Elizabeth Holmes The 'Valley of Hype' behind the rise and fall of Theranos [documentary]

Feelings Drama

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00:00:00Asking yourself whether you're wrong is a really good thing.

00:00:09If you really feel strong conviction that you're doing the right thing, then keep going.

00:00:22That ideology is shared by some of the world's most ambitious creators

00:00:28who flock to Northern California with a dream.

00:00:32They seek like-minded encouragement to move fast and break things,

00:00:37and even fake it until they make it.

00:00:41Those principles can come at a cost, always for investors,

00:00:46often for entrepreneurs and their employees, and sometimes for the public at large.

00:00:52And for one entrepreneur, once lauded the world's youngest self-made female billionaire,

00:00:59the cost could add up to years in federal prison.

00:01:06This is Silicon Valley, a hub of innovation that's often coupled with sleight of hand.

00:01:13I'm Alexis Keenan, and this is Yahoo Finance Presents.

00:01:16Nearly a billion dollars gone bust,

00:01:30swallowed by the opaque Silicon Valley biotech startup Theranos,

00:01:34whose founder Elizabeth Holmes faces years in prison for a pitch pushed to extremes.

00:01:41I knew that I could do something that would be different than what everybody else is doing.

00:01:50She said her technology would revolutionize healthcare,

00:01:53miniaturizing a suite of common blood tests down to a few drops.

00:01:59The technique would democratize diagnostics,

00:02:02driving down cost to make tests so affordable

00:02:05that consumers could access periodic snapshots of their personal health over time.

00:02:13It was a story that Holmes told with unwavering conviction.

00:02:18If you watched a movie,

00:02:21and you took one frame out of that movie,

00:02:26and you said,

00:02:28okay, Elizabeth, tell me the story,

00:02:30I would never be able to tell you that story.

00:02:34But if you gave me a series of frames,

00:02:37I could begin to piece together a story.

00:02:46The concept captivated investors and media

00:02:49and turned Holmes into a startup sensation.

00:02:53Though her stardust began to settle

00:02:55when the Wall Street Journal exposed frames of her story

00:02:58as technology overhyped.

00:03:02The reckoning fueled a barrage of scathing news reports,

00:03:06a New York Times bestseller,

00:03:09and a feature documentary,

00:03:11leaving Holmes accused of fraud,

00:03:13of peddling impossible science,

00:03:16and portrayed a vixen.

00:03:18Her confident charm and even physical appearance

00:03:21were cited to explain why distinguished advisors

00:03:24and hopeful investors

00:03:26in a male-dominated field

00:03:29bought what she was selling.

00:03:31Yet not everyone is convinced

00:03:33that Holmes was just a persuasive pretty face,

00:03:37or that her methods to materialize her vision

00:03:40should be viewed in black and white.

00:03:43This is going to sound a little strong,

00:03:44but to a certain degree, she's a victim.

00:03:46Because she didn't know what she didn't know.

00:03:49And she relied on people who gave her bad advice,

00:03:51or mismanaged it, I think.

00:03:54Even for Theranos,

00:03:55I'm not 100% convinced that it is fraud,

00:03:57although we have lots of leads

00:03:59that many, many, many things were wrong.

00:04:02The first crazy concept that we had

00:04:04that people said absolutely could not be done,

00:04:06especially when I tried to raise money

00:04:09for the first time to start the company,

00:04:11was wanting to change the way lab testing was done.

00:04:15If you're going to start a company,

00:04:16the first question is why, right?

00:04:18For me, it was, this is a change in the world

00:04:22that I want to see.

00:04:23The change was never realized,

00:04:25at least not by Theranos.

00:04:28Instead, the company imploded under a raft of lawsuits,

00:04:32regulatory actions, and SEC fines,

00:04:35all targeting Holmes for promising more

00:04:38than she could prove.

00:04:40Yet holding Holmes to both criminal charges

00:04:42and such intense media scrutiny

00:04:44could ultimately be what makes her unique

00:04:47as a Silicon Valley entrepreneur

00:04:50and may overshadow her pioneering role

00:04:54in an emerging biotech field.

00:04:57The biggest concern I've had with the media

00:05:00was immediately after Theranos started falling apart

00:05:04was there was a rumble of people saying,

00:05:06well, this was such a bad idea,

00:05:07this could never happen.

00:05:09Or actually, really, I think Elizabeth's vision

00:05:12was phenomenal, right?

00:05:14And I share the same vision,

00:05:15and so I really resonate with that.

00:05:16I think it is a good idea,

00:05:19and it needs to be, it needs to happen.

00:05:22It was all doable.

00:05:23I mean, that's the other thing.

00:05:24There wasn't any engineering problem

00:05:26that couldn't be resolved

00:05:27by the time I came in the company.

00:05:28There was refinements.

00:05:30I think with a different board,

00:05:31maybe with a different COO,

00:05:33with somebody to coach her

00:05:34and help develop her as a CEO and a spokesperson,

00:05:37I think a lot of this could have been avoided.

00:05:41In a culture that handsomely rewards innovators

00:05:43while embracing this fake-it-till-you-make-it ethos,

00:05:47who deserves to shoulder the blame?

00:05:50Prosecutors say it's Holmes and her former boyfriend

00:05:53and Theranos COO, Sonny Belwani,

00:05:57for allegedly operating the once-hyped blood testing company

00:06:00as a criminal scheme

00:06:02that defrauded investors, doctors, and patients.

00:06:05Others, including one of Theranos' earliest critics,

00:06:10say the answer is not as clear

00:06:12and take into account a system known

00:06:15to conflate optimism with reality.

00:06:18I suspect that there's many other companies

00:06:21that don't really have the ideas that they propose,

00:06:24that they do, that they have.

00:06:25They're still working on them.

00:06:28They haven't tested them out.

00:06:30They are probably over-optimistic.

00:06:32And maybe most of these ideas would fail.

00:06:35I don't think that Theranos is an exception in that regard.

00:06:39If Theranos is no exception,

00:06:41how strongly will criminal accusations hold up?

00:06:45And where will jurors draw the line

00:06:47between an entrepreneur's push for disruption

00:06:50and fraudulent deception?

00:06:54But I'm sure the courts are going to place

00:06:56a different standard on it than I do.

00:06:58But my standard is,

00:07:00if an entrepreneur makes a claim

00:07:02and you want to invest,

00:07:03it's your obligation to go validate

00:07:06all the claims she's made.

00:07:08She may have made exorbitant statements,

00:07:11but those could have all been corroborated

00:07:14before the money was invested.

00:07:16And in fact, if somebody had done the work

00:07:18to try to corroborate them,

00:07:19they would have found out

00:07:20they're really exorbitant.

00:07:22They're wishful and they're futuristic

00:07:27and they don't represent the present.

00:07:29If you invested based on those claims,

00:07:31you would have said,

00:07:31okay, that's fraud.

00:07:33If Holmes' strategy was to temporarily fake it,

00:07:37how different were her tactics

00:07:39from her Silicon Valley peers?

00:07:42When did the alleged charade begin?

00:07:44Why did financial backers keep her company afloat

00:07:47for more than a decade?

00:07:49And what lessons should future investors learn?

00:07:53The answers lie in a tangle of conflicting symptoms

00:07:57that can give investors reason for confidence

00:08:00as well as caution in the traditions

00:08:02of seed capital rich Silicon Valley.

00:08:05Disruption often begins like this.

00:08:12An aspiring creator claims their vision

00:08:15for a new reality,

00:08:16then sets out to piece together

00:08:18the missing parts to their puzzle.

00:08:21What we wanted to change was the fact

00:08:24that when you find out you're sick,

00:08:27you're already too sick in many cases

00:08:29to be able to really change the course of the disease.

00:08:32The way you change that is that you have to reinvent

00:08:35every element of the system,

00:08:37which means you have to reinvent the tests,

00:08:40you have to reinvent the devices,

00:08:41you have to reinvent the software,

00:08:43you have to reinvent the locations

00:08:45through which the testing is provided, the pricing.

00:08:48So this was not a short-term business plan.

00:08:52And there's one place,

00:08:53perhaps more than anywhere else in the world,

00:08:56that fosters the rapid incarnation of these bold ideas.

00:09:01This is the Valley of Dreams, right?

00:09:03It's a unique situation.

00:09:05There's no other place in the world

00:09:07where somebody with a big idea can come

00:09:09and have access to capital,

00:09:12have access to all of the corporate services you need

00:09:15to get it off the ground.

00:09:16So people come here with big dreams.

00:09:18And I think Elizabeth had a great big dream.

00:09:21This region of resources in its early days

00:09:24known as the Santa Clara Valley

00:09:26was formed by generations of tech pioneers

00:09:29whose ideas were brought to life

00:09:31with the help of Deep Pockets.

00:09:34Silicon Valley was just another little agricultural valley

00:09:37in California through the middle part of the 20th century.

00:09:41And the thing that changed it all

00:09:42was World War II and the Cold War.

00:09:45The government did something that it hadn't done before

00:09:48in the big way it got into the research and development business

00:09:50and particularly put an immense amount of money

00:09:53into research and electronics and computing.

00:09:55It was decades before the blockbuster successes

00:09:59of Valley tech icons Steve Jobs, Bill Hewlett, and David Packard

00:10:04when the Valley's founding fathers

00:10:06put the federal government's money to use.

00:10:09The startup that brought silicon into Silicon Valley

00:10:12was a short-lived operation called Shockley Semiconductor.

00:10:16And the person who founded it was William Shockley.

00:10:19He was a co-inventor of the transistor.

00:10:21A veteran of telecom behemoth Bell Labs,

00:10:25Shockley realized the power of silicon

00:10:27to miniaturize transistors

00:10:29that by the mid-1950s

00:10:31helped power the world's first microchips.

00:10:34And so the Valley gets more and more significant

00:10:38in the landscape of tech.

00:10:40By 1957, Shockley's team founded its own startup,

00:10:44Fairchild Semiconductor.

00:10:46Instead of turning to the federal government,

00:10:48the group made a radical move

00:10:50and looked to the private market,

00:10:53securing funding courtesy

00:10:54of East Coast investment banker Arthur Rock.

00:10:58Arthur Rock later becomes

00:11:00one of the most legendary venture capitalists

00:11:03in Silicon Valley history.

00:11:04That same year,

00:11:06the microchip earned a reputation

00:11:07as indispensable

00:11:09as the Soviet Union launched its Sputnik satellite.

00:11:13The first artificial Earth satellite.

00:11:15Beating the U.S. into orbit.

00:11:19This basically lights Washington, D.C.'s hair on fire.

00:11:23And all of this money starts getting invested

00:11:25in rockets and missiles

00:11:27and technologies to get things and people

00:11:31out into space

00:11:32and ultimately to the moon.

00:11:34In shooting for the moon,

00:11:36the influence of Santa Clara Valley technology

00:11:39and the investment dollars it attracted

00:11:41were forever altered.

00:11:44The region had officially left behind

00:11:46its agricultural roots

00:11:48to become a tech and investment hub.

00:11:51A next generation would prove

00:11:55what Silicon could do,

00:11:56not just for big business and government,

00:11:59but for the individual.

00:12:01Who has all the computers?

00:12:03The establishment,

00:12:04the government,

00:12:04big corporations.

00:12:06Key players to that independent movement

00:12:08were two Fairchild alums,

00:12:10Bob Noyce and Gordon Moore,

00:12:12who in the late 1960s founded Intel

00:12:15to build memory chips.

