The Theranos Lie: Elizabeth Holmes - Stanford Drop-Out to $9B fraud - A Case Study for Entrepreneurs

Hello everyone, welcome back to this week's Business Dock Case Studies. We're following up on a series we did last week on glitches and this was a pretty big glitch. Thera knows we all think we know what happened and I'm going to speed up. Let's go over it real quick and I'm going to go back to some things that were in the middle of this that you can learn because the same thing that happened to Elizabeth Hone and her nose could happen to you, so let's start with a quick tour. the story that she

drop

ped out of Harvard in 2003 with the vision of doing something really innovative and useful like, for example, can't we just have to drink three, four, or five vials of blood?

Can we take a small

drop

of blood, analyze it and do multiple tests? That thinks about technology, could we do that? could we achieve it? That's a vision, you know what? That's bad vision. I don't like having my blood drawn. I have friends who are diabetic. I don't like pricking their fingers all the time. They do their blood sugar testing they love any kind of test that's painless or takes less time, so it's good that there are things out there that need to be worked out into something really interesting that could happen, you know, especially if you could take a small unit to check out remote areas and test people to quickly take a drop of blood and find out what's going on.

You could go to malaria outbreaks. You heard so many wonderful things. So this was a noble vision. It was a noble vision. and she, her family, wherever she was, she had a very interesting circle of friends that led her to this contact with some people, we had a lot of money and a lot of influence and it was not a typical venture capital path, that's the first thing there. what to think about here it wasn't the typical path she gets 500 thousand half a million dollars from Tim Draper in DFJ Tim is a great guy he runs Draper University for the university for

entrepreneurs

to come learn that there are wonderful things going there and Tim was a believer there, although the track wasn't really in the line of risk, like going to Series A.

Series BC was met with traditional venture capital firms, many of which do careful diligence. Instead, she receives a year later, 2005, five point eight million from Rupert Murdoch, so she somehow puts herself in front of Rupert. a lot of influence and stuff there, she starts at Harvard, she goes to Stanford, maybe her family has some connections there, but either way she finds herself in the company of very powerful people who are way beyond the typical venture capital path that leads to 9 point 1. million and not 6 from ata and then 28 point five million from the Lawrence Ellison revocable family trust as in Larry Ellison CEO of Oracle and just saying incredible inventor in his own right, but he's not exactly your typical VC, you can see what's going on so she surrounds herself with a lot of people maybe the family knew Henry Kissinger Shultz, a general, suddenly we have a medical company that has a who's who of Defense and Secretary of State now, if you run a defense company, I was required to manufacture chemicals for the defense industry or test compounds for perhaps battlefield use.

I could see it, but where are the Medical Sciences people on the board? together to look at your work because this work will result in medicines, products, tools that are used on you and me in the field of healthcare and it is much more important to do it right or where these people were, so you are out. VC's way and she has a medicine. I think that was the key that led to what happened a little later. We continue the story, so suddenly now he's been doing it for several years and it's really starting to pick up speed. 2010 2011 2012 she ends up getting a deal with Walgreens Walgreens supposedly invested 50 million dollars.

There's a lot of secrecy around this, so who knows what Walgreens actually did, but there's an announcement anyway. Hey, you'll be able to go to Walgreens and take your kid there. and you know, just a little jab, doing a bunch of blood tests and everything else, the Nobels are except it wasn't working and people were starting to ask questions about it, like the lead scientist, a guy called Gibbons, who he ended up committing suicide. There are terrible stories about how his nose reacted to that and how those houses reacted to that instead of, Oh my God, we've lost our chief scientist, we've lost this employee, let's contact his family, let's get together as a company.

