Theranos was a start-up that supposedly invented revolutionary blood-testing technology. Based on this claim, founder Elizabeth Holmes was able to raise $1.3 billion in funding from famous investors. At its peak, in late 2014, Theranos was valued at over $9 billion and Holmes was celebrated as the world’s youngest self-made female billionaire. But just a year later, Theranos was exposed as a huge fraud, and Holmes was eventually sentenced to 11 years of prison.

What lessons should investors learn from the astounding Theranos saga?

Bad Blood

Theranos’s tale reads like a novel. Bad Blood, an excellent book by John Carreyrou, describes the company’s background, leading up to late 2013, when the 10-year-old enterprise was finally prepared for its commercial launch. Its “mini-labs” were going to roll out across thousands of Walgreens and Safeway locations. These Theranos-branded labs used proprietary technology, requiring just a finger prick to get speedy, inexpensive blood test results. In June 2014, Fortune magazine ran a cover story about Theranos and its young charismatic founder. Glowing articles and media appearances about Holmes’s initially secretive company mushroomed afterward.

Venture Capital Rolls In

For the next year, Holmes was a constant headline presence at business and medical conventions, interviewed by fawning reporters, politicians, and business leaders. With contracts in hand and a star-studded board of directors, Theranos raised boatloads of capital from the Walton family ($150 million), Fox News’s Rupert Murdoch ($125 million), former United States secretary of education Betsy DeVos’s family ($100 million), and Carlos Slim, then the richest man in the world ($30 million), among others. Alas, Theranos’s investors, business partners, doctors, patients, and reporters soon learned that they were all victims of an outrageous fraud.

The Fraud Gets Exposed

John Carryrou, a reporter for the Wall Street Journal, began doggedly following anonymous tips that Holmes had vastly overhyped Theranos technology and its income projections. He eventually ran the first of many meticulously sourced bombshell exposés about Theranos on October 15, 2015. Theranos “revolutionary” mini-labs were a mirage, he claimed. The company’s tightly kept secret technology didn’t work properly and gave false test results, so the company was mostly using traditional blood-testing machines for the test pilot at Walgreens. And because Theranos sites took tiny blood draws, the key part of their marketing shtick, they had to be over-diluted in the lab, ruining accuracy further.

Theranos Gets Shut Down

From the first whispers of accusation, Theranos put on a militant face, vehemently denying the WSJ’s claims. Using high-powered attorneys, Theranos threatened the paper and its sources with defamation lawsuits. But within weeks of the first WSJ article, the FDA confirmed publicly that Theranos devices were “not validated.” The Centers for Medicare and Medicaid Services, a government agency responsible for blood lab safety, reported that Theranos’s labs didn’t “comply with certificate requirements and performance standards” and caused “immediate jeopardy to patient health and safety.” Quite damning and far short of cutting-edge, obviously.

Shocking Aftermath

Theranos labs were quickly shuttered, and Walgreens and Safeway quietly put their now embarrassing collaborations to bed. Theranos had claimed its cutting-edge medical devices were in use by the military and major pharmaceutical companies, generating hundreds of millions in revenue, but it was all a lie. There were no useful new blood tests, no military or pharmaceutical relationships, and virtually zero revenue. The business and medical worlds were shocked. How had so many financial journalists and the seasoned Theranos board members been duped? Why hadn’t professional investors identified this blatant fraud during due diligence?

Lesson 1: Don’t Ignore Red Flags

These are great questions because there had been several red flags that investors ignored. The company hadn’t provided any evidence to back its grandiose technological or financial claims—even for investors, board members, and business partners. When an esteemed board member raised questions about seeming product limitations, he was quickly pushed out, as were a number of experienced top executives. Theranos also had not produced independently reviewed financial statements, unheard of for a company raising large sums of money. A call to government agencies would have easily confirmed that the company wasn’t in compliance with the FDA and never had lucrative military contracts.

Lesson 2: FOMO Blinds

One point to recognize is that excessive FOMO hinders rational due diligence. The independent lab specialist Walgreens hired to evaluate Theranos’s technology raised serious concerns. Theranos didn’t allow him to view the innards of the mini-labs and wouldn’t explain the magic under the hood. They couldn’t even produce results of sample blood tests Walgreens executives took while visiting their future partner! But executives’ emotions overcame logic—Walgreens was desperately fearful that CVS, its archrival, would cut the deal with Theranos, leaving it behind. So it chose to grasp at very questionable dreams despite the skepticism of its independent expert.

Lesson 3: Look Beyond Looks

Holmes is a master manipulator, and Theranos investors allowed themselves to be taken in. She meticulously managed every detail of her persona, including how she dressed, acted, and spoke, to elevate her image. Theranos was presented not as a simple financial quest but one that would solve the world’s problems as it minted money for investors. Holmes carefully cultivated deep relationships with many wealthy, influential people, expanding her credibility. Investors desperately wanted to remain in the orbit of this sophisticated, charming, altruistic and famous woman who would make them rich while she changed the world.

Lesson 4: Who vs What

Some investors are too focused on who’s in the deal rather than what’s in the deal. Scammers know this and take full advantage. As noted, Theranos became a cult of celebrities with a board and investor roster laden with former secretaries of state, five-star generals, and tech billionaires. People who would have otherwise been much more skeptical and scrutinizing let their guard down as part of this prestigious herd. In the end, many in the rarefied group surrounding Holmes got hoodwinked because they were all relying on each other’s credibility rather than researching her company.

Lesson 5. Diversify Your Investments

While the Theranos implosion has unique features, even the most meticulous investor can get defrauded. The potential for fraud is another reason to always diversify. In the end, the large investors whose money went down with the ship are not losing sleep over it. Take Rupert Murdoch, for example. Sure, $125 million is a lot of money to lose, but it’s a tiny fraction of his wealth. Murdoch took an immediate tax write-off, so the bite for this fiasco was well under 1% of his $17 billion net worth. Thanks to diversification, Theranos was a pinprick for him, not a blow.