A Venture Capital Nightmare | What Went Wrong With Theranos

What's up guys? In today's video, we're going to talk about Theranos, Elizabeth Holmes, kind of the relationship between investors and entrepreneurs and how venture capitalists think about investing, kind of some mispractices that happened when investing in Theranos. So quick recap, if you haven't heard about Theranos, it's all over the news, but Elizabeth Holmes was a Stanford dropout. Classic, right? But at 19 years old, she decided she didn't need to keep going to school and she started this healthcare technology company. The whole thesis that, you know, the lengthy process of drawing blood and getting it sent off to a lab and these lengthy just testing processes is no more. She claimed that you could, off just a drop of blood, just a single finger prick of blood, her machine and technology could do about 200 test results and have results back in minutes. So kind of this, you know, revolutionary technology. She started it, you know, in 2003. And this is like right, you know, after, during this, you know, massive tech boom, you know, so there's all these investors in Silicon Valley, the Facebooks, the Amazons that are just raising millions and having valuations in the billions. It was a great time for entrepreneurs and investors. And Elizabeth, you know, we're gonna talk about some of the things that she did right and some of the things she did wrong. Basically, you know, she developed this software, she got some seed money from friends and family, she started putting the company together, and, you know, she quickly started not caring as much about the technology and started investing more in appearances. You know, she was criticized because as she started going out and raising money, her voice got deeper and she started wearing black like Steve Jobs. And, you know, she just started to be more assertive. And, you know, she thought it was a, you know, a better technique for going out and raising money. Obviously, all startups have these crazy forecasts, you know, and that's fine in venture capital. It's fine to have these assumptions and to say, yeah, we anticipate this massive total addressable market of X gazillion. And, you know, we're going to— we hope to be there in 3 years or whatever. And, you know, like that's standard startup talk. Where Elizabeth went wrong is not about the forecast. That's totally fine. But she started misrepresenting her current traction. So she started lying to her current investors or potential investors about where she was at and what the company had done, how much revenue they had generated. That's where she started kind of deviating from the traditional course because In the beginning, I had a lot of empathy. I'm like, you know, this girl's just kind of trying to build this company. Like, what's what's wrong with that? But as you dig more into the story, then you learn more about this. So obviously, there's a bunch of videos about it. There's a book called Bad Blood. There's actually a recent Hulu series that came out called The Dropout, all which that kind of COVID these. I'd recommend all of them. They're all great. But let's dig a little deeper here. Let's talk about this relationship. So something that Elizabeth did is she targeted not venture capitalists. She targeted, you know, in her first couple raises. Some people call it old money. Some people call it dumb money, but she targeted these kind of wealthy old investors that, you know, had missed out on kind of the boom, the dot-com boom, really played on the emotions to get them allocated. You know, she went after these single-family offices or just high net worths that had, you know, come into a lot of money. And the reason being is, you know, a venture capital firm is going to do serious due diligence on any sort of deal. You know, they're not going to make any massive allocations. I mean, maybe a seed round, but this is like when she was raising a Series A, you know, they're not going to make any large investments without doing some serious due diligence on the company. And family offices are sometimes known to not be as scrutinous as VCs for angel. If they like the entrepreneur, they like the investor, or you just, you know, the family likes you, you're a family friend, you can raise some more money. So she went out, she built a stalwart board of advisors, guys like Jim Mattis, Henry Kissinger, George Shultz, Robert Murdoch, Tim Draper, Larry Ellison. You know, she got all these phenomenal names on board and behind her. And once you get one, it's a lot easier to get another. Just like for you guys that are raising funds, you know, that first investor, it's that immediate stamp of approval, right? For anyone else you go to, yeah, this other person's already on board. It's like this reassurance, this almost referral that, hey, this is a good deal, because so-and-so invested in them. So in venture, there gets to be this lot of, you know, a lot of FOMO about missing out on opportunities. So sometimes rounds will, you know, be subscribed really quickly without a ton of due diligence just because people want to get in. So Elizabeth did a really good job at playing those cards. You know, she kind of batted investors against each other. She batted, you know, potential contract, you know, companies against each other, like contracts, but she really just played this game and it's okay to do that, but you can't lie about your current traction. You can't be deceptive about your revenues or, you know, at the stage at which some of these contracts are developed. So, you know, like in 2013, she went out to, you know, Walgreens. She landed this massive contract with Walgreens to start testing their facilities. And Walgreens didn't even look at Theranos. They basically just said, yeah, well, sorry, we already have a contract with CVS and Safeway. So too bad, you know, we don't want to work with you. And then these offers came flying in. Always important to do your due diligence in, you know, the venture marketplace. So another thing to be thinking about in this deal is one of my mentors once told me that rational deals provide rational returns and irrational deals can provide like irrational, like unreasonable, like unrealistic returns. So some people love, you know, going after the You know, these kind of crazy, you know, investment opportunities. But it's just part of the game, part of the risk. So, and another thing that made this deal so bad, right? What was so wrong about this is, you know, this technology was impacting human lives very legitimately. And she didn't disclose that. They would go out and, you know, like when they signed that Walgreens contract, people would take these tests that made decisions about, you know, what medication to take. All medication has side effects, right? Like they all do. So, you know, people are getting misdiagnosed for diabetes or all these various illnesses that they may or may not have, all these false positives. So it's a very sensitive arena to be playing in. She lied about the FDA's approval and, you know, just was very manipulative and deceptive on all fronts. So, I mean, I have a friend who's starting a tech company. Recently raised several million dollars in funding. And it's honestly kind of a similar scenario where their product isn't complete. Like, and they're, they have, you know, they collect this data for companies and, you know, it's right like 80% of the time, except the thing is, is they disclose that to their investors and to their clients that purchase. They're like, look, we're, you know, we're still a startup. We're still growing. You know, there's kind of this, you know, 20% chance that the data is faulty. Data for an e-commerce business is a little different than human lives deciding, you know, looking at severe terminal illnesses. I mean, it was just kind of this, this bad mix of, you know, the market they were in. She just went way over her head and manipulating and being deceitful to investors. I hope you guys learned something from this video. And just so you know, like Elizabeth Holmes isn't the only one that this happened to. This is, you know, starting to happen in different elements. I mean, Neumann at WeWork, like obviously not the same caliber a violation, but, you know, pretty flagrantly deceptive. And, you know, the way he went out and pitched his company and got investors on board. So you're starting to see more and more of these. So all those, you know, VC funds out there, just, you know, be careful about, you know, the allocations you're making and investments and always do your due diligence. So hope you guys have a good one.