Apr 29, 2024
Human due diligence, the meticulous process of evaluating the character, capabilities, and track record of potential partners or employees, remains a cornerstone of astute business decisions.
Yet, the past decade has been marred by several glaring lapses in this domain, leading to significant repercussions for businesses and investors.
Today, we will explore five of the most notable human due diligence blunders of the past ten years, elucidating the reasons behind their failures.
1. Theranos and Elizabeth Holmes
The Blunder: Theranos, founded by Elizabeth Holmes, claimed to have developed a revolutionary blood-testing technique that required only a few drops of blood.
The Oversight: Investors and partners were captivated by the potential of the technology and failed to rigorously validate the claims made by the company.
The Result:
The technology claims were debunked as false, leading to a massive downfall of the company's reputation and valuation.
In 2015, concerns about the validity of Theranos's technology were raised by medical professionals and investigative journalists.
By 2016, Elizabeth Holmes's personal net worth plummeted from $4.5 billion to virtually nothing.
In 2018, Theranos, Holmes, and former company president Sunny Balwani were charged with fraud. Holmes was found guilty on four counts in January 2022 and was sentenced in November 2022 to 11 years and 3 months in prison. Balwani was convicted on all 12 counts in July 2022 and was sentenced in December 2022 to 12 years and 11 months in prison, followed by 3 years of probation.
Theranos ceased operations in 2018, marking the end of a company that was once valued at $10 billion.
The Theranos saga underscores the critical importance of thorough due diligence and the dangers of being swayed by charisma and grand promises. It serves as a stark reminder of the potential consequences of failing to rigorously vet and validate technological claims, especially in sectors as critical as healthcare.
2. Adam Neumann and WeWork
WeWork, officially known as The We Company, was founded in 2010 by Adam Neumann and Miguel McKelvey. The company's primary business model revolved around providing shared workspaces for startups, freelancers, and businesses. At its peak, WeWork's valuation soared to a staggering $47 billion, largely driven by the vision and charisma of its CEO, Adam Neumann. However, beneath this glossy exterior lay a series of human due diligence failures that would eventually lead to one of the most dramatic collapses in the startup world.
Over-Reliance on Charisma: Adam Neumann's dynamic personality and grand vision for WeWork played a significant role in attracting investors. His ability to paint a picture of WeWork not just as a real estate company, but as a global community, was compelling. However, investors and board members became too enamored with Neumann's charisma, often overlooking the practicalities and sustainability of WeWork's business model.
Lack of Financial Oversight: Neumann's control over WeWork was substantial, with little to no checks and balances in place. This led to questionable financial decisions, including significant spending on lavish parties, personal real estate deals, and even a private jet. The lack of financial oversight and transparency raised red flags for potential investors and analysts.
Conflicts of Interest: Neumann had multiple conflicts of interest, including leasing properties he personally owned back to WeWork. Such arrangements were not only ethically questionable but also posed significant financial risks to the company.
Culture and Governance Issues: WeWork's corporate culture under Neumann was often described as toxic. Reports of excessive partying, drug use, and a general lack of professionalism raised concerns about the company's long-term viability. Additionally, Neumann's leadership style was often described as autocratic, with little room for dissent or alternative viewpoints.
Failed IPO and Aftermath: The culmination of these human due diligence failures became evident when WeWork filed for an initial public offering (IPO) in 2019. The company's S-1 filing revealed a myriad of financial irregularities and governance issues. The negative publicity, combined with growing skepticism about WeWork's business model and valuation, led to the IPO being shelved. This was followed by Neumann's ousting and a dramatic drop in the company's valuation.WeWork's story serves as a cautionary tale about the importance of human due diligence. While vision and charisma are essential for leadership, they should not overshadow the need for transparency, ethical governance, and financial prudence. Investors, board members, and stakeholders must ensure that thorough vetting processes are in place to avoid such blunders in the future.
3. Travis Kalanick and Uber
Uber, the ride-hailing giant founded in 2009, revolutionized the transportation industry. However, its rapid ascent was not without significant challenges, many of which were rooted in human due diligence failures. Here's a deeper dive into these failures:
Aggressive Expansion at the Cost of Compliance: Under the leadership of co-founder and former CEO Travis Kalanick, Uber adopted an aggressive expansion strategy. This often meant entering markets without fully adhering to local regulations. While this approach allowed Uber to quickly establish a presence in new cities, it also led to numerous legal battles, bans, and a tarnished reputation in several regions.
Toxic Corporate Culture: Uber's workplace culture came under scrutiny in 2017 when former engineer Susan Fowler published a blog post detailing instances of sexual harassment and discrimination she faced at the company. This revelation prompted an internal investigation, which uncovered a culture that often sidelined concerns about employee well-being in favor of growth and profitability.
Leadership Controversies: Travis Kalanick's leadership style was frequently described as combative and unapologetic. His approach, while instrumental in driving Uber's growth, also contributed to many of the company's controversies. Kalanick's involvement in various scandals, including a recorded argument with an Uber driver over fares, raised questions about his suitability as the company's leader.