00:12:18They too tapped venture capitalist Arthur Rock,

00:12:21whose $2.5 million stake

00:12:23advanced the uniquely American concept

00:12:26of partnering wealthy investors

00:12:28with tech entrepreneurs.

00:12:31The concept would carry into the next millennia

00:12:34to prop up countless enterprising founders,

00:12:37including Elizabeth Holmes.

00:12:39Once you have a computer on a chip,

00:12:41you can build a wooden box around it

00:12:43and it's a desktop computer

00:12:44and it's under your control.

00:12:46It's not under the university's control

00:12:47or the Pentagon's control.

00:12:50And look, it's Vietnam, it's Watergate.

00:12:51This is an anti-establishment moment

00:12:53in American culture.

00:12:56That movement gave rise in the mid-1970s

00:12:59to computer enthusiasts

00:13:00Steve Wozniak and Steve Jobs.

00:13:03With Noyce's help,

00:13:05Jobs and Wozniak secured funding

00:13:07for a first personal computer

00:13:09the Apple through investor Mike Markala

00:13:11and later through Sequoia Capital

00:13:14that would evolve into one of the region's

00:13:16most profitable VCs.

00:13:19The venture capital becomes an important glue

00:13:22between the generations, right?

00:13:23Who are the leading venture capitalists of today?

00:13:26There are people who were,

00:13:27that had these massive exits in the 90s

00:13:30who in turn were funded and mentored

00:13:32by people who had massive exits

00:13:33in the 80s and 70s.

00:13:35These generational networks

00:13:38reinforce Silicon Valley's tightly-knit circles

00:13:40and its backlash against corporate business

00:13:44as usual.

00:13:45You can't have total corporate misbehavior

00:13:48in order to be successful,

00:13:49but at the same time,

00:13:50there's this encouragement and cultivation

00:13:51and tolerance of behavior

00:13:53that might get you kicked out

00:13:55of a traditional company.

00:13:56Silicon Valley has a strong sense of itself

00:13:58from the very beginning

00:13:59as not being like other companies.

00:14:02This is a different sort of business.

00:14:03We think different.

00:14:05We do things differently.

00:14:06And we have amazing results as a result.

00:14:10Even investors have been known

00:14:12to play by their own rules.

00:14:15The venture capitalists themselves

00:14:17did not want to sue Theranos.

00:14:20And there's a reason for that.

00:14:21It's because they all live in Silicon Valley.

00:14:23And if they sue a company

00:14:25that they've invested in,

00:14:27they're not going to get the next deal.

00:14:30Plaintiff's attorney Reed Cathrine

00:14:32represented individual investors

00:14:34who did sue Theranos,

00:14:36claiming fraud.

00:14:37Two late-stage minority backers

00:14:39who bought company shares indirectly

00:14:42and complained they relied on false claims.

00:14:45The sole venture capital firm

00:14:47to sue Theranos

00:14:48was one of its largest investors,

00:14:50Partner Fund Management.

00:14:52It brought two lawsuits

00:14:54that ended in settlement.

00:14:56It's very important

00:14:57for the venture capitalists

00:14:58to be able to get the next deal,

00:14:59to get the next Google,

00:15:00to be able to be

00:15:02one of the first to invest.

00:15:04That was already

00:15:05a well-established part

00:15:06of Valley culture

00:15:07by the time Steve Jobs comes along.

00:15:09There were lots of arrogant jerks

00:15:10in the semiconductor industry.

00:15:12And part of the culture

00:15:14of the chip makers,

00:15:15the semiconductor makers,

00:15:16was if someone was producing

00:15:18amazing technology,

00:15:19you were kind of going to let them

00:15:20get away with murder.

00:15:22In hindsight,

00:15:24a predictable setting

00:15:25for the whirlwind ascent

00:15:27of Elizabeth Holmes

00:15:28and for her meteoric fall.

00:15:34When we began Theranos,

00:15:35what we focused on

00:15:36was creating a customized medicine tool

00:15:39that could be used in the home.

00:15:40The ability to begin bringing monitoring,

00:15:43as we call it,

00:15:43into the home,

00:15:44we believe could fundamentally change

00:15:47the way that both patients are treated

00:15:50as well as drugs are developed.

00:15:52That was Elizabeth Holmes in 2005,

00:15:55one of the few times early on

00:15:58that she spoke publicly

00:15:59about her ambitions.

00:16:00I think it all starts with a very unique

00:16:03kind of founder

00:16:04who truly has a passionate,

00:16:07burning conviction

00:16:08that they've come up with an idea

00:16:11that will change the world.

00:16:12And they have the soaring ambition

00:16:14to just be driven

00:16:15to want to make it happen

00:16:16as fast as possible.

00:16:18Conviction spurred Holmes

00:16:19to drop out of Stanford University.

00:16:22In 2003,

00:16:24the 19-year-old traded in life

00:16:26as a full-time undergrad

00:16:27for life as a full-time CEO.

00:16:31I'd always believed

00:16:34that the purpose of building something,

00:16:37building a company,

00:16:38is to make a difference in the world.

00:16:40And I got to the point

00:16:42in which I found

00:16:44what I felt like I was born to do.

00:16:47As if ripped from a playbook

00:16:49for Silicon Valley superstardom,

00:16:51Holmes' early college departure

00:16:53followed in the footsteps

00:16:54of Oracle's Larry Ellison

00:16:56and Apple's Steve Jobs.

00:16:59Another Holmes-era dropout

00:17:00included Facebook's Mark Zuckerberg,

00:17:02who in 2004

00:17:04cut his time short at Harvard.

00:17:07There was a lot of money left over

00:17:08from the dot-com boom.

00:17:09You have PayPal being acquired by eBay,

00:17:12turning the founders of PayPal,

00:17:14who become known as the PayPal Mafia,

00:17:16into multimillionaires.

00:17:17And that includes people like Peter Thiel,

00:17:20Elon Musk, Reid Hoffman,

00:17:22Jeremy Stoppelman,

00:17:23like all these people

00:17:23who go on to found other companies

00:17:25in the Valley.

00:17:26Who didn't graduate college

00:17:28and left college at 19 years old?

00:17:30We have Bill Gates,

00:17:32we have Steve Jobs,

00:17:33we have Mark Zuckerberg.

00:17:36Holmes filed her first patent

00:17:38around the same time

00:17:39she sidestepped her college career.

00:17:42A wearable monitor

00:17:43with skin-piercing microneedles

00:17:45to detect biological red flags

00:17:48and deliver therapeutic drugs.

00:17:51By the next year,

00:17:52in 2005,

00:17:54investment capital

00:17:55was rolling in.

00:17:57Now, how much money

00:17:58have you raised thus far

00:17:59in venture capital funds?

00:18:01We raised just over $6 million,

00:18:03and then we've also raised money

00:18:05from private investors.

00:18:07Factoring for inflation,

00:18:08the figure dwarfed

00:18:10even Apple Computer's

00:18:11first money raise

00:18:12in 1977,

00:18:15a $250,000 investment,

00:18:18much of which

00:18:18was structured as a loan.

00:18:21With many fewer strings attached,

00:18:23investors bet big on Holmes.

00:18:27So in the beginning,

00:18:28it was Don Lucas,

00:18:29very seasoned venture capital guy.

00:18:31I'm sure he,

00:18:32I don't know the details,

00:18:33but I know Don's reputation

00:18:35won't let them know.

00:18:35He probably did excellent due diligence.

00:18:37Well, the first guy really was

00:18:39Don Lucas Sr.,

00:18:40who had originally been

00:18:41an investor in Oracle.

00:18:43But at this point in time,

00:18:45I think he was sort of

00:18:46not fully paying attention

00:18:48to what's going on.

00:18:49However well-vetted,

00:18:51the apparent confidence

00:18:52was contagious.

00:18:54Billionaire venture capitalist

00:18:55Tim Draper backed Holmes,

00:18:57as did billionaire Oracle

00:18:59co-founder Larry Ellison.

00:19:01What was fundraising like?

00:19:03Finding the right people

00:19:05to invest in you,

00:19:07I think, is everything.

00:19:09To find the right people,

00:19:11Holmes didn't need to look far.

00:19:14Draper had been a family friend,

00:19:16and other deep-pocketed investors

00:19:18traced directly to Holmes' alma mater.

00:19:22Stanford's biggest,

00:19:23most important product

00:19:24isn't tech, it's people.

00:19:26Look through the whole genealogy

00:19:28of Silicon Valley,

00:19:29starting with Hewlett and Packard,

00:19:30who were Stanford students

00:19:31there in the 30s.

00:19:32And you have access

00:19:33to incredible resources,

00:19:35professors,

00:19:36business people coming to campus.

00:19:37Modern Stanford has become

00:19:38this town square for billionaires, right?

00:19:41It's this place where

00:19:42you rub shoulders

00:19:43with incredibly successful people,

00:19:45and they're telling you,

00:19:46this is how you can be like me.

00:19:48The exclusive access

00:19:49held another secret

00:19:51to Holmes' initial success.

00:19:53Prominent backers gave rise

00:19:55to an impressive board,

00:19:57including former U.S. Secretaries of State

00:19:59Henry Kissinger,

00:20:00the late George Shultz,

00:20:02and former Secretaries of Defense

00:20:04William Perry

00:20:05and General James Mattis.

00:20:07Like, the only person

00:20:08missing from your board

00:20:09is the Pope.

00:20:09How did that happen?

00:20:10Was it like,

00:20:11I'm just going to write

00:20:12to Henry Kissinger?

00:20:13These kind of caliber

00:20:14of people who are

00:20:15in the public eye,

00:20:16but probably not so easy

00:20:17to ring up.

00:20:18In our case,

00:20:18those were people

00:20:19who I had the privilege

00:20:21of getting to know,

00:20:22and in many cases,

00:20:23working with,

00:20:23for, in some cases,

00:20:24a couple years

00:20:25before we asked them

00:20:26to join the board.

00:20:27Once one got on board

00:20:29and was sold by,

00:20:31the others were sold by him.

00:20:32They're all related

00:20:33to the Hoover Institution

00:20:34for the most part.

00:20:36Which is stocked

00:20:37with former heads of state

00:20:38and very powerful people,

00:20:40people who've had

00:20:41incredible political careers

00:20:43and military careers,

00:20:44who also have,

00:20:46in turn,

00:20:46connections to

00:20:47the business community

00:20:48and instill credibility

00:20:49on a very young,

00:20:50untested person.

00:20:51For all its privilege,

00:20:53the early board

00:20:54was mostly devoid

00:20:55of expertise

00:20:56in diagnostic testing,

00:20:58biochemistry,

00:20:59and molecular biology.

00:21:01At least in its

00:21:02initial composition,

00:21:03practically they had

00:21:04no scientists

00:21:05who were relevant

00:21:06to the topic

00:21:07of what that startup

00:21:09was about.

00:21:09They had powerful people

00:21:10who could really

00:21:11sway power

00:21:12across many constituents

00:21:14and probably facilitate

00:21:15investors to send

00:21:18their money to Theranos

00:21:19and open lots of doors

00:21:20and gain publicity,

00:21:22but they had no science.

00:21:23They had no science

00:21:24and they had no board

00:21:25to tell them

00:21:26that they have no science.

00:21:28One exception

00:21:29was Holmes'

00:21:30college mentor

00:21:31and first director,

00:21:32then Stanford

00:21:33chemical engineering dean

00:21:35and professor,

00:21:36Channing Robertson.

00:21:37I think he gave

00:21:38the credibility

00:21:38that these investors needed.

00:21:41I hired the person

00:21:43that I was working for

00:21:44at Stanford.

00:21:45That's a wonderful story,

00:21:47isn't it?

