Motley Fool Hidden Gems Investing - The Dropout: Fraud in Silicon Valley

Episode Date: February 27, 2022

Based on the hit podcast of the same name, "The Dropout" is a new mini-series starting March 3rd on Hulu. Rebecca Jarvis, chief business correspondent at ABC News and host of the podcast, discusses the story of Elizabeth Holmes. Founder of Theranos in 2003, Holmes was ultimately convicted of multiple counts of fraud. Jarvis shares: - What made Holmes tick - The nuance of "faking it 'til you make it" - Whether Silicon Valley could produce another Theranos today Stocks mentioned: AAPL, LYFT, UBER Host: Olivia Zitkus Guests: Rebecca Jarvis Producer: Ricky Mulvey, Emily Scharnhorst Engineer: Rick Engdahl, Tim Sparks Learn more about your ad choices. Visit megaphone.fm/adchoices

You have these SEC depositions versus Elizabeth Holmes on stage, where Elizabeth Holmes on stage knows every answer, there's certainty, we will be in Walgreens around the world, these giant claims, whereas when the SEC confronts her with very direct questions, her answer is so frequently, I don't know, or I don't recall. Chris Hill I'm Chris Hill, and that was Rebecca Jarvis, Chief Business Correspondent at ABC News and host of the hit podcast, The Dropout, which followed the story of Elizabeth Holmes and Theranos. That podcast is the basis for the new Hulu miniseries, also called The Dropout, which starts on March 3rd. Motley Fool editor Olivia Zitkus caught up with Rebecca Jarvis. They talked about the environment in Silicon Valley that elevated Holmes, and how she got away with fraud for so long. There are so many stories and tellings about Elizabeth Holmes and the Theranos saga. You have

John Kerry Rue's Bad Blood book and podcast, the Dropout podcast of your creation, and now the Hulu show, The Dropout. So why is this a story that we keep coming back to? Well, I think you have the woman at the heart of the story, Elizabeth Holmes, who is a fascinating individual. She's an enigma. She's an outlier. You also have the whole ecosystem surrounding her story from Silicon Valley to the media, to the world that she really grew up inside of at a time when she went out to raise funding around the same time as Mark Zuckerberg, when suddenly venture Capital and other investors were, for the first time in really large numbers, starting to bet millions or even billions of dollars on these young founders without significant track records.

And I think there's also the fact that this is a technology that could have become more ubiquitous. It was certainly inside of many Walgreens stores and was poised to be in many places. And anyone can imagine the idea of walking into a store to get a blood test. And if that blood test isn't reliable, then wow, what are we supposed to rely on? Where does the trust come from in our medicine, in our care? And so I think those three things together were something that certainly drew me to this story and something that I think make a lot of people give a pause and a beat and want to understand more because they recognize, or as I felt, that this is something that can have implications for the much broader world. I'm curious about her early life and her

relationship with money. How do you think her relationship with her family and her upbringing influenced how she interacted with, viewed, and used money? Because she kind of went right from being a teen to being a CEO? Right. Well, that's a question as a journalist that I asked a lot of the people in her orbit, the people who, family, friends who knew her early on, trying to understand what they believed was part of her psychology, why she was doing the things that she was doing, why she was such a motivated person, why she believed that she could change the world. I think that's something that every parent, I'm a parent and became a parent through the process at the time that I was creating this podcast a few days later, gave birth to my first child. I think as every parent, you want your child to believe that they can change the world, that they can make the world a better place.

