American Scandal - Encore: Theranos | Are Venture Capitalists to Blame? | 4

Episode Date: October 8, 2024

Lindsay sits down with Charles Duhigg, a Pulitzer Prize-winning journalist who covers the tech industry. The two explore why venture capitalists work to create monopolies, and whether these powerful investors bear responsibility for the failures at Theranos.Need more American Scandal? With Wondery+, enjoy exclusive seasons, binge new seasons first, and listen completely ad-free. Start your free trial in the Wondery App, Apple Podcasts, Spotify or visit wondery.app.link/IM5aogASNNb now.  See Privacy Policy at https://art19.com/privacy and California Privacy Notice at https://art19.com/privacy#do-not-sell-my-info.

Hi, this is Lindsey Graham, host of American Scandal. Our back catalog has moved behind a paywall. Recent episodes remain free, but older ones will require a Wondery Plus subscription. With Wondery Plus, you get access to the full American Scandal archive, ad-free, plus early access to new seasons and more. Join Wondery Plus in the Wondery app or on Apple Podcasts. A listener note, this episode originally aired in 2021. From Wondery, I'm Lindsey Graham, and this is American Scandal. In the mid-2010s, Theranos grew into one of the most celebrated companies in Silicon Valley.

Founded by the young entrepreneur Elizabeth Holmes, Theranos promised a revolution in medicine. The company would offer inexpensive blood tests for a variety of health conditions. These tests would only require a few drops of blood, and with their availability in stores like Walgreens, millions of Americans would gain easy access to vital information about their health. It was a grand vision, but Theranos would never make good on this promise. The Wall Street Journal published a searing exposé, revealing problems with the company's technology and leadership. The article would ultimately destroy Theranos and lead to criminal charges against Elizabeth Holmes.

would ultimately destroy Theranos and lead to criminal charges against Elizabeth Holmes. Theranos became a national sensation, exposing a dark side of Silicon Valley, where companies often abide by a fake-it-till-you-make-it mentality. It's a strategy that can help court investors, but it's also led some to wonder whether the tech industry needs to fundamentally change. My guest today is Charles Duhigg, an investigative journalist and the best-selling author of The Power of Habit, which explores how we can change our lives by changing our habits. He's also the author of Smarter, Faster, Better. As a reporter, Duhigg was part of a team that won a Pulitzer Prize in 2013 for a series that looked at the global problems with the tech industry. Before becoming a reporter, Duhigg worked in private equity. In our conversation, we'll look at how venture

capitalists often work to create monopolies, even when the companies themselves might be troubled. And we'll discuss whether these powerful investors are ultimately responsible for failures at companies like Theranos. Our conversation is next. like Theranos. Our conversation is next. things to turn deadly and what, if anything, can save the company's reputation. Make sure to listen to Business Wars wherever you get your podcasts. Charles Dewey, welcome to American Scandal. Thanks for having me. We've all heard about venture capitalists and how their money has helped fund the growth of tech giants like Uber, Facebook, and quite a few others. But let's start at the basics. What is venture capital and how does it work? So venture capital is any time that a group of pretty rich people,

for the most part, get together and they hand some cash to a young company and say, we're going to take a stake in your company. We're going to take some of your stock, and we're going to give you the money that you need to grow and to become the firm that you want to be. Now, what's interesting about venture capital is it hasn't actually been around that long. There's always been investors and companies. But as an organized activity, it really started basically back in the 1940s when a professor at Harvard Business School discovered that some of his colleagues over at MIT had this idea for a new kind of medical technology. And so he got together some of his friends and he said, look, we'll give you some money

and some advice because you're all scientists and we're all smart business people. We'll give you some advice and give us a stake in the company. And if you do well, we'll all get rich. So that's how it's perhaps different from any other financing like debt or a loan. Exactly. So debt or a loan is literally a bank saying, we're going to give you some money. You don't give us any stock in return, but you have to pay us back what we gave you plus some interest. And debt or a loan is the safest kind of investment you can make, right? If that company ends up going bankrupt and they have to sell off all of their assets, the people who gave them debt, they get paid first. Now, standing behind those people who gave them debt, the bank, are the venture capitalists, the people who gave them money and said, you don't have to pay this money back, but you do have to give us some stock in your company.