00:21:47Yeah.

00:21:48Huh.

00:21:48It was great.

00:21:50Like entrepreneurs

00:21:51before her,

00:21:52Holmes tweaked

00:21:53her concept

00:21:54along the way.

00:21:55Within two years

00:21:56of leaving Stanford,

00:21:57her patent applications

00:21:58included a portable analyzer

00:22:00that would quickly

00:22:02and inexpensively

00:22:03test biological fluids,

00:22:05including blood.

00:22:06I got interested

00:22:08in blood and lab testing

00:22:09because it's a tool

00:22:11and the ability

00:22:12to dramatically reduce

00:22:13the sample volume

00:22:14that's required

00:22:15for doing lab testing

00:22:17traditionally

00:22:18and dramatically

00:22:20reduce the cost.

00:22:22Holmes' portable analyzer

00:22:24first became known

00:22:25as the Edison

00:22:26and later

00:22:27as the Minilab.

00:22:28In its first iteration,

00:22:30the device would cater

00:22:31to pharmaceutical companies

00:22:32to test adverse drug reactions

00:22:35in clinical trials.

00:22:37Later versions

00:22:38would serve doctors

00:22:39and patients,

00:22:40replacing the bulk

00:22:41of traditional lab testing

00:22:43altogether.

00:22:44Instead of having to

00:22:46go to a lab

00:22:48in order to give blood,

00:22:50we're actually going

00:22:51to begin

00:22:51to make it possible

00:22:52for people

00:22:53to do lab testing

00:22:54in the places

00:22:56they need care.

00:22:58Instead of large needles,

00:23:00vials of blood,

00:23:01and days-long

00:23:02processing times,

00:23:03Holmes envisioned

00:23:04that doctors

00:23:05and patients

00:23:05could draw

00:23:06just a few drops

00:23:07of blood

00:23:08using a finger stick sample

00:23:09stored in the company's

00:23:11proprietary nanotainer

00:23:12and get immediate results

00:23:14for an array

00:23:15of common blood tests.

00:23:17The product

00:23:17is meant for

00:23:19an individual

00:23:20to actually conduct

00:23:21a blood test,

00:23:23ultimately at home,

00:23:25and the box

00:23:26is about the size

00:23:27of a printer,

00:23:28a desktop printer.

00:23:29So it's probably

00:23:30maybe 18 inches long

00:23:31and 15 inches wide

00:23:32and 12 inches tall.

00:23:35Holmes' pivot

00:23:36to engineer

00:23:36a desktop analyzer

00:23:38came with a mountain

00:23:39of electrical,

00:23:40chemical,

00:23:41and bioengineering

00:23:42challenges.

00:23:43The vision

00:23:44was so ambitious

00:23:45that critics,

00:23:46including Theranos employees,

00:23:48said it couldn't be done.

00:23:50Added hurdles

00:23:51came from Richard Fuse,

00:23:53a Holmes family friend

00:23:5430-plus years her senior,

00:23:56who filed a patent

00:23:57to seize upon

00:23:58an overlooked element

00:23:59in the would-be analyzer's

00:24:01supply chain.

00:24:03Holmes later sued Fuse,

00:24:04accusing him

00:24:05of creating the patent

00:24:06with stolen Theranos IP.

00:24:08By 2010,

00:24:10five years into her pursuit,

00:24:12there was light

00:24:13at the end of the tunnel.

00:24:14After struggling

00:24:15to stay afloat,

00:24:16Holmes reported

00:24:17to the SEC

00:24:18that Theranos

00:24:19had sold

00:24:19$45 million

00:24:20in private company shares.

00:24:23And a $12 million

00:24:24line of credit

00:24:25came from Holmes'

00:24:26then-significant other,

00:24:28Sonny Belwani,

00:24:29a dot-com-era millionaire

00:24:30who Holmes

00:24:31had recently hired

00:24:32as Theranos' COO.

00:24:34I actually think

00:24:36the impact

00:24:37of what we are doing

00:24:37to put the diagnosis

00:24:39right there

00:24:40where the patient is,

00:24:40this invention

00:24:41is going to be

00:24:42way up there.

00:24:43We will have

00:24:43the same impact

00:24:44on human health

00:24:45and medicine

00:24:46as the discovery

00:24:47of antibiotics had.

00:24:49Belwani and Holmes

00:24:50first became friends

00:24:51in 2002.

00:24:53Belwani was 37

00:24:54and Holmes 19.

00:24:57The two became a couple

00:24:58after Holmes

00:24:59left Stanford.

00:25:00She didn't choose

00:25:01Sonny, really.

00:25:02The board made her

00:25:03go hire somebody

00:25:03and Sonny looked

00:25:04good on paper.

00:25:05The couple was criticized

00:25:07for going to great lengths

00:25:08to keep their romantic

00:25:10relationship a secret.

00:25:12That was ridiculous.

00:25:14This is part of the naivete.

00:25:15The way the company

00:25:16found out that

00:25:17she and Sonny

00:25:18were having a relationship,

00:25:19she changed her

00:25:20home mailing address

00:25:20to be his.

00:25:22She never told the board

00:25:23and once we began

00:25:24to see the documents

00:25:25and the communications

00:25:27between them,

00:25:28it became very clear.

00:25:30In an unfruitful deposition,

00:25:31Catherine pressed Holmes

00:25:33to explain.

00:25:35Can you tell me

00:25:36whether or not

00:25:38you had a romantic

00:25:39relationship

00:25:40with Sonny Belwani?

00:25:42Again, due to the

00:25:42pending charges

00:25:43by the Department of Justice,

00:25:45I am instructing Elizabeth

00:25:46to invoke her Fifth Amendment rights

00:25:48and not answer.

00:25:49Did you ever get an answer

00:25:50to those questions?

00:25:52No.

00:25:53No.

00:25:54She pled the Fifth.

00:25:56The partnership continued

00:25:57until 2016,

00:25:59when Belwani left the company.

00:26:01The dynamic

00:26:02is likely to come

00:26:03into focus

00:26:04in Belwani and Holmes

00:26:06now separately

00:26:07scheduled trials.

00:26:08According to court documents,

00:26:10Holmes intends

00:26:11to introduce evidence

00:26:12concerning her mental state

00:26:14during her time

00:26:15as CEO.

00:26:16In 2013,

00:26:18Holmes and Belwani

00:26:19struck an equally puzzling

00:26:21business partnership.

00:26:23Theranos announced

00:26:24a major deal

00:26:25with drugstore giant

00:26:26Walgreens

00:26:27to deploy the device

00:26:28in its Palo Alto

00:26:30and Arizona stores

00:26:31despite the device's design

00:26:33for home

00:26:34and doctor's office use.

00:26:37Under a $140 million contract,

00:26:41Walgreens would become

00:26:42the exclusive pharmacy

00:26:43to offer Theranos tests

00:26:45and someday

00:26:46in more than 8,000 U.S. stores.

00:26:49Walgreens got enamored

00:26:50with the notion

00:26:51of putting one in every store

00:26:52so that you as a customer

00:26:53could come in

00:26:54and have your blood test

00:26:55done while you shop.

00:26:56In a carefully worded

00:26:57press release,

00:26:58the company said

00:26:59consumers can now complete

00:27:01any clinician-directed lab test

00:27:02with as little

00:27:03as a few drops of blood,

00:27:05with results

00:27:06available in a matter

00:27:07of hours.

00:27:09It went on to say

00:27:10that blood samples

00:27:11would be drawn

00:27:12either from a tiny finger stick

00:27:14or a micro-sample

00:27:16using traditional methods.

00:27:19The Walgreens partnership

00:27:21made Holmes a darling

00:27:22of business and tech media.

00:27:25Her story catapulted

00:27:26to the covers of magazines

00:27:28and to the front pages

00:27:29of newspapers.

00:27:31Under Holmes and Belwani's management,

00:27:34in 2014,

00:27:36Theranos' funding spiked

00:27:37to $400 million.

00:27:39She was on every cover

00:27:41looking her Steve job best.

00:27:43Everyone called her

00:27:44the next Steve Jobs

00:27:44and it was just wonderful.

00:27:46I mean,

00:27:46I don't know a CEO

00:27:47who wouldn't kill

00:27:48to have that kind

00:27:49of positive publicity.

00:27:51Wired first reported

00:27:52Theranos' analyzer

00:27:54could perform

00:27:55hundreds of blood tests

00:27:56and as many as 30

00:27:58from a single drop.

00:28:00Holmes soon boasted

00:28:01to Fortune

00:28:02that 70 different tests

00:28:03were possible

00:28:04from a finger stick sample

00:28:05and that Theranos

00:28:07offered more than

00:28:08200 common tests.

00:28:10The bold claims

00:28:11elevated Holmes

00:28:12to her first cover feature.

00:28:15I was the editor,

00:28:15Tim was the story editor

00:28:17and Roger Parloff

00:28:18was the writer

00:28:19and we were excited about it.

00:28:21It sounded, you know,

00:28:22just like everyone else

00:28:23said back then.

00:28:24I mean, this was like

00:28:24the next big thing,

00:28:26you know,

00:28:27and there was a lot

00:28:28of enthusiasm about it

00:28:30and a lot of interest,

00:28:31certainly.

00:28:32It was already a good-sized company

00:28:35with 500 employees.

00:28:36It was represented

00:28:37by David Boies,

00:28:38who at that time

00:28:39was sort of the preeminent

00:28:40attorney in the country

00:28:41and it had backing

00:28:43from Larry Ellison

00:28:44and Betsy DeVos.

00:28:47TechCrunch also interviewed Holmes

00:28:49in the peak

00:28:50of her company's ascent.

00:28:52This is the amount of blood

00:28:54that's needed to draw

00:28:55to do a test.

00:28:56A lot of private companies

00:28:58were getting

00:28:58a significant amount

00:29:00of funding,

00:29:00so I think it was,

00:29:02valuations were just high

00:29:04across the board

00:29:05and there was a sense,

00:29:07there was a lack

00:29:08of circumspection,

00:29:09I guess,

00:29:09around what was going on

00:29:10in the industry.

00:29:11Forbes followed suit,

00:29:13publishing a cover feature

00:29:14of its own.

00:29:15They were kind of saying

00:29:16she may be the next big thing,

00:29:18like visionary guru,

00:29:20Silicon Valley,

00:29:21big deal,

00:29:22young.

00:29:23A lot of CEOs,

00:29:24sometimes they can be

00:29:25very controlling,

00:29:26and she just had

00:29:27none of that.

00:29:28I think even at that point,

00:29:29Forbes was already telling me

00:29:31that she was apparently

00:29:32America's youngest

00:29:34self-made female billionaire.

00:29:36The coming out party

00:29:38lasted nearly two years,

00:29:40as Holmes purported

00:29:41to disrupt

00:29:42the multi-billion dollar

00:29:43diagnostics industry

00:29:45dominated by companies

00:29:46like Quest,

00:29:47LabCorp,

00:29:48Siemens,

00:29:49and Abbott.

00:29:50Meanwhile,

00:29:51Walgreens' customers

00:29:52relied on Theranos-branded tests

00:29:54and the company's valuation

00:29:56soared to nine billion.

00:29:58The company grew

00:29:59to more than 800 people

00:30:01on its payroll,

00:30:03including former

00:30:03Apple OSX developer

00:30:05Avi Tavanian,

00:30:06eventually asked to resign

00:30:08from the Theranos board,

00:30:09and chief scientist

00:30:11Ian Gibbons,

00:30:12a 30-year biochemistry expert

00:30:14who in 2013

00:30:16took his life

00:30:18after receiving a subpoena

00:30:19to testify

00:30:20in the patent dispute

00:30:21with Holmes' former

00:30:22family friend.

