The problem here is that if one investor is &#x27;in&#x27; the rest will assume they did due diligence and will use this as social proof to invest as well, aka the herd mentality in investing.<p>Quite a few VC&#x27;s would never invest these kind of funds without a full process DD (legal, financial, technical, commercial), but once you&#x27;re vetted by one of the top flight VCs and have received an investment from them a lesser party could easily make a whole pile of (wrong) assumptions, especially if there are links between the parties outside of the VC circuit.<p>What should be done is definitely not always what is actually done.<p>A simple reason for this is that if the DD fails the  investor pays for the DD from their own management fees, but if the deal goes through the company invested in usually gets the invoice from all the DD parties (as per the terms sheet, this is a very common clause). This puts a weird incentive on VCs to let deals go through, they can&#x27;t have too many DDs fail during the process or it can actually materially impact their ability to work.<p>Imagine that if 2% (which is pretty much the going rate) of a small fund (say 50M) is what the VC company has to operate on for every year that it runs (so 1M) divided over all the partners and associates in the fund, renting a building in some prestigious place, travel and so on has to bear the additional load of several full process failed DDs (anywhere from 50K to 200K each) it can <i>really</i> hit hard if too many of them fail.<p>So if there is a way to avoid doing DD because a larger party is already &#x27;in&#x27; this is a quick way to validate and a very easy mistake to make. Of course - given that that is what I sell - I would very much prefer it if every round every investor would do their own due diligence but in practice you really don&#x27;t see that. The most common format is that in every round there is some level of DD done (thoroughness roughly related to the size of the deal) and then all the parties involved decide to invest (or not...) based on DD done by one of them.<p>In the Theranos case I suspect the &#x27;big names&#x27; blinded investors, which is dumb on a very basic level. But it&#x27;s their money and if they decide to throw it away on a BS project that is their right. The bit that really bothers me is how many good companies you could have funded instead of this one too-good-to-be-true unicorn.