I’m not sure very many VCs fell for anything. Many investors — yes. But not that many VCs.
DFJ led a $500k seed investment. A $500k seed round for a medium-sized fund is just a small bet on a founder.
No other traditional VCs invested in the rounds, other than ATA Ventures, who is still a bit non-traditional and has GPs who have taken intentional, aggressive bets on material science and other areas that often never even get to market and lose 100%. They were likely willing to lose all the money as well, which looks initially to have been single-digit millions (total round: $9.1m). That’s a lot more than $500k, but still, a bet. Although it’s a tough loss, even losing $9m won’t destroy most VC firms. If you are trying to turn say a $150m fund into $450m, you can afford a $9m loss. You don’t like it, but you can afford it, as long as you have other big winners.
The vast, vast majority of the $1.7b capital does not appear to have come from traditional VCs at all and certainly not from rounds led by traditional VCs, at least as near as I can tell from Theranos | Crunchbase
I think DFJ may have made a solid bet — for $500k. They don’t all work out at that size, and that’s OK. You bet on a bunch of driven founders at that stage. Hopefully, they don’t end up like Theranos. But it’s OK if most fail.