00:30:24There's a little bit

00:30:25of irony in the photograph

00:30:27now.

00:30:28It's like the firehouse

00:30:29catching on fire.

00:30:30What you're seeing

00:30:31in that photograph,

00:30:32it's exactly what is not

00:30:33supposed to happen.

00:30:35By that time,

00:30:37U.S. attorneys

00:30:37say Holmes

00:30:38was peddling a fraud.

00:30:40The accusation

00:30:44was first waged

00:30:45in an October 2015

00:30:47Wall Street Journal expose.

00:30:50Reporter John Carreyrou

00:30:51skewered Holmes' claims

00:30:53that her technology

00:30:54could accurately process

00:30:56hundreds of tests

00:30:57using the fingerstick technique.

00:30:59It really wasn't

00:31:00until John Carreyrou's story

00:31:02in the Wall Street Journal

00:31:04came out

00:31:05that we had any understanding

00:31:06that there was less here

00:31:07than met the eye.

00:31:08Whistleblowers

00:31:09who informed Carreyrou's reporting

00:31:11compounded the damage,

00:31:13claiming the analyzer

00:31:14returned enough

00:31:15false positive

00:31:16and false negative results

00:31:18that the company

00:31:19was forced to run

00:31:20all but one test

00:31:21on traditional equipment

00:31:22made by the very companies

00:31:24Holmes aimed to disrupt.

00:31:26Even if you could test blood

00:31:27on third-party equipment,

00:31:29they were diluting that blood

00:31:30on equipment

00:31:31that was not made

00:31:32for diluting that blood.

00:31:34Their defense was,

00:31:35well, we did have

00:31:36the technology,

00:31:37and it was not on our box,

00:31:39but it was on third-party equipment,

00:31:41in their testing

00:31:42and in their quality assurance

00:31:43and all the things

00:31:44you're supposed to do

00:31:45at a lab.

00:31:47They were,

00:31:47if the numbers didn't work out,

00:31:49they were playing

00:31:51with the samples they used

00:31:53and it's questionable.

00:31:57At the heart

00:31:58of the Justice Department's

00:32:00indictment

00:32:00are accusations

00:32:01that Holmes and Belwani

00:32:03lied about Theranos technology

00:32:04to dupe investors

00:32:06and business partners

00:32:07into forking over cash

00:32:09and to dupe patients

00:32:10into paying

00:32:11for Walgreens-based tests.

00:32:15Claims further examined

00:32:16in Carrie Rue's

00:32:17non-fiction book,

00:32:19Bad Blood,

00:32:20and in Alex Gibney's

00:32:22documentary,

00:32:23The Inventor.

00:32:25Well, and the question is,

00:32:26did she know

00:32:27she was perpetuating a fraud

00:32:29or was there something

00:32:30more mysterious going on?

00:32:32I think she is afflicted

00:32:35with what the police call

00:32:36noble cause corruption,

00:32:38meaning, simply put,

00:32:39it's like the end

00:32:39justifies the means.

00:32:41Holmes and Belwani's knowledge

00:32:42will be key to their defense,

00:32:44given prosecutors' burden

00:32:46to prove intent,

00:32:47a non-negotiable element

00:32:49required to obtain a conviction.

00:32:51Well, that's what makes

00:32:52this a difficult story

00:32:54to draw conclusions about

00:32:56in terms of investment fraud,

00:32:58because I don't think

00:32:59anyone disbelieved this story,

00:33:01including Elizabeth Holmes

00:33:03at the outset.

00:33:04By 2010,

00:33:06seven years after

00:33:07Holmes started Theranos,

00:33:08is when U.S. attorneys

00:33:09say she and Belwani

00:33:11began a conspiracy

00:33:12that by 2015

00:33:14would include lying

00:33:16to investors

00:33:17about the range

00:33:18and accuracy of tests,

00:33:20faking product demonstrations,

00:33:22misrepresenting

00:33:23projected revenues,

00:33:25and fabricating stories

00:33:26that Theranos' device

00:33:28had been deployed

00:33:29in military combat zones.

00:33:31By 2013,

00:33:33prosecutors say

00:33:34the two knowingly promoted

00:33:36and delivered,

00:33:37tests likely to contain

00:33:38inaccuracies,

00:33:39and falsely represented

00:33:41to investors

00:33:42that the tests

00:33:43did not require

00:33:44FDA approval,

00:33:45a point Holmes has contested,

00:33:47along with pleading

00:33:49not guilty

00:33:49to criminal charges.

00:33:51When I started,

00:33:53they had scrapped

00:33:54the Edison device,

00:33:56so we were working

00:33:56on the next generation,

00:33:58you know,

00:33:59black box.

00:34:01It was 2015,

00:34:03a month before

00:34:04Carrie Roo revealed

00:34:05what Jocelyn Bailey

00:34:06and other Theranos employees

00:34:08already knew.

00:34:09More than 90%

00:34:11of Walgreens-based tests

00:34:12used neither the mini lab

00:34:14nor tiny blood samples,

00:34:16and instead

00:34:17came from traditional

00:34:19larger-volume blood draws

00:34:20processed by traditional

00:34:22analyzers

00:34:23made by Siemens.

00:34:26Bailey's job

00:34:27was to develop

00:34:28immunoassays,

00:34:30a common type of blood test

00:34:31intended to run

00:34:33inside the mini lab.

00:34:35Did you know

00:34:36about the Siemens machines

00:34:37being used

00:34:38while you were working there?

00:34:40Yeah.

00:34:41Yeah, we knew.

00:34:42I think it was

00:34:43communicated to me.

00:34:44Our team knew about it.

00:34:47I don't know

00:34:47if everyone knew.

00:34:49We knew that

00:34:50finger sticks had been cut

00:34:51or had been cut

00:34:52real recently

00:34:53from the clinics.

00:34:55Some of those

00:34:55original claims

00:34:56were known.

00:34:57You know,

00:34:58it hurts,

00:34:59but we knew it

00:35:00and we were in the lab

00:35:02trying to make it better.

00:35:03The revelations

00:35:04turned Fortune's

00:35:05cover story

00:35:06on its head.

00:35:07It became clear

00:35:08that they couldn't

00:35:09accomplish the tests

00:35:10that they wanted to

00:35:11using the Edison machine.

00:35:13Then,

00:35:13in fairly short order,

00:35:14it unraveled

00:35:15when some of the technicians

00:35:16blew the whistle on her.

00:35:18One whistleblower,

00:35:19Tyler Schultz,

00:35:20a Theranos employee

00:35:22and grandson

00:35:23to board member

00:35:24George Schultz,

00:35:25disclosed the shortcoming

00:35:27to the Wall Street Journal

00:35:28and filed a complaint

00:35:29with New York State's

00:35:31Department of Health

00:35:32saying the company

00:35:33had manipulated

00:35:34proficiency testing,

00:35:35a process

00:35:36meant to promote

00:35:37test accuracy.

00:35:38At a minimum,

00:35:41if the Theranos-Walgreens

00:35:422013 press release

00:35:45and Holmes'

00:35:46statements to media

00:35:47were to be believed,

00:35:48with as little

00:35:49as a few drops

00:35:50of blood,

00:35:51its device

00:35:52should have been able

00:35:52to accurately process

00:35:54multiple,

00:35:55if not more than

00:35:56200,

00:35:57common diagnostic tests.

00:35:58Did it make you

00:36:01question the technology

00:36:03or not necessarily?

00:36:05You definitely realize

00:36:06that 220 assays

00:36:08on a single drop

00:36:09of blood

00:36:10on the same machine

00:36:11that you developed,

00:36:12that's not feasible.

00:36:14And so you realize

00:36:15that their goal

00:36:16was to have it

00:36:17in all these wellness centers

00:36:18and have the price be cheap

00:36:20and all this kind of stuff.

00:36:21You understood why

00:36:22they were using

00:36:23these commercial analyzers.

00:36:24You didn't realize,

00:36:26I guess,

00:36:26the extent of how much

00:36:27they had pitched

00:36:28their own machine

00:36:29and how the public

00:36:30was understanding

00:36:31that everything

00:36:32was being done

00:36:33on our technology.

00:36:35When reporters

00:36:36pressed Holmes

00:36:37on the inconsistencies,

00:36:39she admitted

00:36:39that only one

00:36:41finger stick test

00:36:42was commercially available

00:36:43using the Minilab,

00:36:45a single assay

00:36:46for herpes virus

00:36:47HSV-1.

00:36:50The rest,

00:36:51Holmes said,

00:36:52remained in R&D

00:36:54or awaited approval.

00:36:56In 2016,

00:36:58the Centers for Medicare

00:37:00and Medicaid

00:37:00notified Theranos

00:37:02of laboratory deficiencies

00:37:04posing immediate jeopardy

00:37:06to patient health.

00:37:07The agency sanctioned

00:37:09the company

00:37:09and agreed to a settlement

00:37:11banning Holmes

00:37:12from owning

00:37:13or operating

00:37:13a clinical lab

00:37:14for two years.

00:37:16The agreement

00:37:17forced the company

00:37:18to shutter its Walgreens

00:37:19and laboratory operations.

00:37:23Holmes' defense

00:37:23wasn't enough

00:37:25to quiet

00:37:26her most formidable critics.

00:37:28A flood of lawsuits

00:37:30followed.

00:37:31Arizona's attorney general,

00:37:32investors,

00:37:33and the SEC

00:37:34claimed fraud.

00:37:36Walgreens sued

00:37:36for breach of contract,

00:37:38and the Justice Department

00:37:39filed criminal charges

00:37:40for conspiracy

00:37:41and wire fraud.

00:37:43did Holmes

00:37:44ever explain to you

00:37:45why she

00:37:47maybe embellished

00:37:48what her product

00:37:50could do?

00:37:51No,

00:37:52although she didn't have to.

00:37:54You know,

00:37:54it's not uncommon

00:37:55for entrepreneurs

00:37:57in particular

00:37:57to talk

00:37:58in the present tense

00:38:00about the future.

00:38:02My product

00:38:02can do this.

00:38:03Your product's

00:38:04not built yet.

00:38:05Your product

00:38:06is a bunch

00:38:07of concept.

00:38:07But nonetheless,

00:38:09the tendency

00:38:09is to say,

00:38:10my product

00:38:10can do this,

00:38:11or my service

00:38:12can unify people.

00:38:14But no,

00:38:14that's,

00:38:14I mean,

00:38:15it's a way

00:38:15of essentially

00:38:16describing

00:38:18a future vision.

00:38:19And Elizabeth

00:38:20was very good

00:38:20at that.

00:38:21Aside from

00:38:22the DOJ's

00:38:23criminal action

00:38:24and a civil suit

00:38:25filed by Theranos

00:38:26customers,

00:38:27Holmes settled

00:38:28the lawsuits

00:38:28out of court.

00:38:30The company

00:38:30paid Walgreens

00:38:31around $25 million

00:38:33to settle

00:38:34its breach

00:38:34of contract

00:38:35claim,

00:38:36and separately

00:38:37agreed to pay

00:38:38nearly $5 million

00:38:39to Arizona

00:38:40customers.

00:38:41A $500,000

00:38:43fine was paid

00:38:44to settle

00:38:44the SEC's

00:38:45claims of fraud.

00:38:47Among other

00:38:47stipulations,

00:38:49Holmes relinquished

00:38:49her controlling

00:38:50stake in Theranos

00:38:51and diverged

00:38:52from Belwani,

00:38:53who continued

00:38:54to defend

00:38:55the SEC's

00:38:56claims.