And something that I think that this series really delves into that Liz Merriweather and the team spent a lot of time investigating and using the podcast as source material. But looking at speaking to sources and thinking more deeply and going digging even further into it is what those early years, what those formative years meant for her in creating who she was as a leader and the person that we all got to know on stages and TED Talks and then later on through SEC depositions in the trial. right her um time at stanford in particular and and the way it's portrayed in the show as kind of it wasn't just a blip on her radar right she went to stanford for a time and then eventually her family put what was supposed to be her tuition money towards towards theranos right in the early days and i'm wondering like do you think that theranos was going to come about no matter what, because Elizabeth was who she was, or whether Theranos was like a product of that privilege, like of Stanford and of her family's ability to support her? Well, when I look at

all of the available information that I've learned about Elizabeth Holmes over the years, this was a woman who was clearly on a mission, who wanted to do big things with her life. Now, what design those things might create. You could say it was the time that she spent in the laboratories as an undergraduate studying in China and the work that she did there that became formative. She told the story, as we saw over and over again, about her uncle and his cancer and that being part of the genesis of her story. And I think for people who will watch this series, who listened to the podcast, I still think it's a fascinating thing that she still is very much this enigma. With all the material, with everything answered, with all of her exposure,

people still struggle to really understand what was actually going on there. I still can't decide whether or not Elizabeth understood the science or rather the extent to which she understood or didn't understand. Do you think she understood what was happening and was just willfully ignorant of the fact that it didn't support her vision, the big word she likes to use? Do you think she knew the science herself? I'm curious of your opinion there. Well, from talking to, I'm not, I don't know the science. For example, I didn't study science for years and years and years of my career, but people like Phyllis Gardner, the Stanford professor who met with Elizabeth Holmes very early on, who Gardner has dedicated her entire life to the

science, to understanding medicine. You look at that and the people who win Nobel prizes for truly changing the world. For the most part, these are not people who spent a handful of years or even a handful of semesters in college. These are people who dedicated their entire lives to it and had breakthroughs after decades of work. So it is from the standpoint purely of how does one achieve the kind of medical revolutionary breakthrough that Elizabeth purportedly had achieved? Well, you take years and years, decades of your life, and you dedicate yourself to that. And there were people who were on Elizabeth Holmes' team who had that background, like Adam Rosendorf, the lab director, and others. But they still, along the way, said that this was a very difficult thing, that the idea of getting to the other side of this innovation was a very, very complicated journey.

and something that came out at the trial was that this test that she had said so many times over and over again in speeches, a few drops of blood can run hundreds of tests that at no point in time could these devices ever run more than 12 tests. I want to talk a little bit about pivot points in the story of Theranos.

Like in my mind, a big one comes up first and that's Theranos' demo. I'm using quotes around that with my hands right now to Novartis AG in 2006. I wonder, is there a moment that stands out to you as being pivotal in that it set Elizabeth and her company down a path that they couldn't turn back on, even if they wanted to? I know there are so many. That's probably a difficult question, but I'm curious if anything kind of stands out to you. The government's case was fundamentally when Elizabeth Holmes was out of money and out of time, she decided to lie.

And where Sonny Belwani really enters the Theranos story as a player that goes beyond Elizabeth's love interest or even a friend is around 2009 when Theranos is burning through money and needs essentially a bailout, which at that time would have been a really complicated thing because the economy was coming right out of the Great Recession and it was really hard to get access to credit. And Sonny comes in and gives them this lifeline in the form of a loan. And then they start going out and pitching Walgreens and what we saw at trial and what has been exposed over the time that I've investigated this were the source documents that Theranos originally presented to Walgreens, which in 2010 suggested that their technology was ready. It was ready to be rolled out and deployed in stores. And it had been independently validated by 10 of the 15 largest pharmaceutical companies. This is the material that Walgreens saw. This is the material that a lot of investors testified that they saw. And yet, there was no way that they were ready to roll that out in Walgreens in 2010 because they not only couldn't, but they didn't roll anything out until 2013. And as we now know, through the trial and through years of reporting, they never got their machines inside of Walgreens. These wellness centers that were supposed to be doing the on-site testing relied on labs, central labs that they sent the samples to. So you have this picture of a giant, ambitious goal that so many people supported along the way.

