wonder-technology touted by a startup (or anyone else) is real and performing as advertised (or at least getting there at a reasonable pace). There are people who can help you with that - the subject matter experts.
- Those experts are not cheap.
You also need to ascertain they are the right kind of experts.
I initially wanted to quote Clarke's third law:
3. Any sufficiently advanced technology is indistinguishable from magic.
... because what Theranos was trying to sell was more magic than technology. But Clarke's other laws are just as relevant:
When a distinguished but elderly scientist states that something is possible, he is almost certainly right. When he states that something is impossible, he is very probably wrong.
The only way of discovering the limits of the possible is to venture a little way past them into the impossible.
There is also a proposed fourth law:
4. For every expert, there is an equal and opposite expert.
It's remarkable how Arthur C. Clarke's laws are applicable to investment research and due diligence. Not only do investors need to distinguish advanced technology from magic, but they also have to figure out whose opinion to take into account. Asking good questions and getting informed beforehand is a good approach.
Clarke's third law implies that Technology-Magic is a continuum. At some point technological progress makes impossible possible. Antibiotics, space travel, television, mobile communications and many other things we take for granted would have seemed like magic just 100 years ago. For investors, the problem is determining if a given technology is advanced enough to become real within their investment horizon. If it stays within the realm of magic for too long, the investment will fail. Founders and experts often have a good idea where a technology is on this spectrum. Our goal is to help investors get similar insights without having to trust a single person.
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