00:38:57Cathrine

00:38:58said his clients

00:38:59recouped

00:39:00their investments.

00:39:01Still,

00:39:02most of the

00:39:03$900 million

00:39:04homes raised

00:39:05came from

00:39:06investors

00:39:06who took

00:39:07no legal

00:39:08action against

00:39:09her.

00:39:10So they all

00:39:11sort of circled

00:39:12the wagons

00:39:13around Theranos

00:39:14and didn't

00:39:16go after them.

00:39:17In fact,

00:39:18they did reach

00:39:19an agreement

00:39:19not to go

00:39:20after them

00:39:20early on.

00:39:23That overwhelming

00:39:24capitulation

00:39:25by the very

00:39:25investors who

00:39:26prosecutors say

00:39:27were victims

00:39:28of fraud

00:39:28begs closer

00:39:30examination

00:39:30of Silicon

00:39:31Valley's

00:39:32status quo

00:39:33and the

00:39:34contributing

00:39:34roles of

00:39:35the parties

00:39:36that power

00:39:36its big

00:39:37ideas.

00:39:42Of course,

00:39:43I have to

00:39:43blame

00:39:44Sonny Belwani

00:39:46and Elizabeth

00:39:47Holmes.

00:39:48I mean,

00:39:48they're the

00:39:48primary two.

00:39:50I mean,

00:39:50they're the

00:39:51co-conspirators

00:39:53who created

00:39:54this mess.

00:39:56You can't do

00:39:56it alone.

00:39:57She was and

00:39:58is a singular

00:39:59figure.

00:39:59And she

00:40:00does bear

00:40:00responsibility.

00:40:01I mean,

00:40:02even as young

00:40:02as she was,

00:40:04she bears

00:40:04responsibility

00:40:05for what

00:40:06happened under

00:40:06her watch.

00:40:07Look,

00:40:07so many other

00:40:08people went

00:40:09along with

00:40:09her.

00:40:10So many other

00:40:10people wanted

00:40:11it to happen.

00:40:12She will say

00:40:13in her defense,

00:40:13it wasn't me

00:40:14alone.

00:40:15And that's

00:40:15true.

00:40:15It's true of

00:40:16every entrepreneur.

00:40:17It's never

00:40:17them alone.

00:40:18Where do you

00:40:18put Sonny

00:40:19Belwani in

00:40:20all of this?

00:40:21I think he's

00:40:21really critical.

00:40:22He's in some

00:40:23ways the bad

00:40:24cop to her

00:40:24good cop.

00:40:25And we often,

00:40:26in the case

00:40:27of tech companies,

00:40:27there's many

00:40:28instances of

00:40:29the man behind

00:40:30the curtain or

00:40:31the more silent

00:40:32partner.

00:40:32And you saw

00:40:33that at Apple

00:40:33with Steve

00:40:34and Steve.

00:40:35You see this

00:40:35at Microsoft

00:40:36with Paul Allen

00:40:37writing basic

00:40:38and Bill Gates.

00:40:39I'm not sure

00:40:45the investors

00:40:46were wrong

00:40:46because I'm

00:40:47not sure

00:40:47they ever

00:40:48fulfilled their

00:40:49own obligations

00:40:50and responsibilities.

00:40:52Venture capital,

00:40:52the rule of thumb

00:40:53of VC is that

00:40:55out of ten

00:40:55investments,

00:40:56you'll have

00:40:56three that fail,

00:40:58you'll have

00:40:58three that kind

00:40:59of go,

00:41:00you know,

00:41:00fine.

00:41:02And you'll

00:41:02have one or two

00:41:03that actually

00:41:03make you money

00:41:04and sometimes

00:41:05make you a lot

00:41:05of money.

00:41:06And what makes

00:41:07the risk worth

00:41:07it is when

00:41:08you hit big.

00:41:10The investment

00:41:11money was good

00:41:12eventually because

00:41:13it gives runway

00:41:14for scientists.

00:41:15So she did a good

00:41:17job at getting

00:41:17some runway later,

00:41:19but the first

00:41:20round of the

00:41:20technology obviously

00:41:21was a massive

00:41:23failure and was

00:41:24terrible for

00:41:25patients.

00:41:26But she did

00:41:28a good job

00:41:28at setting a

00:41:30vision for

00:41:31scientists to

00:41:31work towards

00:41:32to allow,

00:41:33like, a lot

00:41:34of companies

00:41:34don't have that

00:41:35much funding.

00:41:37In private

00:41:37company investing,

00:41:39the prospect

00:41:40of this investor

00:41:41has to fill out

00:41:41a very detailed

00:41:43form that says

00:41:44I understand

00:41:44the risks,

00:41:45I understand

00:41:46that, you know,

00:41:47I may not get

00:41:48any return on

00:41:49this, I understand

00:41:50furthermore this

00:41:51will not affect

00:41:52my net worth.

00:41:52They're accredited.

00:41:53They're accredited.

00:41:55Sophisticated actually,

00:41:56I think that's the

00:41:57term, but nobody

00:41:58did.

00:41:59I mean, they all

00:41:59filled out the

00:42:00form, but nobody

00:42:01did the work.

00:42:01I didn't see them

00:42:02storming the gates

00:42:03and going after

00:42:03the board saying,

00:42:04hey guys, you know,

00:42:06you've got to

00:42:06in fact the board

00:42:07was telling Elizabeth

00:42:08you don't have to

00:42:08do that, which I

00:42:10think she got bad

00:42:11advice.

00:42:12In announcing

00:42:13its settlement

00:42:13with Holmes,

00:42:14the SEC posed

00:42:15Theranos as a

00:42:16lesson for

00:42:17entrepreneurs,

00:42:18warning that

00:42:19innovators who

00:42:20seek to

00:42:20revolutionize and

00:42:21disrupt an

00:42:22industry must

00:42:23tell investors

00:42:24the truth about

00:42:25what their

00:42:26technology can do

00:42:27today, not

00:42:28just what they

00:42:29hope it might

00:42:29do someday.

00:42:30I believe that

00:42:34the SEC did

00:42:35not have

00:42:36jurisdiction.

00:42:37I think the SEC

00:42:38has got a great

00:42:38role to play in

00:42:39public markets and

00:42:40all kinds of other

00:42:40things like that,

00:42:41but I'd hate to

00:42:42see them get deep

00:42:43into the venture

00:42:44community and the

00:42:44startup world.

00:42:45It's a fine line

00:42:46between that and,

00:42:47you know, the

00:42:48mom and pop

00:42:49business, believe

00:42:49it or not.

00:42:50There are some

00:42:51people who say

00:42:52that Elizabeth

00:42:53Holmes is being

00:42:54held to a public

00:42:56company standard.

00:42:57Do you think

00:42:58that that's a

00:42:59valid argument?

00:43:01I think there's

00:43:01some merit in

00:43:02that.

00:43:02One of the

00:43:03things, particularly

00:43:05the last decade of

00:43:06Silicon Valley, the

00:43:07decade since the

00:43:08Great Recession, that

00:43:09has been different

00:43:10has been the private

00:43:11markets have

00:43:12dominated more than

00:43:13the public markets.

00:43:14Companies would go

00:43:15public, they'd have

00:43:16to go public.

00:43:17I mean, Intel went

00:43:17public when it was

00:43:18three years old, Nescape

00:43:19went public when it

00:43:20was less than two.

00:43:21The way you raise

00:43:21capital was on the

00:43:22public markets, and

00:43:23with that came

00:43:23accountability.

00:43:24And now, in the

00:43:25last decade, you

00:43:26have, it's harder

00:43:27to go public, right?

00:43:28New regulations

00:43:29post-recession.

00:43:31It's a heavier lift.

00:43:32And there's been

00:43:33all of this private

00:43:34capital just sloshing

00:43:36through the global

00:43:36markets looking for

00:43:37a home.

00:43:38And then you have

00:43:39this kind of flywheel

00:43:41of storytelling and

00:43:42buzz about, oh,

00:43:43this is the next

00:43:44big thing.

00:43:44And everyone's like,

00:43:45I want to get in

00:43:46on that.

00:43:46Then you're allowed

00:43:47in kind of relative,

00:43:49you're protected from

00:43:50the scrutiny of

00:43:50public markets.

00:43:52Does that mean that

00:43:52you can get away

00:43:53with fraud?

00:43:54No.

00:43:55Investors are right

00:43:56to be, you know,

00:43:57calling her to

00:43:57account.

00:43:59Warmenhoven said

00:43:59early investors had

00:44:01every opportunity

00:44:02to do just that.

00:44:04They did nothing

00:44:05in terms of trying

00:44:07to ascertain the

00:44:09current status of

00:44:10the product or the

00:44:11risks to completion

00:44:12or anything else.

00:44:15Whose fault is that?

00:44:16I think it's the

00:44:16investor's fault.

00:44:17Yeah, you invest in

00:44:18something.

00:44:19You want to know how

00:44:20your investment is

00:44:20doing.

00:44:21And I think it's

00:44:23also a symptom of

00:44:24the founder culture

00:44:25that has really,

00:44:26you know, really

00:44:28took hold of the

00:44:29Valley exactly during

00:44:30the time that

00:44:30Theranos was growing.

00:44:33The first meeting I

00:44:34was in was with all

00:44:34the major investors.

00:44:36And they hadn't had

00:44:36any meetings with the

00:44:37company since the

00:44:39round had closed.

00:44:40And, you know,

00:44:41maybe an occasional

00:44:42phone call or something,

00:44:43but nothing as a group.

00:44:44Nothing where they got

00:44:45a status report,

00:44:46which I found

00:44:46staggering.

00:44:47And weren't

00:44:47demanding it?

00:44:48They didn't seem to

00:44:49press hard before the

00:44:51investment, and they

00:44:52certainly didn't seem to

00:44:53press hard after the

00:44:54investment.

00:44:54From my viewpoint, it

00:44:55was really out of

00:44:56character for a startup

00:44:57investor not to be all

00:44:59over it, you know.

00:45:00If you were a venture

00:45:01capitalist and you put

00:45:02in $100 million, you

00:45:04would be there every

00:45:05week.

00:45:05How are we doing?

00:45:06Are we on track,

00:45:08you know?

00:45:10So those documents

00:45:11do not exist.

00:45:12Not in the hands of

00:45:13the investors.

00:45:14I mean, they were

00:45:15available internally.

00:45:16Internal documents

00:45:18may have exposed the

00:45:20chasm between

00:45:20Theranos' aspiration

00:45:22and ability,

00:45:23though Holmes told

00:45:24the SEC its

00:45:26investor pitch left

00:45:28room for improvement.

00:45:29We didn't intend

00:45:31these documents to be

00:45:33standalone, and

00:45:34sitting here now, I

00:45:36know we could have

00:45:36been much better at

00:45:38the way we prepared

00:45:38materials.

00:45:39And did you talk

00:45:40about specifically the

00:45:41technology and blood

00:45:43draw and what was in

00:45:45place at that time

00:45:45versus what was

00:45:46aspirational?

00:45:47Was there a clear

00:45:47delineation between

00:45:48those two?

00:45:50We tried to do that.

00:45:52When we look at

00:45:53Theranos investors,

00:45:55many of them, not

00:45:56necessarily your

00:45:57clients, but certainly

00:45:59perhaps a VC fund,

00:46:02we would expect to be

00:46:04seasoned investors who

00:46:05can properly vet a

00:46:06company, a startup like

00:46:08Theranos.