Ethical and Legal Missteps: Uber faced allegations of using software tools like "Greyball" to evade regulators and "Hell" to spy on competitors. Such practices not only raised ethical concerns but also led to legal challenges and further eroded trust in the company.
Treatment of Drivers: One of Uber's most significant challenges has been its relationship with drivers. The company's insistence on classifying drivers as independent contractors rather than employees has led to protests, lawsuits, and regulatory challenges worldwide. This classification has implications for drivers' earnings, benefits, and job security.
Data Breaches and Privacy Concerns: In 2016, Uber experienced a data breach that exposed the personal information of 57 million users and drivers. Instead of promptly disclosing the breach, the company paid the hackers to delete the data and kept the incident secret for over a year. This lack of transparency and accountability further damaged Uber's reputation.
Uber's human due diligence failures underscore the importance of ethical leadership, corporate responsibility, and a commitment to fostering a positive workplace culture. While the company has taken steps to address these issues in recent years, its story serves as a reminder that growth at any cost can lead to significant challenges and reputational damage. Proper vetting, checks and balances, and a commitment to ethical practices are crucial for sustainable success.
4. Trevor Milton and Nikola Motors
Nikola Motors, an electric and hydrogen fuel cell truck startup, emerged on the scene with promises of revolutionizing the trucking industry. Founded by Trevor Milton in 2014, the company quickly gained attention and investment based on ambitious claims about its technology. However, as events unfolded, it became evident that there were significant human due diligence failures associated with the company and its founder.
Overhyped Claims: Trevor Milton made several bold claims about Nikola's technology and products. These included assertions about the capabilities of the company's trucks, their range, and the state of their technology. Many of these claims were later challenged by industry experts and analysts.
Lack of Tangible Products: Despite the grand promises, Nikola had not produced a commercially available vehicle by the time many of the controversies emerged. The company's reliance on renders and prototypes, rather than tangible products, raised eyebrows.
The "Rolling Truck" Incident: One of the most significant controversies involved a promotional video that showed a Nikola truck "in motion." It was later revealed that the truck was simply rolling down a hill and was not operating under its propulsion. This incident severely damaged the company's credibility and raised questions about its honesty and transparency.
Misrepresentation of Technology: Nikola faced allegations of exaggerating the readiness and uniqueness of its technology. For instance, while the company claimed to have developed significant components in-house, reports suggested that many parts were sourced from third-party suppliers.
Trevor Milton's Departure: Amidst growing controversies and allegations of fraud, Trevor Milton stepped down as the Executive Chairman of Nikola in September 2020. His departure, while necessary for the company's image, also highlighted the significant due diligence failures associated with his leadership.
Regulatory and Legal Scrutiny: Following the allegations and revelations, Nikola came under the scrutiny of regulatory bodies, including the Securities and Exchange Commission (SEC). The company's practices, disclosures, and representations to investors were all under investigation.
Nikola Motors and Trevor Milton's story serves as a cautionary tale about the importance of thorough human due diligence. Investors, partners, and stakeholders must rigorously vet claims, especially when they seem too good to be true. The allure of groundbreaking technology and charismatic leadership should not overshadow the need for transparency, honesty, and tangible results. The cost of oversight, as demonstrated by Nikola's challenges, can be monumental for both reputation and financial standing.
5. Sam Bankman-Fried and FTX
FTX, a prominent cryptocurrency exchange, was founded by Sam Bankman-Fried. Under his leadership, the platform quickly rose to prominence in the crypto world. However, recent events have brought to light potential human due diligence failures associated with both the company and its founder.
Misleading Communications: One of the most significant issues highlighted in recent reports is the alleged misleading communications by Sam Bankman-Fried. His former lieutenant and business partner testified that Bankman-Fried's tweets assuring customers that FTX was "fine" were false. This is particularly concerning given the trust users place in exchanges to safeguard their assets.
Financial Shortfalls: Testimonies have revealed that Bankman-Fried was aware of an $8 billion shortfall in customer assets when he made public reassurances about the exchange's financial health. Such a significant discrepancy between public statements and internal realities raises serious concerns about transparency and honesty.
Misuse of Customer Funds: Federal prosecutors allege that Bankman-Fried misused billions of dollars in FTX customer funds. These funds were reportedly used to support other ventures, including the hedge fund Alameda Research, real estate purchases, and political donations. Such actions, if proven true, demonstrate a severe breach of trust and fiduciary responsibility.
Software Manipulations: Testimonies have indicated that Bankman-Fried requested changes to FTX's software code, allowing Alameda to withdraw unlimited funds from the exchange. Such privileges were not extended to other users and were not disclosed, raising ethical and transparency concerns.
Legal and Regulatory Challenges: The recent trial and investigations into FTX and Bankman-Fried's actions have cast a shadow over the exchange's operations. These legal challenges, combined with the allegations of fraud and misuse of funds, have significantly impacted the company's reputation in the crypto community.
The unfolding story of Sam Bankman-Fried and FTX serves as a stark reminder of the importance of human due diligence, especially in industries like cryptocurrency, where trust and transparency are paramount. Stakeholders, including users, investors, and regulators, must remain vigilant and prioritize thorough vetting and oversight to ensure that leadership actions align with ethical standards and regulatory compliance.