There is a concept of self-deception. During a con, a successful conman does very little, they "just" have to prime the mark. After they bite, then they fool themselves so to speak.

Just because VC have money doesn't necessarily imply they are more rational or better thinking. Everyone involved here wanted this to be real and true. So while on paper due diligence was done, unconsciously nobody wanted to lift the curtain too much and peek what's behind.

This is also very common with software testing. Often when developers are testing their own software, they are not very good at discovering bugs and so they end up in production. This happens because even though rationally they want to ship a better product, irrationally it is hard to get into a mentality of proving that the product you just sweated months on is broken, or bug ridden or unstable and so on. So tests are written but they are written to show make them pass and show that stuff and unconsciously avoiding the trick or edge cases that would reveal brokenness.

Yes, and this is why you won't find any reputable biotech VC on the investor list of Theranos ( Mostly a mix of private equity, family funds and informals) . Biotech VC's have domain experts in house or in their network who won't take the narrative at face value and do ask the hard questions.

> investors generally try and do their due diligence before investing

They don't, especially in SV. Several of them have written about this. Beyond some cursory checks, they don't do much since it's often too expensive and time consuming to investigate every possible deal. A strong team with good connections and referrals is usually enough.

I recall reading on Quora that the CEO used family connections to land her initial funding from some reputable investors. They may have glossed over the due diligence. The rest just piggybacked on the reputation of the early investors. There may have been some or many which did that diligence but since they didn't speak up, we'll never know.

Herd mentality? Later stage investors probably assumed the early stage investors did their homework, while ultimately no one really did (or the early investors weren't at home enough in the space to realise the product wasn't properly working, or results were being faked, etc)