00:46:08In this case, probably

00:46:09what you would consider a

00:46:11seasoned investor like

00:46:12Tim Draper, perhaps Larry

00:46:15Ellison in Oracle, they

00:46:17invested early when it

00:46:18was just a concept.

00:46:20And a lot of VCs will

00:46:21invest even when it's not

00:46:22proven.

00:46:23Theranos got well beyond

00:46:25that and then started

00:46:26raising funds, massive

00:46:28amount of funds, over

00:46:30$700 million, from other

00:46:32investors.

00:46:33The amounts of money

00:46:34that a certain class of

00:46:36what I call mega VCs with

00:46:38untold, unprecedented

00:46:40amounts of capital

00:46:41available to invest,

00:46:42starting with a Japanese

00:46:43company, SoftBank, and

00:46:45some of the sovereign

00:46:46wealth funds in the

00:46:47Middle East who are

00:46:48looking for what to do

00:46:50after the oil begins to

00:46:51peter out, are able to

00:46:53and are bringing amounts

00:46:54of money that have just

00:46:55never been seen before.

00:46:56There's no independent

00:46:57validation.

00:46:58That's what concerns me

00:47:00now when we look at some

00:47:01of these mega funded

00:47:02companies like WeWork and

00:47:04Uber that it hasn't been

00:47:05vetted as much as you

00:47:06would normally hope and

00:47:07expect from at least an

00:47:09independent venture capital

00:47:11set of players.

00:47:12And that adds to the

00:47:14board and the CEO and

00:47:15here we are.

00:47:16And they go dig in inside

00:47:18the company and get the

00:47:19facts.

00:47:20Start with Channing

00:47:20Robertson.

00:47:21Start with the head of

00:47:22engineering.

00:47:22You know, and start

00:47:24asking questions.

00:47:30In addition to Holmes,

00:47:31it was Channing Robertson

00:47:33who in 2016 gave

00:47:35Wormenhoven confidence

00:47:37to join Theranos' board

00:47:39even after media and

00:47:41lawyers had accused

00:47:42Holmes of fraud.

00:47:43And he had just

00:47:44concluded organizing

00:47:46two, what do we call

00:47:48it, blue ribbon panels.

00:47:49One that looked at the

00:47:50science of the biochemistry

00:47:53inside the box and

00:47:55another one looking at

00:47:56the mechanical nature of

00:47:57the box to make sure it

00:47:59was all viable and

00:47:59doable.

00:48:00And they both came back

00:48:01very positive.

00:48:02So I didn't get in deep

00:48:04to understand how far

00:48:05they were from go to

00:48:06market.

00:48:07But I did have enough

00:48:08confidence that the

00:48:09fundamentals were sound.

00:48:10He clearly thought that

00:48:12she was special.

00:48:13And when she felt like

00:48:15starting a company, he's

00:48:16the one she went to.

00:48:17He was being paid quite

00:48:19handsomely to work for

00:48:21her and had a desk in

00:48:22their offices.

00:48:23And he claimed that he

00:48:24didn't know about that

00:48:25technology.

00:48:26And he claimed that he

00:48:27didn't know about the

00:48:29fact that things didn't

00:48:31work.

00:48:31He claimed he didn't know

00:48:32things were being run on

00:48:33third-party equipment.

00:48:34I don't know what the

00:48:36heck was going on with

00:48:37him, why he wouldn't ask

00:48:38these questions, why he

00:48:40claims to have been

00:48:41completely in the dark.

00:48:42And he's the one that

00:48:43brought her around, got her

00:48:45credibility, and was paid

00:48:46handsomely annually.

00:48:48One former board member

00:48:50reportedly did ask the

00:48:52hard questions.

00:48:54According to ABC, Avi

00:48:55Tevanian, software

00:48:56engineer and former

00:48:57right-hand man to Steve

00:48:59Jobs, was asked to

00:49:01resign in 2007, following

00:49:03his ultimatum that Holmes

00:49:05be replaced as CEO.

00:49:07The way that startup boards

00:49:09are usually, they're made

00:49:10up of venture investors,

00:49:12and they're made up of

00:49:12other people with domain

00:49:13expertise.

00:49:14And, you know, at the

00:49:15early stage, later stage,

00:49:16corporations may

00:49:17look even more widely

00:49:19for people who have

00:49:21domain expertise in

00:49:22politics and statecraft.

00:49:23Sure, because they have

00:49:24domain expertise in

00:49:25understanding how large

00:49:26organizations can run and

00:49:28interact with the rest of

00:49:28the world.

00:49:29Something's off from the

00:49:30very early stage.

00:49:32I would say there was a

00:49:33lack of scientific

00:49:34mentorship overall.

00:49:37It was the assay teams,

00:49:39and that was it.

00:49:40There was little other

00:49:41science guidance given

00:49:42to the actual scientists.

00:49:44So even Channing

00:49:45Robertson was not

00:49:46interacting with your

00:49:47group?

00:49:47No, he wasn't present,

00:49:49as far as I could tell.

00:49:51That did set Theranos

00:49:52apart from the very

00:49:53beginning, and it was a

00:49:54red flag to other

00:49:55potential venture

00:49:57investors in the tech,

00:49:58and particularly the

00:49:59biotech space.

00:50:00It's a biotech company

00:50:01that doesn't have the

00:50:02personnel or the

00:50:04procedures in place

00:50:05that a biotech company

00:50:06would need to have,

00:50:07even at the very

00:50:08beginning stage, to

00:50:09develop product.

00:50:11In 2016, Theranos

00:50:13finally empaneled a

00:50:15medical board, and

00:50:16under new leadership,

00:50:18Holmes presented a

00:50:19scaled-back version of

00:50:21its updated device,

00:50:22the Minilab, to the

00:50:24American Association

00:50:25for Clinical

00:50:26Chemistry.

00:50:27There's clearly been a

00:50:28lot of interest in your

00:50:29company.

00:50:30I would argue that a

00:50:30lot of that comes from

00:50:31the fact that there

00:50:32were these claims that

00:50:33were made that were

00:50:33very broad early on,

00:50:3570 tests, the whole

00:50:36panoply of lab tests

00:50:38from a couple drops of

00:50:39blood, and the evidence

00:50:41that you presented fell

00:50:42far short of that.

00:50:44So, how should we

00:50:45think about that?

00:50:47Well, I think we

00:50:50fully understand in

00:50:51picking this place to

00:50:53come to introduce it,

00:50:54that we have a lot of

00:50:55work to do to engage

00:50:56with this community, and

00:50:58I mean, I can tell you,

00:50:59I wish that I had

00:51:01started earlier in the

00:51:02context of building the

00:51:04scientific and medical

00:51:05board that we've had the

00:51:06privilege to build.

00:51:07Under legal pressures

00:51:09and burning cash, the

00:51:11effort would prove too

00:51:13late.

00:51:15Should the board have

00:51:16looked at its own

00:51:16composition and said,

00:51:19perhaps we don't have

00:51:19the level of expertise

00:51:20that's required for a

00:51:23revolutionary healthcare

00:51:24company?

00:51:25Yes, but, you know,

00:51:26you're asking people to

00:51:27admit their own

00:51:28weaknesses.

00:51:29You know, let's give

00:51:30credit to Elizabeth Holmes.

00:51:31She was quite the

00:51:32charmer, and people just

00:51:33felt great and important.

00:51:35You know, in their own

00:51:36minds, I'm sure they

00:51:37thought they were

00:51:37providing good sage

00:51:39counsel, but, yes, of

00:51:40course that should be a

00:51:42part of the equation as

00:51:43well.

00:51:44Stanford Medical School

00:51:45professor Dr. Phyllis

00:51:46Gardner reportedly

00:51:47critiqued finger stick

00:51:48draws as an impossible

00:51:50source from which to

00:51:51glean accurate results

00:51:52for hundreds of tests.

00:51:54She described Theranos

00:51:56investors as crazy and

00:51:57its board members as

00:51:59old men whose brains

00:52:00had gone to their

00:52:01groin.

00:52:03Yet the suggestion that

00:52:05Holmes' concept was

00:52:06nothing more than

00:52:07fantasy fails to

00:52:09account for a flood of

00:52:11diagnostic startups

00:52:12surfacing in her wake.

00:52:15Take Genalite and its

00:52:16Maverick Analyzer that's

00:52:18FDA-approved and on its

00:52:20way to running more than

00:52:21100 common tests from a

00:52:23tiny drop of blood.

00:52:25Over here is our

00:52:26proprietary technology.

00:52:27So this is a machine we

00:52:28just got cleared from the

00:52:29FDA, and what it's really

00:52:32good at is running,

00:52:33analyzing blood proteins.

00:52:34Nobody else has a machine

00:52:36that can analyze a large

00:52:38number of blood proteins in

00:52:4015 minutes on the whole

00:52:41blood in a physician

00:52:43setting.

00:52:43So that's our ambition.

00:52:46The Maverick can perform

00:52:47much of what Holmes

00:52:48envisioned.

00:52:50The device features a

00:52:51proprietary optical silicon

00:52:53sensor that detects color

00:52:55changes in light when it's

00:52:56exposed to targeted blood

00:52:58molecules.

00:52:59For now, blood comes from a

00:53:01low-volume draw taken from a

00:53:03patient's arm.

00:53:05And next is the FDA's

00:53:07decision for the Maverick to

00:53:08perform about 200 common

00:53:10diagnostic tests from a

00:53:12finger stick.

00:53:13It is a politically charged

00:53:15topic to operate off of a

00:53:17finger stick.

00:53:18What you'll see when we take

00:53:19the blood out of the tube is

00:53:21we're going to take a tiny

00:53:22fraction of one drop of blood.

00:53:24So we've validated that our

00:53:26machine works on less than a

00:53:27drop of blood.

00:53:28We're going to add less than

00:53:29a drop of blood to it.

00:53:30Less than a drop.

00:53:31Yeah.

00:53:32So it's about 4% of one drop

00:53:35that we use.

00:53:36In late 2020, the Maverick was

00:53:39also granted emergency use

00:53:41authorization to diagnose SARS-CoV-2,

00:53:44also known as COVID-19.

00:53:47It's one of 28 approved

00:53:48coronavirus and flu tests that

00:53:50can all be performed from a

00:53:52finger stick.

00:53:54Eventually, how many tests are

00:53:57you hoping that Genalight will be

00:54:00capable of performing on one

00:54:02device?

00:54:03That list is well under 200

00:54:05tests.

00:54:05It's really about 100 tests

00:54:07comprise the vast majority of

00:54:09that.

00:54:09And there's only a few of those

00:54:11that we can't do.

00:54:12We can get to 95% of all

00:54:14commonly ordered tests in 15

00:54:16minutes.

00:54:17So what do you have to say to

00:54:19the critics who said Theranos'

00:54:23vision was science fiction?

00:54:24Well, I think you just saw it

00:54:27happen in the other room.

00:54:28So this is what the future looks

00:54:30like.

00:54:30A small sample of blood can

00:54:32perform hundreds of tests.

00:54:34Exactly.

00:54:36While not every test can be

00:54:38accomplished using a tiny drop of

00:54:40blood, the advancements show

00:54:42Holmes may have had the right

00:54:43concept and the right story

00:54:46without enough technology at the

00:54:48right time.

00:54:49There's, you know, a difference

00:54:51between the idea and the

00:54:52execution, you know, clearly.

00:54:54But decentralization of

00:54:55diagnostics and getting more data

00:54:56in the hands of doctors when

00:54:58they're making decisions is

00:54:59vital.