The first reaction was from a guy who had been asking questions and writing emails and had doubts about the technology: getting his damn laptop, getting all the confidential information from him, putting that out in a culture of secrecy and he has to react that way. Way, they have no choice because we're trying to preserve what turned out to be a myth and a guy commits suicide under the pressure of everything and you just have this cold reaction. There are plenty of articles you can Google, but suffice it to say, I think that was it. a key point that really told a lot of people what the real psychological profile of the management team was and how they were reacting and it was cold and it wasn't right, they were scared deep down, they weren't going to admit it, they were covering things up, so we moved on at this point 15 according to the crisis basis, 686 million dollars have been raised and it is a valuation of nine billion dollars, that's right, valuation of nine billion dollars, damn, that's the only word for that you take this to an evaluation of nine billion dollars.

With many echoes in the halls about what is potentially to come, we turn to 2015 and I call this the tale of two cities in the first half of the year, which burned bright in March, they made another three hundred and forty-eight million dollars inverted. supposedly at that time in July, the FDA, you know, announces that they're only approving one test and one test is for herpes. Google in the middle of this, although it was a little depressing because Google is looking into it. G. Ventures, Google's venture group. They are very good with statistics, if you ever look on Google, they are very good at measuring things, they are really good, they are very scientific and very disciplined, and Google Ventures said we wanted to do some diligence on this and they weren't. getting cooperation from thorough notes and Elizabeth Holmes even though they come to them saying, "Hey, do you want to invest?" and they are sure we do a little diligence. "Oh wait, not so fast, finally a guy from Google actually goes to Walgreens to have No tests and instead they take a couple vials of blood.

He said wait, what are you doing? Why don't we do the little prick and discover that something is wrong here? The story of the prick of a drop of blood did not match your personal experience, so by your own diligence Google is not then, a magazine appears and they say that there is a culture of secret here and there is no peer review. This is the American Medical Association. This is the Association that doctors, hospitals and the healthcare industry are a part of. What is the key to much of the validation of the research? They say this, so there are exciting cracks in the wall and the wall falls in October when the Wall Street Journal kaboom writes an article about the challenges and not just an article that they had followed articles, they had five six months of intense investigation they did now Elizabeth Home spends a lot of money, you may remember and you know Jim Cramer finally says yes, no, you know what the deal is here, let me ask you a question, does it work or not? no, yes or no, she gives a hundred and ninety-eight word answer, man, during you know, disgruntled employees and stuff, so all of a sudden you start listening to Elizabeth Holmes, she sounds more like a politician who doesn't want to answer questions about his positions on the issues and he was being advised by David Boies and David Boies was a lawyer who has a lot of experience in politics and helping people craft responses and advocate for people.

It is also known that people who were under their noses were not allowed to talk to anyone about what they were doing when they mentioned something like that. when a guy says he put something innocent on Facebook boom he got a letter from a lawyer it's like quitting, shut up so what's going on? You know, so much secrecy. 2016, the avalanche continues in Arizona,

fraud

lawsuits are filed in Arizona. Vanity Fair puts up a magazine-like unflattering article that delves into the problems that led to the company's downfall because now the story is what happened Oh, unbelievable, unbelievable, unbelievable, 9 billion Wham and even Forbes is coming back and it says we believe the value of the company right now is almost zero, no one can validate the intellectual property, Walgreens filed lawsuits, the partner fund filed a lawsuit until the end of 2016, layoffs and then comes the hard blow.

Elizabeth Holmes gets a two year ban from operating a medical testing lab, so basically the police show up and the police are like, this is medicine, this is important for public trust, it's very important, it's Bobby, never It's a good thing the cops show up, whether it's at your keg party or your business, and basically that's what happened, the cops showed up and started questioning the girls. for IDs and that's the moral equivalent a thousand times worse that happened here. 2017 Elizabeth Holmes supposedly starts taking some of the actions she has and settling lawsuits here. I'll give you more shares, even more shares.

I still think there is something. We have a little bit of real ownership here, but I'll give you more shares to not sue and I'll give you more shares to sign a mutual release and then she starts. I call that bandwagoning, now you have Forbes and other magazines coming out saying Hey guys, you know we think this is about to run out of money, well recently, if they announce that they are trying to rent or lease their headquarters to someone else person, to me, this sounds like things that a good board of directors will be sitting in the background and trying to pull off a win, now who knows if that's going to happen.