And in the early days, the Avitovanians of the world supported it, the right-hand man to Steve Jobs at Apple. And even in those early years, as Avi Tavanian told us when I interviewed him, he didn't feel that he was getting the full picture and he didn't feel that Theranos and Elizabeth Holmes were taking the steps that if they were truly serious and committed to having this product be ready for market that they would be taking. the sec depositions and um you know which happened well obviously years ago well before her trial started um you've been you've combed through those um very finely i'm wondering what you think was the most important thing they showed us and told us about the person elizabeth holmes that we hadn't seen or heard before? Like what was the most revelatory thing? I spent so much, I think I had dreams about the depositions. So I think one stark contrast, and we make this point in the podcast, is that you have these SEC depositions versus Elizabeth Holmes on stage, where Elizabeth

Holmes on stage knows every answer, there's certainty, we will be in Walgreens around the world, these giant claims. Whereas when the SEC confronts her with very direct questions, her answer is so frequently, I don't know, or I don't recall. And we calculated it. We sifted through all of it. And that was more than 600 times, as we say in the podcast. So the contrast of this just incredibly confident character, individual with a woman who suddenly just can't put our finger on a lot of things. I think that's a pretty, there was so much opposition there in terms of what we represented versus what ultimately materialized when push came to shove and it was under deposition under oath. Okay. I want to ask a question that kind

of harkens back to where we started, which is about why the story is so interesting. And you mentioned the ecosystem and the culture that is Silicon Valley in which, you know, fake it till you make it and big promises are kind of the norm to a point. Do you think that ecosystem is primed to produce another Theranos? Like could what helped produce Elizabeth Holmes produce another Elizabeth Holmes? I've asked a lot of people in Silicon Valley what they make of this and if they think so, and answers are divided. There's a lot of people in Silicon Valley who are very quick to say, she wasn't one of us. That's not how we operate here. But there's another group in Silicon Valley who will say that there is that ethos of having to show hockey stick growth.

And even if the VCs and the other companies somehow were able to manage to take that away, I had this interesting conversation with Adam Grant at Wharton, and he said he sees it a lot coming from the individuals themselves. They look around at their classmates, and their classmates are all high performers, and they want to perform too. And there's this push right now to show what you're so capable of. And you even look back to Elizabeth's own story and the timing of when she founded Theranos right around the time that Facebook was being founded across the country by Mark Zuckerberg. And never before in the degree that what we've seen since Theranos have we seen so many young people with predominantly untested ideas getting millions or even billions of dollars to do those things. And that can feed into a system. And especially in a time when the interest rates are 0%, the cost of money is virtually free. If you have access to capital, I talked to venture capitalists and I talked to investors and they will say sort of outside of the bounds of an interview, they will say, well, to not invest, to not put your money at some semblance of risk

is actually the bigger risk when money costs nothing. Right, we like risk at The Motley Fool in healthy amounts, for sure. And yeah, I think, you know, fake it till you make it wasn't, you know, created by Elizabeth Holmes, although her face is now certainly attached to that, you know, that saying.

And I just want to point out one thing because a number of people in Silicon Valley have said one thing that they, that's really important to distinguish. The idea of faking sort of the future, there's a big difference between saying, we're going to the moon and I feel confident that we can get there versus we've been to the moon. Right. And to say that your technology was deployed on the battlefield when your technology never was deployed on the battlefield, or to say that you can run hundreds of tests when in actuality, at the very most, you can run a dozen tests, 12 tests, those are very different things than suggesting audacious forecasts and goals for yourself. Right. We need healthy idealism, right? And we need goals that we want to reach. But yeah, the idea of faking the past, I guess, that's right. That's what's so troubling about it.

Okay, awesome. If we were to imagine a world, just for a moment, in which Theranos didn't deal with blood and healthcare and patient testing, but that they were a company like, let's say, Uber 2.0 or Lyft 2.0, do you think the fallout would have been nearly this bad? What's your opinion on that? I think people would have looked at it differently because many times over the years as we've interviewed people, they will say, well, this wasn't a cell phone. This wasn't an app. This was something that can impact people's lives. And I think it certainly is part of what drew people to the story, this idea you want to be able to trust your health care. And if you can't, my goodness, what does that mean? And if somebody is faking your health care so that they can make huge amounts of money, well, what does that say for the world? So I think that really drew people to this story. If we imagine it, we've imagined as uber 2.0 so if it wasn't health care but if theranos did succeed if it had succeeded as a health care company had brought its rolled its um revolutionary blood tests out in walgreens and