And that way we own a part of the company. And by the way, if your company does well, if you have lots of profits, then we also have the right to demand some of those profits. It's interesting that you say one of the earliest examples of venture capitalism was investment in a medical technology company, because this series just looked at Theranos. Why are venture capitalists so often associated with technology? Are they only designed for that kind of business? Not necessarily, but I went to Harvard Business School. When I was at HBS, we learned the Willie Sutton rule. Willie Sutton was a great bank robber, one of the most successful

bank robbers. And when eventually he got caught, a reporter came up to him and they said, Willie, why do you rob banks? And Willie said, well, because that's where the money is. And that's why venture capital is investing in tech right now. And for the last 20 years or so, right? It's not that technology is something special, that venture capitalists didn't invest in other things. In fact, there's lots of venture capitalists who invest in all kinds of other things and in manufacturing companies and supply chain companies. But most of the VC dollars that we're aware of are going to tech. And that's because tech is the fastest growing industry. It's where the money is. Not only that, but the thing that we know about technology, at least as the industry is constructed right now, is that you can get these economies of scale, right? You give someone a million dollars and

they build Facebook and suddenly Facebook is worth $5 billion. They don't have to hire a bunch of people. There's also some historical precedent here, which is that the birth of the tech industry, as we think about it, the birth of Silicon Valley was rooted in venture capitalism. as we think about it. The birth of Silicon Valley was rooted in venture capitalism. When Hewlett Packard started, which was one of the original tech companies that really created Silicon Valley, they were backed by a small group of venture capitalists. When Stanford decided to start really growing aggressively to become a powerhouse university, one of the things that they did is they really put a lot of money into venture capital in the Silicon Valley area. And the thing that they build in Silicon Valley is they build tech.

And so since essentially the origins of the contemporary technology industry, venture capital has grown up alongside it because that's where the money is. Well, it sounds like venture capitalists then have pretty much fundamentally changed the business landscape in the last 60, 80 years. What they've done is they've definitely created a new source of capital for companies, right? They have supercharged the ability to create new companies and start new companies. If you were to go back to the 1950s or 60s, starting a new company was like a big deal, right? It was like you had to go find the money and you had to convince other people to join you.

And it was a big, big, risky thing. Most people worked for IBM or they worked for Hewlett Packard. It was the rebels who would go off and start firms. Nowadays, to start a company, all you really need to do is know how to put together a PowerPoint deck with four or five slides and promise that you're going to make $ know how to put together a PowerPoint deck with four or five slides and promise that you're going to make $5 billion someday. And so you're right. Venture capital has made it much easier to start new companies, in part because venture capital has gone from being this small little thing to being a huge asset class with billions and

billions of dollars to give away every year. You make it sound like it's almost free money. I mean, for some companies, it is free money, right? At least at first. The problem is that there is no such thing as a free lunch or free money over the long term. And so when you work with venture capitalists, you are definitely giving something up. You're giving up equity. Oftentimes, you're giving up control. You're giving up the ability to determine your fate. Now, that started shifting in the last couple of years, particularly among these high-flying entrepreneurs who seem like they have unicorn dust on them. Traditionally, venture capitalists were in charge. They were the guys and some gals, but they're mostly guys. They were the guys with

the wallets who had the cash, so they could call the rules. But what's happened in the last decade in particular, as there's been so much growth, so much economic prosperity, is that so much money has flooded into venture capital that they're now desperate to give their money away. And that's empowered entrepreneurs. Entrepreneurs can now make demands of venture capitalists that they couldn't make previously. They get to pick and choose who they're going to allow to invest in their companies. And as a result, the power dynamic has shifted. Another important shift that's occurred is that venture capitalists used to be the adults in the room, right? So there was this one early venture capitalist named Tom Perkins, who was a famous venture

capitalist who helped build 60 or 70 companies. He's one of the founders of Kleiner Perkins, who was a famous venture capitalist who helped build 60 or 70 companies. He's one of the founders of Kleiner Perkins, which is one of the best known venture capital firms from the last wave of tech. And Perkins would go in and he would actually get really involved in these companies. He would invest in a company, he would show up at their offices one day a week, and he would hold people's feet to the fire. He would ask them, how much are you spending? Show me your budgets. Prove to me that you're making good choices. He brought what's known as good governance to firms. He was really involved in the companies that he funded. And this was true of venture capitalists throughout the 60s and 70s and 80s and 90s, venture capitalists were the adults in the room.