You know, because this is the problem that I think was fundamental to the company when you have a big ego about what you're doing and you have a lot of arrogance about what you're doing, you forget that it's okay to fail. Failures are inevitable and all these people were investing in you and are investing in your vision and it might not work out, especially in an area of ​​seven-year medical testing. that the FDA has to review things there are so many things to do to protect the public that you may not succeed so they believe in you they are investing in a vision and failure is not something that will land you in prison or Arresting them here is inevitable when you're building your business and trying to build a product, but when you're holding on to the idea that you haven't failed and you're trying to sell the story that you've succeeded before you've achieved it. you have no choice but to go into denial, which leads to comments that turn out to be false and with your ego you invoke control and force secrecy and cover up the people who talk about it and what happens here, guess what reality and They really die. and you listen to the people who worked under their noses who worked with Elizabeth Holmes, that's what happened here, let's think about Elizabeth for a second and think about the shape that she was in because remember she wasn't saying I'm investigating and that She was investigating. saying we've made it, she's at Walgreens, we're going to do a deal with Safely that then fell through, so now for her to come and acknowledge what happened, think about the pressure she must have put on.

I do not forgive. her and I don't think a lot of people do because of what she did in the things she said and how she behaved, but I think she doesn't, she didn't start here, she ended here, is what I said. Take a minute and think about this, what do you have to do? She has connected with some very powerful people, what does she say? Sorry, Rupert Murdoch. I haven't really achieved it. Actually, she is still under investigation. We have been using others. people machines Sorry Henry Kissinger thank you for defending me when you spoke to the media Sorry Tim Draper thank you for continuing I think it was CNBC and telling people you know we defeated the vampires and defended my my reputation thank you for doing that and thank you for delaying at the beginning, but I'm not really where I am, I'm not there yet, you know, thanks Larry Ellison for all that money you invested, I know you.

We're not really a VC, we went to your family fund, but you know, I haven't really done it, look what she has to undo when the problem comes, the wave of pressure that was on her, I couldn't confess if you believe. about it, she absolutely could be the most honest thing, but the pressure is to deny it and say, "I know we can do it. I just know we can do it and then I won't have to tell all these people." these things because I think we can do it, that's because of the arrogance and denial that lives here and, by the way, that's what the head scientist was saying, so I think the incredible wave of pressure that was on her, you're in the cover of Forbes on the cover of Fortune you're being hailed as this businesswoman, which is great.

I want my daughters to admireincredible entrepreneurial women. I would have loved for her to be successful for that reason, so that they have role models in life, see how. I can go high, but when that wave of pressure became too great, I think there was a time when Elizabeth couldn't come clean because of the social cost she would pay for her reputation in the eyes of her family and everyone who did her wrong. these presentations. on stage to cry out loudthe Clinton Global Initiative, what do you say, thanks for having me, but I need to point out something that still doesn't work, what do you say, so I guess I'm not going to give him any respite for what happened, but I'll just sit there .

Go back and paint a picture for yourself of how you can end up in this situation and it's wrong if you just put aside your denial and your arrogance and all that and say, I'm an entrepreneur and I can fail, but I can also end up inventing wd-40 in the process. , but if you want to support me, support me and here's an interesting statistic and analysis by a venture capitalist on why they invest. 64% of the reason they invest is not the product. It's not the great idea, it's not the market, it's in the team and the leader, that's who they are. 64% of the decision is based on the team and the leader says: you know what I think is a really interesting idea.

I think it's a really good idea. market I think it's a very smart product the way they take the idea it becomes a product and you know what I think this is the team to do it that's the girl to do it that's the man to do it that's the woman to do it that is the man to do it, I think it's amazing when you think about it, that's where venture capitalists put it in the market, products, all that stuff here and then 64 percent are these, the people that do it, they're These, the people who make it, so when you think about it, you know that venture capital has a built-in mechanism to filter here, so I'm going to go back a little bit, rewind a little bit and redo the cut and here's an interesting fact about the venture capitalist. risk, 64% of the reason, according to a

study

in which they invest is based on the team, it is not the great idea of ​​the product, the interesting market, it is the team, it is an interesting idea, a very intelligent idea and it is a very substantial market.