pharmacies um and on on battlefields would people still be upset even if the means by which they reach their end you know were the same as as they were in reality i think that's a very interesting question because it's sort of the you you can't handle the truth type of of idea um it would still be illegal um the question is what price would elizabeth holmes have paid and i do think it's a it's an important question for people to think about um and and and something that i'm sure a lot of founders are contemplating as they look at her story. I want to zoom out to kind of the larger picture and ask, you know, what are one or two things that you think investors and just like normal retail investors, I want to point out for our listeners that Theranos was never

a public company. But just for the average investor, like what are one or two things that you think normal people can do to avoid investing in the next Theranos, right? Even if we're not tossing VC money at Theranos like Elizabeth Holmes was enjoying. Sure. Well, and frankly, a lot of the money that went to Elizabeth Holmes came more from family offices than the biotech venture community. The biggest checks came from Rupert Murdoch and the DeVos family and the Waltons. But I think the lesson here is to be skeptical and groupthink can work in some really negative ways, especially when it comes to investing. And a lot of the time when it comes to investing, it works out initially. And yet the truth generally does catch up with companies

and various other asset classes. So I think it's really important to be skeptical, to know what you're investing in, and not to just take the tip from whoever it is. Bernie Madoff even, he relied heavily on affinity fraud, as in your friend says it's good, so you believe it's good without doing a lot of your own research. That's the kind of thing that's actually quite simple, but it goes, it defies in some ways the way we behave as humans. And if you can tap into that and remind yourself not to just jump on the train because everybody else is on it, you probably are going to save yourself some money. I like that. Be skeptical, do the individual work, do the research and you'll hopefully be better off for it. I mean, you want to believe in the

thing actually, independently of what someone else has told you. Right. Yeah, I agree. What are you hoping that people get out of the retelling of this story on the screen in this format? You've already created a podcast. What are you hoping for now that people can watch it on their televisions? You know, I feel so proud of the podcast and the work that we put in and the depth that we were able to go into in the story. And for me, the number one thing that guides all of my work is truth and the pursuit of the truth and curiosity and asking questions. And I hope that people who have read everything under the sun and listened to the podcast and watched all of the documentaries. Um, I hope that they watch this and I hope that they enjoy it. And I hope

that they feel like maybe they learned something new because Liz Merriweather and her team did so much individual and new research. And I hope that they see Amanda Seyfried and see what I saw when I walked into, uh, the very first shoot with her, which was just a complete awe-inspiring moment of her really inhabiting this human being. And when I first walked in, she had her back to me. Amanda had her back to me. And after spending so much time watching Elizabeth Holmes and depositions and interviews and speeches, I got chills because even the mannerisms of Amanda Seyfried from the back reminded me so much of Elizabeth Holmes. Her embodiment is terrifying. I've had the chance to watch some screeners, and man, it is unsettling in a fantastic way.

I'm so glad to hear you think so. It's going to be great. Okay, last Elizabeth Holmes question. After all this time, and now as an expert on the woman, I would dare to say, what is the biggest misconception out there about Elizabeth Holmes? I've never been asked that question. I think to me the lesson in this story is to never assume and it's something that drives the work that I do to never go into a story with assumptions that you know because

if you look at this story there were so many sort of assumptions the the ability to sort of cast off things that were complicated or didn't quite make sense. And so for me, it's looking at everything in, again, back to that idea of being skeptical and looking at the world, trying to see the world without just completely seeing it through the eyes of groupthink and really saying, if something doesn't make sense, then maybe it doesn't make sense, even though everyone else might be telling you it does and it should. Thanks so much. I had such a great time talking with you today, Rebecca. Likewise. Yeah. Thank you so much. Really appreciate your time.

That's all for today, but coming up this week, we'll be talking inflation, real estate, stock investing, and more. As always, people on the program may have interest in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. I'm Chris Hill. Thanks for listening. We'll see you tomorrow. Thank you.