And then this dynamic that I mentioned before, when all of a sudden there's so much more venture capital money, now suddenly entrepreneurs can start calling the shots. They're in charge because they can say, I'm going to let you invest in my company. One of the demands that entrepreneurs had was to say, look, if I'm going to let you invest in my company, I don't want you sticking your nose in here. I don't want you telling me what to do. In fact, I want you to give me enough power so that I have a super voting authority on my board. You can't rein me in even if you want to. And I think many people would argue that has been a change not for the better.

Was this the issue at play with Theranos? Elizabeth Holmes managed to raise a lot of money from investors while maintaining a tight grip over her company. I don't know the Theranos story very well. I've never reported on Theranos. But just from reading the coverage, what I do know is my understanding is that Elizabeth Holmes and others went to mainstream venture capitalists, and that particularly in the biotech space, people who know that space really well, people who know the blood technology space particularly well, and that those folks started doing their due diligence. They started asking things like, can you give me proof that your technology works? How many peer-reviewed published papers do you have about this technology where

other scientists are objectively evaluating it and determining whether it lives up to its promise. And whatever those established venture capitalists heard, it made them decide not to back this company. The people who backed Theranos are like Rupert Murdoch, who knows media really, really well, but as far as I know, doesn't know much about biotech. Betsy DeVos, right? Betsy DeVos didn't even earn her own money. She inherited it from people who started Amway, a door-to-door sales company. She was the education secretary under Donald Trump. So I don't think that she has a degree in biotech. Maybe she's an expert in biotech, but as far as I know, she isn't.

So my guess is that those people were just in a position where they really weren't qualified to do due diligence, and they didn't reach out to ask people who knew how to do due diligence on biotech to evaluate this investment before they handed over their money. He was hip-hop's biggest mogul, the man who redefined fame, fortune, and the music industry. The first male rapper to be honored on the Hollywood Walk of Fame, Sean Diddy Cone. Diddy built an empire and lived a life most people only dream about. Everybody know ain't no party like a Diddy party, so. Yeah, that's what's up.

dream about. Everybody know ain't no party like a Diddy party, so. Yeah, that's what's up. But just as quickly as his empire rose, it came crashing down. Today I'm announcing the unsealing of a three-count indictment, charging Sean Combs with racketeering conspiracy, sex trafficking, interstate transportation for prostitution. I was f***ed up. I hit rock bottom, but I made no excuses. I'm disgusted.

I'm so sorry. Until you're wearing an orange jumpsuit, it's not real. Now it's real. From his meteoric rise to his shocking fall from grace, from law and crime, this is the rise and fall of Diddy. Listen to the rise and fall of Diddy exclusively with Wondery Plus. I'm Jake Warren, and in our first season of Finding, I set out on a very personal quest to find the woman who saved my mom's life. You can listen to Finding Natasha right now exclusively on Wondery Plus. In season two, I found myself caught up in a new journey to help someone I've never even met. But a couple of years ago, I came across a social media post by a person named Loti.

It read in part, Three years ago today that I attempted to jump off this bridge, but this wasn't my time to go. A gentleman named Andy saved my life. I still haven't found him. This is a story that I came across purely by chance, but it instantly moved me. And it's taken me to a place where I've had to consider some deeper issues around mental health. This is season two of Finding, and this time, if all goes to plan, we'll be finding Andy. You can listen to Finding Andy and Finding Natasha exclusively and ad-free on Wondery Plus.

Join Wondery Plus in the Wondery app, Apple Podcasts, or Spotify. Let's investigate perhaps the reason why there's so much money coming into venture capitalism, because it should still be an industry of some fundamentals, and that is a return on investment. Absolutely. Absolutely. So the reason why so much money has come in is that during various periods, venture capital has provided huge returns. The venture capital model is kind of a strange one, because if I'm starting a venture capital firm, I know that I'm going to make, let's say, 20 investments. And I believe going in before I've even hung up my shingle, I believe that 18 of those investments are going to go belly up. They're going to declare bankruptcy. They're going to fail. Something's going to