00:55:00Beyond Genalight, investment in

00:55:02miniaturized diagnostics hardly

00:55:04dried up when Theranos was forced

00:55:05to close its doors.

00:55:07Similar startups have been proving

00:55:09the concept as anything but

00:55:11science fiction.

00:55:13There's Ethelis, a Sequoia-

00:55:15backed in-home blood testing

00:55:17device touting technology to

00:55:19detect white blood cell count,

00:55:21viral infections, and cancer

00:55:23from a single drop.

00:55:25And Truvian's portable benchtop

00:55:27analyzer takes five drops of

00:55:29blood to deliver multiple

00:55:31assays within 20 minutes.

00:55:34If the latest technology is

00:55:36living proof that Holmes'

00:55:38concept was sound, where

00:55:40exactly was her Achilles heel?

00:55:43If she had dialed it back and

00:55:46was straightforward about using

00:55:48commercial analyzers and was

00:55:50straightforward that, you know,

00:55:52this is about access, this is

00:55:53about getting patients blood draw

00:55:56somewhere else and like that kind

00:55:58of stuff and said that and we're

00:56:00working on our finger stick

00:56:01technology, we're working on this,

00:56:03then, you know, we could have

00:56:05gotten there most likely.

00:56:07This is an epic fail of a

00:56:10perceived, a self-inflicted need

00:56:12for speed that proved to be, you

00:56:14know, very dangerous and fatal to

00:56:16the company and we could have had

00:56:18an entirely different story and on

00:56:19top of this, we have to do it at

00:56:21breakneck speed and this is a case

00:56:22where literally and figuratively speed

00:56:24kills.

00:56:27It's easy to blame the people

00:56:30involved.

00:56:30It's easy to say, oh, you

00:56:31investors, you should have known

00:56:33better, like you should have

00:56:34looked more closely, but the hype

00:56:37machine is powerful.

00:56:38The magazine covers are powerful.

00:56:41Maybe if enough people don't want

00:56:43to dig deep enough because we all

00:56:46want to believe, we'll prop them up,

00:56:48we'll put them on the cover of

00:56:49magazines and they can just plow

00:56:51forward and maybe eventually they'll

00:56:52make it or maybe not.

00:56:54But there definitely is a public

00:56:56hunger for that kind of celebrity.

00:57:03Nearly a year before the journal's

00:57:05expose, John Ioannidis published a

00:57:08critique of Theranos and other

00:57:10well-funded health care startups for

00:57:12a lack of peer-reviewed data and for

00:57:15keeping their intellectual property

00:57:17too close to the vest.

00:57:19Theranos had published practically

00:57:20nothing that they had a couple of

00:57:23papers, but they were not relevant to

00:57:24their technologies.

00:57:25So there are several unicorns out

00:57:29there with very high valuations, with

00:57:32very little or no evidence that is

00:57:36supported by peer-reviewed publications.

00:57:39Why is peer-reviewed publications so

00:57:41important in your opinion?

00:57:43This is how science is run.

00:57:45This is how we can put trust that

00:57:49something has merit, that something is

00:57:51real, that something can be scrutinized

00:57:53by other scientists and be proven or at

00:57:57least sustain some criticism and show

00:58:01that it is relatively bulletproof.

00:58:05Holm's sleight of hand didn't go

00:58:07entirely unnoticed.

00:58:09Fortune's editorial team did note limits

00:58:12to their account.

00:58:14Have this sentence in the original piece

00:58:17that was published in June of 2014.

00:58:19It said, quote, precisely how Theranos

00:58:21accomplishes all of these amazing feats

00:58:23is a trade secret.

00:58:25So what does a journalist do from there?

00:58:28It's difficult to cover proprietary technology.

00:58:31What do we really know about Facebook's

00:58:33algorithms and how far can we go in there?

00:58:36Well, some of it is ultimately a trade secret.

00:58:39So it's an unproven proprietary technology,

00:58:43particularly as it pertains to something

00:58:44as sensitive as health care, that we

00:58:47probably should have been more skeptical

00:58:49about or had more questions about.

00:58:51And I think it's a great lesson.

00:58:54Just because someone is claiming they're

00:58:56doing it doesn't mean that the media

00:58:57and the investment community and everyone else

00:59:00should just believe them.

00:59:01And it's often harder for the media

00:59:02because they don't have the same amount of time

00:59:04or necessarily the technical depth.

00:59:06Whether it's the media, investors, or customers,

00:59:09everyone needs to do the work and make sure

00:59:10that what they're doing is they're getting

00:59:12into bed with someone who's doing a good job.

00:59:14And look, it's not just the media.

00:59:16The media consists of the people who produce it

00:59:18and the people who read it, right?

00:59:19And then when it all comes crashing down,

00:59:23we rush out to buy the books,

00:59:24we rush out to watch the documentaries.

00:59:26We sort of salivate over the, oh, you know,

00:59:30look at all, what a fraud, you know,

00:59:32those silly people.

00:59:33And so we kind of delight in the failure stories

00:59:36as well as the successes.

00:59:38And it does become hard to put it in context

00:59:41and see the broader facts and say,

00:59:43well, this was a manifestation of a bigger,

00:59:46you know, a bigger problem.

00:59:48While Theranos' purported trade secrets

00:59:51were walled off from journalists and outsiders,

00:59:54another party, aside from investors and the board,

00:59:58had power to probe deeper.

01:00:04According to Walgreens, in March 2010,

01:00:07Holmes and Belwani pitched Theranos devices

01:00:10to Walgreens' company executives

01:00:12as viable and consumer-ready

01:00:14and said its technology

01:00:15had been comprehensively validated

01:00:18by 10 of the 15 largest pharmaceutical companies.

01:00:22Do you place any blame there?

01:00:23I place huge blame with Walgreens,

01:00:26but it's more on the negligent side.

01:00:28I don't believe that Walgreens

01:00:30knew what was going on,

01:00:32but they should have known what was going on.

01:00:34It's almost inconceivable to me

01:00:35that they didn't know

01:00:36that things were being run on third-party tests.

01:00:39Somehow things got embellished.

01:00:41There was never any concept anywhere in reality

01:00:44that they could do 150 tests with one drop of blood.

01:00:47It was they could do different panels of tests.

01:00:51But part of it was what people wanted to hear.

01:00:53You know, wow, this is amazing, you know?

01:00:56But the truth was,

01:00:58rather than getting three or four vials of blood taken,

01:01:00it would be a very small sample.

01:01:01And in fact, a sample could be normally a finger brick,

01:01:04and you could just get the drop of blood,

01:01:06let's say, off your thumb or whatever,

01:01:07and have no need to poke a vein.

01:01:10So there's a lot of good things to it,

01:01:12but somehow the one drop of blood,

01:01:15that's what got put in the machine.

01:01:16But, you know, to do the whole panel,

01:01:18do that, I mean, 150,

01:01:19probably would have taken 25, 30 drops of blood.

01:01:22In a deposition before the SEC,

01:01:24Holmes admitted that Theranos

01:01:26had kept Walgreens in the dark

01:01:27over FDA concerns

01:01:29that the nanotainer had been underclassified.

01:01:32Yet she maintained the move away from finger stick tests

01:01:35was no secret.

01:01:37Walgreens was operating with us in the store,

01:01:42so they would have known locally

01:01:44that we were doing venipuncture,

01:01:45to the extent that we were doing venipuncture.

01:01:47Do you have a general sense

01:01:48of what Walgreens was concerned about

01:01:49on the publication of the article?

01:01:53I think there were multiple issues.

01:01:55One was they were reacting to the press in general,

01:01:59but then the other was

01:02:00that we hadn't disclosed the engagement with FDA

01:02:03with them to them yet

01:02:05before it was in the press.

01:02:10Holmes argues that because the FDA engagement

01:02:13had to do only with nanotainers

01:02:15and because it began months,

01:02:17and in some cases years,

01:02:18after soliciting investors,

01:02:20it can have no bearing

01:02:21on the government's claims of fraud.

01:02:24Once the Walgreens concluded

01:02:26we can't get this deployed in the store,

01:02:28from Theranos, as you pointed,

01:02:29they just should have said,

01:02:30time out.

01:02:31What you want to do doesn't fit

01:02:32our architecture,

01:02:33our product strategy, nothing.

01:02:35But that's really kind of where

01:02:36they took the left turn

01:02:37that sent them right in the ditch.

01:02:39Red flags did spook

01:02:41world-renowned medical center

01:02:43Cleveland Clinic.

01:02:44It bailed on a partnership

01:02:46after Theranos left

01:02:47its due diligence requests ignored.

01:02:50And Walgreens' competitor Safeway

01:02:52also withdrew its plans

01:02:54for a pilot program.

01:02:57Was that the value add for Theranos?

01:02:59Was $140 million up front?

01:03:02It got them on the map in a hurry.

01:03:04But the Walgreens deal gave it credibility.

01:03:06And so, you know,

01:03:08it helped them basically raise the money

01:03:10they were looking for.

01:03:10You know, that kind of proposal,

01:03:12something of that size and magnitude,

01:03:14should have been reviewed

01:03:15at the board in depth.

01:03:16And, you know,

01:03:17there were enough people on the board

01:03:18to say, wait a minute,

01:03:19you know, this is not us.

01:03:21In deposition testimony,

01:03:23board members Schultz

01:03:24and retired U.S. Navy Admiral

01:03:26Gary Roughead

01:03:27said they did not question Holmes

01:03:29or anyone else at Theranos

01:03:31once public concerns were raised

01:03:33about Theranos' use

01:03:34of third-party technology.

01:03:37The board had some very competent people

01:03:39and experienced people

01:03:40good operating people in some ways.

01:03:43And they should have called a halt.

01:03:44I'm not sure it was ever fully discussed

01:03:46at the board.

01:03:47And Elizabeth, the CEO, right,

01:03:48had the right to turn it down

01:03:50or to take it to the board.

01:03:51And what about Sonny Belwani?

01:03:53What was his role as you understood it?

01:03:55I never met Sonny.

01:03:57He'd been dismissed from the company

01:03:59before I showed up.

01:04:01Elizabeth was the chief architect

01:04:02and she led most of the engineering program,

01:04:04but Sonny led all the rest

01:04:05of the operations.

01:04:08Veterans of Silicon Valley startups

01:04:10know that faking it

01:04:11can be fair game.

01:04:13Many of these companies start an idea,

01:04:16they think that they have it,

01:04:18actually they don't,

01:04:19but they hope that they will develop

01:04:21the working idea

01:04:22while they're pursuing it.

01:04:24And they have that expectation

01:04:26that let's go ahead

01:04:28and it will kind of get itself together

01:04:32and it will be successful.

01:04:34This is not fraud.

01:04:35I mean, you know,

01:04:35this could be seen as visionary.

01:04:37The distinction between fraud and visionary

01:04:40is very subtle here.

01:04:42These high-risk, high-reward gambles

01:04:44have been taken

01:04:45by some of the most famous visionaries.

01:04:48And even the inventor

01:04:49who inspired Holmes' first prototype,

01:04:52Thomas Edison.

01:04:53He was the original

01:04:54fake it till you make it guy.

01:04:56Now, he was different than Elizabeth Holmes

01:04:58in that he ultimately did make it.

01:04:59He was an inventor

01:05:00who got it right.

01:05:01And along the way,

01:05:02when he was having trouble

01:05:03with the incandescent light bulb,

01:05:04he didn't let anybody in on that.

01:05:06He faked demonstrations.