Wow, there is a need there and these are just the people. To do this, the VCS will believe in the person and then the product and the market, sixty-four percent of the rationale, so once people believe in you, it's even harder to come out of the shadows and say it. It hasn't worked out, but some of the more mature

entrepreneurs

have been more successful in their second venture than in their failed first venture. In fact, you can go back and take a look at the

case

study

I did on Uber before everything. The fun started with Travis and take a look at the challenges he had in the first few companies.

It was actually part of a couple of failures before Ober was built. Now I'm not excusing all the things that happened to Burr, but I am pointing out the failure. great success so it's not a sin to say you know what I didn't get there we didn't make it but you know it's not just her. I know other entrepreneurs where this has happened, where it's just your ego and your arrogance coming together and Suddenly, whether you're running a small business with half a million dollars total investment or you have 686, you have to accept failure and move on and here's why, because sometimes there are positives and if you allow yourself to hold on to the original. and you say this is not happening, this is not happening, you know, and you and you go down that path, you're going to end up in a bad place and you're going to lose your reputation, you're going to be basically disbarred for a period of time.

Well, there can be positives and here's an example: There's an article that I really loved and a guy named Suzanne Patel, if I'm saying this right, she's a Forbes contributor and in January 2015, look this up, she wrote an article about how there was some failures and noble products that were trying to do this, but they got their ego out of the way, they got denial out of the way and they answered the question what do we get from each failure and yet he covers a lot of The products are interesting, like the wd-40. You know, the lube, the can goes down with the red straw and you can do everything from a squeaky door to a bicycle.

It has many different uses and is incredibly beneficial in many ways. Guess what they were trying to make a degreaser, in other words, to remove grease, which is a lubricant, they are trying to invent something to remove that and the 40th attempt, the 40th attempt at the formula led to wd-40, which It had all these other benefits. That's why it's called WD-40 because it was the 40th attempt at making a degreaser that led to some other noble product. Bubble wrap was also supposed to be, believe it or not, wallpaper. Instead, bubble wrap is amazing, it reduces shipping costs.

It is a plastic that is completely recyclable and protects valuable things very well at a very low cost and we used bubble wrap and so many different things that it was an accident and we are going to read the article and you see how the failure at the hands of the inventors who Look at Opportunistic way to the future is not a failure, sometimes you find something else and there are great people, you know Silicon Valley and other people who have had failures and they just move on to the next company and say, "Hey, we tried that," because if no one tries, there is no invention, so we should encourage them to try, but if you try again, whether you are doing something good, a $5,000 startup in your garage versus a six hundred and eighty startup million dollars, failure is not failure, get your ego out of the way. people around you who will tell you the truth and that is the lesson of darkness, you sit there with a leader in the middle who stands firm and you end up in a culture of secrecy.

I don't think Elizabeth Holmes abandoned her noble thinking to do it. something really cool I don't think she wanted to get here I think she ended up here because she got bigger and bigger and bigger and worse and worse and worse think about it remember the time and you were young and maybe you lied to your mom about something when you were a teenager and then maybe you called two friends to make sure they told their parents something, so if their parents talk to your mom you could cover up the lie and then you talk to someone here and then you gave your sister five dollars and took that got the frozen yogurt so he would shut up and not tell, guess what you're piling on top of, and when your mom finally found out what happened, guess what was probably worse than if you had just confessed it in the first place. and Sam, I'm sorry mom, I screwed up and you know what happens in companies and I think that's what happened here, that's this week's story and by the way, by popular demand, the pillow is back, the pillow is back, subscribe to rate the maintenance.

The best channel on the Internet for business content to learn about the successes, failures and skills you need to succeed until next time. I'm Tom Ellsworth. I hope I have left you better than I found you. Now we need to dispel a rumor. Does not exist. The truth is, Theranos now has a single drop of blood early warning test for hemorrhoids and they are changing the company name to anus.