happen. They're going to be bad investments. But one or two of them is going to be successes. And they're not just going to be successes. They are going to be monster successes. I'm going to put in $2 million and 10 years later or seven years later, my $2 million is going to be worth a billion dollars. And so it's going to make up for all the losses and all the other investments that I made that didn't work out. And for a long time, that logic was a pretty good logic because it worked again and again and again. Right? You put a couple of million dollars into Facebook and Facebook becomes the biggest thing on earth. A guy named Masasan, who runs a big venture capital fund called the Vision Fund, he makes a series of investments during the first tech boom, most of which are terrible, most of which go bankrupt when the economy turns. But he put a couple of million dollars into a firm named Alibaba. And those couple of million dollars end up being worth something like $30 or $40 billion by the time Alibaba becomes a giant. And so that has been the logic for a long time is I'm going to make a bunch of bets. Most of

them aren't going to work out, but some of them are. And when they do, they're going to knock it out of the park. And so as a result, a lot of people standing on the sidelines, pension funds, endowment funds, particularly people who listened to a guy named David Swanson, who ran the endowment fund at Yale, who was very, very enthusiastic about alternative investments, about private equity and venture capital as a category of private equity. They said, look, I'm going to start reallocating my money out of stocks because the problem with stocks is it's hard to get an outsized return. I'm definitely not going to be putting it into bonds because interest rates have been low now for over a decade. I'm going to put it into venture capital because venture capital seems to be giving me higher returns. The problem with every asset

class though is that when capital starts flooding in, usually returns go down. And that's what's happened with VC. It sounds like if when you're chasing the home run, like venture capitalists do, there's a lot of incentive to not miss. So you might find yourself in some sort of gambler's fallacy, thinking that and pouring good money after bad. What's the danger there? Well, exactly as you said, one thing that can happen is that venture capitalists will have put money into a company and they'll be so committed to wanting to see that payoff occur that they'll pour more and more money in. But the other thing that's happened is that there has been this theory that has emerged

known as blitzscaling, primarily within the tech industry. And it has its roots in some very sound logic. I was talking to one venture capitalist and he was talking about Uber. And he said, we were early investors in Uber. And as soon as it became clear that Uber was going to be a success, there were 15 Uber competitors. And so the only way that we could protect our investment in Uber was to get Uber as big as possible, as fast as possible. And the only way to do that was to pour hundreds of millions of dollars into it so it could scale at a breakneck pace. That's blitzscaling, right? And it's true. One of the things about the internet economy and the economy today is that it is this winner-take-all economy, right? There's only one Amazon. There's only one Uber. Lyft is a little bit of a competitor, but even in that case, they're smaller and there's only two of them. And so this blitz scaling to get as big as fast as possible requires huge amounts of infusion of capital. And that's what the venture capitalists support is there's no way

that a company can earn enough money to grow that quickly. They need to go to outside investors and venture capitalists are on board. So if I've invested $5 million in this firm and it says, we want to become the biggest firm on earth and we need another 500 million to do that, then as a venture capitalist, it makes sense to me to give them 500 million. Not only that, but if I'm a venture capitalist, I just raised a billion-dollar fund or a $1.5 billion fund. I got to put that money to work because I don't get paid until I put that money out the door. So when one of my investments comes to me and says, we need $500 million more, even though you only gave us 5 million last time, I'm not unhappy to hear that suggestion because I got 500 million

burning a hole in my pocket. And if I can invest it in one company instead of trying to invest it in 10 companies, that means less work for me. Blitzscaling sounds like an attractive strategy if you're certain your company is a winner. It makes an instant monopoly in the market niche that this company is operating in. But what if the company you're investing in isn't a winner? What happens when it's a bad venture? I mean, I've never met an entrepreneur who tells me that their company isn't a winner, right? If you're the kind of guy who says, the kind of gal who says, hey, you know what? I started this company and I don't know, maybe it'll work, Maybe it won't. You're not doing well in Silicon Valley. You're not even in the office of a venture capitalist.

You know, you've gone to the Y Combinator or some other place that's taught you to say, the reason I'm starting this company is because it can change the world. If we can just sell pieces of chicken faster and more efficiently, then peace will break out all over. That's ingredient number one, is to say that you're going to change the world. But ingredient number two is to say, and by next year, we will have 95% of the world eating our chicken. Nobody ever comes in and says, this company, maybe it'll work, maybe it won't. They all pretend or maybe even believe that they're building the most successful company on the face of the planet.