01:05:08He was not so dissimilar

01:05:09from other famous people

01:05:11in Silicon Valley,

01:05:11like, say, Steve Jobs,

01:05:13who was a notorious liar,

01:05:15but also a great storyteller.

01:05:17So she is in that tradition,

01:05:19and that's what makes

01:05:19Elizabeth Holmes interesting.

01:05:21Was she an out-and-out fraud,

01:05:23or was she, you know,

01:05:25just in the great tradition

01:05:27of Thomas Edison and Steve Jobs,

01:05:30you know, faking it till she made it?

01:05:32And it could sort of be

01:05:33a little bit both.

01:05:34She's part of a tradition

01:05:36of fake it till you make it,

01:05:38which to some extent

01:05:39is celebrated in Silicon Valley,

01:05:40but not so much

01:05:41when it comes to medical devices

01:05:43that can actually affect

01:05:44the health of people.

01:05:45Is there a certain point

01:05:46with respect to Theranos

01:05:48where you say

01:05:48that's where things went wrong?

01:05:50I think that there was

01:05:51a gradient going down the tubes,

01:05:55and it's hard to say

01:05:57which specific decision

01:05:59was the worst.

01:06:01I believe that here

01:06:02my response would be biased.

01:06:05I think the decision

01:06:07to move to patients

01:06:09was probably the worst

01:06:12without having something

01:06:14that was mature.

01:06:15Because once you move to patients,

01:06:17then you're exposing people to risk.

01:06:21In pushing a soft-baked

01:06:23healthcare pitch,

01:06:24Holmes isn't alone.

01:06:26In its early days,

01:06:27Silicon Valley biotech company

01:06:2923andMe

01:06:30was ordered by the FDA

01:06:32to immediately discontinue

01:06:34marketing its widely publicized

01:06:36cheek swab test.

01:06:37After making unsubstantiated claims

01:06:39that the company could identify

01:06:40risk levels

01:06:41for a number of diseases,

01:06:43a consumer class action lawsuit

01:06:45followed,

01:06:46and the company settled

01:06:47with complaining customers.

01:06:49Diagnostic startup Ubiome

01:06:51was dropped from CVS

01:06:53after federal investigators

01:06:55and an FBI raid

01:06:56of its San Francisco headquarters.

01:06:58In 2021,

01:07:00the company's co-founders,

01:07:02Jessica Richman

01:07:03and Zachary Apt

01:07:04were accused by the SEC

01:07:06of defrauding investors

01:07:07and indicted by the DOJ

01:07:10for money laundering

01:07:11and securities fraud.

01:07:13Even the FDA

01:07:15and experienced megacorporations

01:07:17have been known

01:07:18to get it wrong.

01:07:20The International Consortium

01:07:21of Investigative Journalists

01:07:23found in 2018

01:07:25that over the prior decade,

01:07:2780,000 global deaths

01:07:29and nearly 2 million injuries

01:07:31were linked to faulty medical devices.

01:07:35Take FDA-approved vaginal mesh

01:07:37implanted in approximately

01:07:3910 million women worldwide

01:07:41before the agency banned U.S. sales

01:07:43over risks including

01:07:45organ perforation,

01:07:47protrusion,

01:07:48and death.

01:07:49Its manufacturers,

01:07:50among others,

01:07:51Boston Scientific,

01:07:53Johnson & Johnson,

01:07:54Coloplast,

01:07:55and C.R. Bard.

01:07:58And healthcare giant Bayer

01:08:00was forced by the FDA

01:08:02to restrict sales

01:08:03of its permanent

01:08:04birth control device,

01:08:05Esher,

01:08:06after reported complications

01:08:07involving device migration

01:08:09and death.

01:08:11This widespread imprecision

01:08:14is evidence

01:08:14that as the next

01:08:16biotech billion

01:08:17is already being raised

01:08:18and spent,

01:08:19from startups

01:08:20to multinationals,

01:08:22there's much

01:08:22to be learned

01:08:23and improved.

01:08:24Elizabeth Holmes

01:08:25was made possible

01:08:26by a broader culture.

01:08:27And her downfall

01:08:28and the attention

01:08:29given to it

01:08:30is also a reflection

01:08:31of the broader culture.

01:08:32You know,

01:08:32there still are investors

01:08:34out there hunting down,

01:08:35you know,

01:08:36who's the next

01:08:36bright young person,

01:08:38man or woman,

01:08:39who's going to have

01:08:40the world-changing product.

01:08:41I think that we have

01:08:47a lot to learn

01:08:48from understanding

01:08:50what happened

01:08:51with Theranos.

01:08:52But I wouldn't like us

01:08:53to lose

01:08:55the bigger picture.

01:08:56The bigger picture being

01:08:57that there's hundreds

01:08:58of companies out there

01:09:00that may be like Theranos

01:09:01eventually,

01:09:02many of them.

01:09:04How do investors

01:09:06who want

01:09:07and care about

01:09:08getting accurate information

01:09:10out of a very opaque company?

01:09:12Where should they look?

01:09:13You know,

01:09:14I'll tell you,

01:09:14all this stuff scares me.

01:09:17And then there's a lot

01:09:17of stuff in Silicon Valley,

01:09:19actually,

01:09:19technical stuff,

01:09:20chip companies,

01:09:22telecom,

01:09:23even medical stuff

01:09:24that people understand.

01:09:25I urge people

01:09:26to make sure

01:09:27they understand.

01:09:28And it's,

01:09:29you know,

01:09:29sometimes it's not

01:09:30100% possible.

01:09:31You can make a rule

01:09:32with yourself,

01:09:33I don't really understand

01:09:34and I'm not going

01:09:34to invest in.

01:09:34Whether founders

01:09:37can back up

01:09:38what they boast

01:09:39may depend

01:09:40on how vigorously

01:09:41interested parties

01:09:42demand to look

01:09:43behind the curtain.

01:09:45I mean,

01:09:46there are several

01:09:46checks and balances

01:09:48and it could be the press,

01:09:49it could be the board,

01:09:50it could be investors.

01:09:51Theranos was a case

01:09:52where all of

01:09:53those entities

01:09:55let down their guard

01:09:56because the story

01:09:58was so great

01:09:58and they believed

01:09:59in the mission

01:10:00and they believed

01:10:00that success would be

01:10:01around the corner

01:10:02until it was.

01:10:03There's a cautionary tale

01:10:04to be looking

01:10:05a little deeper

01:10:05into the underlying economics.

01:10:07I think boards

01:10:08clearly have to be

01:10:10more vigilant

01:10:11than they've been.

01:10:12I mean,

01:10:13ask if it is a secret

01:10:14but 90% of the time

01:10:15I think in Silicon Valley

01:10:17they're going to tell you

01:10:18it's a secret.

01:10:19Now a lot of these

01:10:20biotech startup companies,

01:10:22their IP is very important

01:10:23to them

01:10:24and they want to

01:10:25protect it.

01:10:26There's indeed

01:10:26some tension

01:10:27between IP

01:10:28and peer-reviewed

01:10:30disclosure.

01:10:31With patents

01:10:31it's possible

01:10:32to protect IP

01:10:33and at the same time

01:10:35allow someone

01:10:36to disclose

01:10:36sufficient information.

01:10:38Even with patents

01:10:39and peer-review

01:10:40biotech founders

01:10:42and their funders

01:10:43may need to take

01:10:44a few leaps of faith.

01:10:47You always think

01:10:48when you start

01:10:48a new science project

01:10:50you don't know

01:10:50what the unknowns are

01:10:51and so that naivete

01:10:53of not knowing

01:10:54what roadblocks

01:10:54you're going to hit

01:10:55and what you're going to have

01:10:55to solve along the way

01:10:56I think that has

01:10:57a long way to go

01:10:58with being an innovator.

01:11:00The naivete

01:11:01they joke

01:11:02is a really important

01:11:03piece of innovation.

01:11:04Yeah, yeah.

01:11:05You need money

01:11:06in science.

01:11:06You need a lot of it

01:11:07and you don't know

01:11:10if it's going to work

01:11:11but you need guidance.

01:11:12We don't want to get rid

01:11:13of visionary people.

01:11:14We don't want to get rid

01:11:15of people who really

01:11:16take a shot

01:11:17at a very high-risk idea.

01:11:19We don't want them

01:11:19to think that

01:11:20if they do that

01:11:21they're just going

01:11:22to end up in jail.

01:11:23We want them

01:11:24to take the best shot

01:11:25but we also want

01:11:26to have some transparency

01:11:28about what is being done.

01:11:30Just how much transparency

01:11:31is demanded

01:11:33of future visionaries

01:11:34may also depend

01:11:35on how much light

01:11:37the Justice Department

01:11:38shines on private markets

01:11:39by way of homes

01:11:41in Balwani.

01:11:42A lot of entrepreneurs

01:11:43would love to have

01:11:44that much money.

01:11:46Why do you think

01:11:47that Theranos chose

01:11:49not to just keep

01:11:50its head down

01:11:51and keep the research going?

01:11:53Once you've gone public

01:11:55and you've got

01:11:56this dialogue

01:11:56and mantra

01:11:58and there's all this

01:11:59momentum that you

01:11:59have to maintain

01:12:00it's very hard

01:12:01to turn that off

01:12:02and go into stealth mode

01:12:04again for a period

01:12:05of time.

01:12:06So there was really

01:12:07that's a big part of it.

01:12:08I think Elizabeth

01:12:09had a great big dream.

01:12:10I don't think there was

01:12:11any governors put on her.

01:12:13No speed limits.

01:12:15But that's the case

01:12:16with a lot of people.

01:12:17Some work out

01:12:18some don't.

01:12:19She made some

01:12:19bad decisions too.

01:12:20You know, I mean

01:12:21she's not home free.

01:12:22But I always felt

01:12:23like she was fully

01:12:24committed to try

01:12:25to deliver the product

01:12:26and make the company

01:12:28successful

01:12:28and to do that

01:12:30with all the energy

01:12:31she had.

01:12:31She gave it her all.

01:12:33To a certain degree

01:12:34like I said

01:12:34you know

01:12:35I know people

01:12:35are going to laugh

01:12:36when they say

01:12:36how is she a victim?

01:12:39Do you see

01:12:40Elizabeth Holmes

01:12:41at all

01:12:42as a victim

01:12:43of this culture?

01:12:44I think to some

01:12:45degree she is.

01:12:46I mean look

01:12:47she was

01:12:48and is

01:12:49so young.

01:12:50There's two ways

01:12:51that we can look

01:12:52at Theranos.

01:12:53One way

01:12:54is to say

01:12:55that it is

01:12:56a bad apple

01:12:56and that

01:12:58the people

01:12:59involved

01:13:00the CEO

01:13:00or whoever else

01:13:01were psychopaths

01:13:03and bad people

01:13:04and they were cheating

01:13:06and it's all fraud

01:13:07and everyone else

01:13:09is wonderful

01:13:09and perfect.

01:13:10In a way

01:13:11there's some sort

01:13:12of recall bias

01:13:13to use a scientific term.

01:13:15if Elizabeth Holmes

01:13:17had managed

01:13:18to pull this off

01:13:19and get the technology

01:13:21up and running

01:13:22and develop something

01:13:23that worked

01:13:24everybody would

01:13:26consider her

01:13:27a hero

01:13:27you know

01:13:29the most famous person

01:13:31of the 21st century

01:13:32probably.

01:13:32if I were fired

01:13:41or I had to start

01:13:43this company

01:13:43over a lot of times

01:13:45in order to figure out

01:13:46how to get this right

01:13:47I would

01:13:47and I would just do

01:13:48the same thing

01:13:49over and over again.

01:13:50and I would just do

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