Few founders can pull off the challenges of building a successful startup. In most cases, the result is an honest effort that costs investors their money and employees their jobs. A Small Business Administration study found that in 2019, the failure rate of startups was around 90 percent.

Sadly, there are some business leaders among that 90 percent who do a fantastic job of raising capital and hiring talented employees -- but the stories that they tell investors and talent are completely fabricated. Eventually the truth comes out and the business leaders responsible for this outcome end up in court.

A case in point are the allegations against Theranos, whose CEO Elizabeth Holmes raised $945 million for a company that promised to perform some 240 blood tests from a single drop of blood. Between 2014 and September 2018, Theranos's private market value plunged from a peak of $9 billion to $0 when it filed for bankruptcy.

In her trial on two counts of conspiracy to commit wire fraud and 10 counts of wire fraud, according to the New York Times, several issues emerged. Here are the five most problematic things that investors testified that she did.

1. Convince respected investors to get in early.

People are easily made vulnerable to something called confirmation bias -- the desire to filter out information that contradicts what they already believe.

Such beliefs come from the power of System 1 -- the instinct to jump to a rapid conclusion -- to overwhelm System 2 -- making a decision after weighing a decision's costs and benefits.

Holmes triggered the instinct to jump to a rapid conclusion with her efforts to get famous venture capitalists to get in early.

For example, Tim Draper, the lead partner in Draper Fisher Jurvetson, a venture capital firm, was an early investor. According to Vanity Fair, "he is a family friend, who lived near the Holmeses and his children grew up playing with Elizabeth. Draper saw her as a visionary ahead of her time."

Another early investor was Don Lucas, who backed Oracle founder Larry Ellison. As I wrote in 2019, Lucas was persuaded to invest in Theranos by the way Holmes discussed her ancestors' background in business and medicine in response to his technical questions.

2. Create an overwhelming fear of missing out.

When such a belief is born, simply dropping the names of famous early investors, will kindle FOMO in the hearts of deep-pocketed -- but technically unsophisticated -- others.

This seems to be the force behind the $100 million that Michigan's wealthy DeVos family invested in Theranos in 2014. Lisa Peterson, who handles investments for the family, testified that she did not conduct much due diligence and feared Holmes would deny the family a chance to invest.

To wit, she failed to "visit any of Theranos's testing centers in Walgreens stores, call any Walgreens executives or hire any outside experts in science, regulations or legal matters to verify the start-up's claims," reported the Times. 

How could so much money be invested without such due diligence? As venture capitalist Michael Greeley told me in 2016, "Perhaps the family office was romantically, passionately swayed by Theranos's mission. Everybody looks to the next guy to do the detailed technical due diligence."

3. Refuse to provide audited financial statements.

Once a company has raised hundreds of millions in capital, investors expect to see financial statements that prove the business has revenue and is growing fast. Theranos allegedly made false claims to that effect. According to the Times, the company said in late 2014 that it would generated $140 million in revenue when it had none.

Theranos also allegedly refused investors' requests for audited financial statements. In 2014, Chris Lucas's Black Diamond Ventures, forked over $7 million to Theranos despite Holmes's refusal to share its financial records arguing that their leak would "give competitors a chance to crush the company," noted the Times.

4. Decline requests for a product demonstration.

In addition to reviewing its financial results, Investors ought to understand how a company's product works so they can verify the claims being made by the founder.

Theranos, investors charge, resisted product demonstrations. Bryan Tolbert, an investor, testified that in 2013, Hall Group invested $5 million in Theranos despite lacking "a detailed grasp of the start-up's technologies or its work with pharmaceutical companies and the military."

5. Publish a false list of impressive technology endorsers.

Another hallmark of a successful company is its list of impressive endorsers and customers. According to Houston Public Media, prosecutors alleged that despite Pfizer having reached the opposite conclusion, Theranos forged a Pfizer report that its blood analyzer showed "superior performance."

If you're a CEO doing these things, wake up and advise your board to hire a replacement. If you're an investor and see them happening, hold onto your wallet and run for the hills.