Well, yeah, that's the entrepreneur's pitch. And probably the venture capitalist believes it to make the initial investment. But after that initial investment has been made, and even though the venture capitalist knows that 18 out of 20 of his gambles are going to fail, what if all 20 of them do? There's got to be incentive to continue propping up what was thought to be the winner. Yes, absolutely. Absolutely. When you're deep into a company, there's this old saying, right? If you borrow a million dollars from the bank, the bank owns you. If you borrow a hundred million dollars from the bank, you own the bank. And that's exactly what happens, is that venture capitalists

very often will make one investment, and then the entrepreneur will come back and they'll ask for more money. And they say, nah, I don't think you guys have lived up to the promise. I don't think you're the winner that I thought you were. And they cut them off. And that happens a lot. And it's usually disastrous for that entrepreneur or for that company when it happens. The other alternative is that sometimes you invest $1 million, then you invest $5 million, then you invest $10 million, then they come back to you and they say, we need more money now. And you're thinking to yourself, gosh, they're not really hitting their marks. They're not really performing the way that I thought. But I can't write down $16 million investment at this point. The only thing I can

do is give them another $20 million and hope that they'll have enough cash to figure it out and become the winner that I hoped they were in the first place. I mentioned before Masasan and Vision Fund. This is what Vision Fund has done again and again and again. WeWork is one of the best examples. WeWork seemed like it was sputtering, things were falling apart. But Mazasan and Vision Fund had invested so much money into WeWork already that the only thing they could do was give them more money in the hopes that they can turn it around and figure it out. Because otherwise he has to tell his investors, I just lost tens or hundreds of millions of dollars for you. Tell me how today's VC deals are structured. It's probably not just one person anymore. These are

big firms. It's an established business. Yeah, it is a big business. But I mean, that being said, there's usually one person inside a venture capital fund who is responsible for a particular investment. They're the person who's leading the investment. And then what will happen after that is if it's a big investment, like let's say the Charles Duhigg Venture Capital Fund is going to put some money into Company X, and Company X wants to raise $100 million. company X and company X wants to raise a hundred million dollars. So I become the lead investor and I, Charles Duhigg, I'm the guy inside the fund. Who's really going to be like running herd on this, right? Like I'm in charge of it. So I'm doing all the work. I'm negotiating all the deals. I'm going to go to other venture capital funds. And I'm going to say, look, I'm putting in $10 million. I'm going to be the lead investor. If you want to come in, I'm going to create some space for you. You can put in 5 million, or you can put in 2 million, or you can put in 8 million. What's known as I'm going to syndicate out this round, and I'm going to let other venture

capitalists participate with me. Now, the reason why I would do that is because number one, a hundred million dollars is a pretty big risk for me to take on my own. I want to spread the risk around. But also, I know that if I cut you in on this deal, somewhere down the road, you're going to cut me in on one of your deals. And so that way, I don't have to look for every single great deal and elbow my way into it. I'm going to get invited in by the syndicate that I belong to. And at this point, there's really just about 10 to 15 venture capital funds. There's hundreds, hundreds, maybe thousands of venture capital funds in the world, but there's only about 10 to 15 of them that do the by far majority of the deals, right? These are the funds that control the venture capital industry. And one of the ways that they

preserve that authority is first of all, they have a lot of money, but second of all, they tend to syndicate with each other. They work together as a pack in order to determine which companies get in and to sometimes keep upstarts out. We've mentioned here that the pitch for any aspiring business is that they're going to change the world. That it's not just the bottom line. It's an aspiration for the betterment of humanity. That's the entrepreneur's side.

But on the venture capitalist side, do they have a mission? Is it just to earn profits or is there something larger at hand? I mean, even guys who just want to earn profits, they never just say, I just want to earn profits. The greediest person on the face of the planet will still tell you that they're in it because they really wanted to be Mother Teresa. It just so happens that they became a billionaire in the process. Yeah, venture capitalists, if you talk to them, they'll tell you they got into this because they love technology. They believe technology will change the world. They want to find and encourage the companies of tomorrow that are going to change the world. They want to find and encourage the

companies of tomorrow that are going to make the world a better place. And a lot of them are being honest and truthful. I have a lot of friends who are venture capitalists, and they're really great people. They believe deeply in what they're doing. They're fascinated by new technology. They really want to help entrepreneurs reach their potential. Now, at the same time, they also don't mind getting insanely rich. And the fact that they're able to buy a Gulfstream in addition to cure cancer, hey, it's a great world. Some people might look at venture capitalism and see the potential for a troubling system. It seems like you've got this syndicate of self-dealing billionaires, probably more self-interested than they let on to be,

with an overabundance of capital that they need to spend, giving bright-eyed, bushy-tailed entrepreneurs too much control. Is that a fair criticism, you think? Yeah, there's excesses, but what you just described is like the recipe for a fantastic economy. The whole point of particularly American capitalism is it's supposed to be easy to start new companies.

And it's supposed to be easy to walk away when it's not working and start and try something new. Yeah, it's bad when it gets too concentrated, when there's gatekeepers who start preventing good ideas from getting executed on, when people who are clearly crazy and shouldn't be running companies are given a ton of money for bad ideas, all of that is distortive. But excesses are part of capitalism. There's no way to design an economy that does not have excesses in it if it has free enterprise and competition. basically we've had, what, 12, 13 years now of unchecked growth. And so there are these excesses that you can point at and say, this is going off the rails. That's all true. But the basic system itself is a great system. Asking people to take on risk, to vote with their dollars on what they think is going to win or lose, that's much better than the alternatives, which would be the government making bets on who ought to win or lose,

or being in a situation where there's such little capital, everyone's so risk-averse that if I have a great idea, I can't get any funding for it. And that's happened in the past. That still happens right now to some groups, right? African-Americans have a much harder time raising capital and that's disastrous for the economy. It's disastrous for those communities. It's disastrous for all of us. So I don't think you can argue that the system itself is flawed. It's just that it has some excesses right now. I also want to, because I know that you guys are talking about Theranos. The important thing about Theranos is mainstream venture capitalists did not invest in Theranos. It was individuals who are not professional VCs who gave Theranos its money. It was these fringe figures who were rich but weren't in the habit of making bets on companies

that supported what happened to Theranos. Theranosanos in many ways you can point to as something that's proof that the VC system actually works because all of the establishment VCs, they all passed on Theranos. On January 5th, 2024, an Alaska Airlines door plug tore away mid-flight, leaving a gaping hole in the side

of a plane that carried 171 passengers. This heart-stopping incident was just the latest in a string of crises surrounding the aviation manufacturing giant, Boeing. In the past decade, Boeing has been involved in a series of damning scandals and deadly crashes that have chipped away at its once sterling reputation. At the center of it all, the 737 MAX. The latest season of Business Wars explores how Boeing, once the gold standard of aviation engineering, descended into a nightmare of safety concerns and public mistrust. The decisions, denials, and devastating consequences bringing the Titan to its knees and what, if anything, can save the company's

reputation. Now, follow Business Wars on the Wondery app or wherever you get your podcasts. You can binge Business Wars, the unraveling of Boeing, early and ad-free right now on Wondery+. You mentioned earlier that there might be a lack of regulation in the venture capital industry. What sort of regulations are there and what are the responsibilities of venture capitalists to the public and to the companies that they invest in? So probably the biggest regulation, and this isn't just for venture capital, this is true for essentially all kinds of private equity investments. When you're buying securities, stock in a company that's not a publicly traded

company, the first thing is you have to be what's known as a qualified investor, which means that you basically have to be rich. You have to earn a certain amount of money each year. You have to have a certain amount of money in savings, excluding the value of your house. So basically, the government has said, unless you're rich to begin with, you can't do this kind of investing. And the reason why they say that is because they say, look, if you are rich, we assume that you're financially savvy. So we're going to let you take more risks. Now, for the venture capitalist, assuming that they raise all their money from qualified investors, then when a venture capitalist invests in a company, oftentimes they ask for in return a board seat. They join the board of directors and maybe they'll get one or two seats or maybe they won't get any.

But if they join the board, that's really important because when you're on the board, you're the ultimate bosses of that company. The board can hire and fire the CEO in most cases. The board is where the buck stops. Now, there are some rules about what responsibilities you have if you serve on a board. The biggest rule is that you have essentially a fiduciary interest to all the shareholders and not just yourself. So if, for instance, I'm on the board of a company and I learn about a takeover offer that would make me personally rich, but would screw all the minor investors,

all the employees, all the other people who have bought small pieces of stock in this company, I have an obligation to say no to that deal, to protect the minority investors who are not on the board, because I represent the shareholders. I don't just represent myself. So one of the things that has been a criticism of venture-backed companies is that venture capitalists will get on the boards of these companies and they will act in their own self-interest rather than the interest of all of the shareholders. Again, WeWork is the perfect example of this.

So when WeWork was blowing up, there was a deal that was put on the table that would have paid off all of the board members, that would have made all of the big venture capitalists essentially given them a return on their investment and would have screwed all of the minority shareholders, people like the employees who had stock. Now, there are some who would argue, and I think this is a very powerful and legitimate argument, that the board of directors, these venture capitalists who are on the board, they should have said no to that deal. They should have said, look, you have to give us a deal that treats everyone well. Even if it's going to cost me a little bit of money,

it'll be better for everyone. Instead, the venture capitalists said, yep, we love that deal. Here's my pocket, fill it up with cash. And for the minority investors, sucks to be you. When we contemplate the spectacular explosions of WeWork and Theranos, what would it take to prevent another failure of that scale? I don't think that WeWork and Theranos should have been regulated away. I don't think that more regulations would have prevented WeWork and Theranos. I think in some respects, the system is working, but it's not working to the full extent. Look, Elizabeth Holmes created a fraud. She got people to invest in that fraud.

The people who invested lost all their money, and she's on trial to go to jail. So it seems like that system is kind of working. Now, there were a lot of other people who were injured unfairly. There's people who got bad test results. There's people who were impacted by her fraud, and they deserve to be compensated. She deserves to be punished for that. But the system is trying to do that. We're always going to have frauds. And it's good that the people who invested lost all their money. They should also be publicly ashamed for doing it. In the case of WeWork, there's other victims, unfair victims, the employees of WeWork.

But again, many of the people who invested money lost a lot of their money. Now, some venture capitalists who invested in WeWork, in fact, a number of venture capitalists who invested in WeWork still got rich off of it. They still made big profits. And I think that there should be opportunities for the minority shareholders and for others to sue and say to venture capitalists, you should have been a better job of being the adult in the room. You should have been there making sure that things didn't go off the rails. That was your obligation. And I lost money because you didn't live up to your obligation. And I think that you should have to compensate me for that.

I think that that's fair. And so I think that there are ways that we could strengthen civil liabilities and civil law to allow shareholders to sue. I think that regulators, government regulators, should be taking more of an interest in working harder to regulate companies where the board of directors does not seem to be living up to their responsibilities and does not seem to be doing a good job of keeping their eye on the firm. But these rules all exist. We don't need new regulations to do this. We just need regulators that new regulations to do this. We just need regulators that are willing to do it. But what would that look like if regulators are doing it?

What would it mean for regulators and prosecutors to get tougher on venture capitalists? So there is a feeling among some of the observers of Silicon Valley that we need to see more criminal prosecutions of directors on boards for not upholding their fiduciary duty. And one person I was talking to, he said, look, the first time that you see a venture capitalist be put into handcuffs and put into the police car and prosecuted criminally for not being the adult in the room, for not living up to their obligation to protect minority shareholders, to stop a crazy CEO from doing crazy things, the first time one of those guys gets arrested and it's on TV, you're going to see a huge change

in Silicon Valley. You're going to see a huge change across venture capitalists. And I think that's right. For a long time, regulators have been toothless when it comes to regulating private investments, in particular, venture capitalists. There's been this romance about venture capitalists, that they're the handmaidens of innovation. And I think at some point, some regulator is going to step up and say, actually, these guys, this is where the buck stops. They didn't do their job. Let's haul them into court. And then all of a sudden, a bunch of other people are going to start saying, I got to pay closer attention and make sure that I don't get arrested next.

Charles Duhigg, thank you so much for speaking with me today. Thanks for having me on. That was my conversation with Charles Duhigg, a Pulitzer Prize-winning journalist and the author of The Power of Habit. From Wonder 8, this is episode four of Theranos for American Scan. In our next series, the Houston Astros shocked the baseball world by winning the 2017 World Series. Just a few years earlier, they were the worst team in the major leagues, but their miraculous rise would be forever tainted when it was revealed that some players and coaches had cheated to gain advantage.

tainted when it was revealed that some players and coaches had cheated to gain advantage. If you're enjoying American Scandal, you can unlock exclusive seasons on Wondery Plus. Binge new seasons first and listen completely ad-free when you join Wondery Plus in the Wondery app, Apple Podcasts, or Spotify. And before you go, tell us about yourself by filling out a survey at wondery.com slash survey.