Silicon Valley has had more than its share of global market game changers, but also a larger than average share of gigantic failures. Sometimes if you invest in a unicorn, you get the horn. In this Tough Things First podcast, Ray Zinn discusses Elizabeth Holmes and the funding of fantasy.
Rob Artigo: Welcome, everyone, back to the Tough Things First Podcast, a top destination for entrepreneurial leadership in Silicon Valley and across the globe. I’m Rob Artigo, I’m an entrepreneur in California, here once again with Ray Zinn. Hi Ray.
Ray Zinn: Hey, Rob. It’s so good to be with you again.
Rob Artigo: I’m flattered by the opportunities every time. I’m sure you have heard of Elizabeth Holmes. She is not an unknown name in Silicon Valley, of course. She dropped out of college at age 19. She launched Theranos, I think that’s how you pronounce that.
Ray Zinn: Theranos, Theranos.
Rob Artigo: Theranos, okay, Theranos. She touted Theranos as a breakthrough health technology company. She promoted the company’s technology. She said her technology performed blood tests rapidly and required only a very small amount of blood and could be performed rapidly thanks to this small automated device, which she’s commonly pictured holding just between her index finger and her thumb. That was 20 years ago when she dropped out of school to start this. Today, the company is no more. Holmes went from being the world’s youngest female billionaire now to down on her luck, ex billionaire, convicted of fraud.
Rob Artigo: She was found guilty of three counts of wire fraud and one count of conspiracy to commit wire fraud on January 3rd, 2022. She faces a maximum 20 years in prison and a fine of $250,000 plus restitution, which as we get into this, talking about the investors, she’s got a … That’s a lot of money. And who knows what she did with the money she actually had other than spending it on a legal defense? But as of the recording of this podcast, she has yet to get any jail time. She’s not in jail or not in prison. So Ray, is this a cautionary tale or what?
Ray Zinn: Well, absolutely. She had raised $700 million from some very, very well known investors. I mean, some very well known ones. And so but these are people who are not sophisticated. They don’t know the technology. They were really betting on her. She’s got a great gift of gab. She’s a people person, at least as far as investors are concerned, and some of them are still supporting her. For example, Tim Draper still supports her and what she’s done. He says, “I invest in people, not ideas.” This idea of course was absolutely fraudulent. That little thing she held in her fingers, actually what they put in the inside this little machine that analyzes the blood.
Ray Zinn: In my growing up, my dad used to say, “If something’s too good to be true, it probably is.” And so that should be the warning shot over anybody’s bow is if you get somebody proposing to you an idea or a concept that sounds too good to be true, run from it as though you’re going to be dying of COVID-19, so just escape it immediately. Don’t even consider it. And so it’s difficult to get into her mind as to what she was thinking at the time. She had to know that what she was doing had to be fraudulent, snake oil as they call it. But maybe she was so convinced that it could be done because that’s part of her defense, is that … By the way, she is going to be sentenced in September of this year. And maybe she was so convinced that ultimately it would work that she kept pushing the technology.
Ray Zinn: And sometimes if you keep telling yourself a lie over and over and over, you begin to believe it. And I think that was her case, is that she kept telling herself that this is going to work, this is going to work, this is going to work, until she believes it. In athletics when I was in athletics, I would pump myself up as you would. Psyching myself out and just getting myself ready for the contest, and I’m sure that’s what she would do every time she met with investors. She would pump herself up. She would just talk herself into it because in order to come up with that kind of gift of gab and that kind of line of reasoning, you really got to get yourself pumped up because it’s amazing that she didn’t trip over herself a number of times.
Ray Zinn: There are a lot of clues, by the way, along the way that investors should’ve seen or known that there was something going amiss because she would never show them the machine, and she would never let them talk to anybody that knew the machine, or knew how it worked, or the technology behind it. And that right there is a red flag.
Rob Artigo: Yeah. One of the early examples of this, talk about people giving money based on her abilities, Holmes goes to Switzerland to raise capital. And she has Edison, which is that little device that she said did all this testing. It wasn’t working, and the model, the demonstration that she provided involved diagnostics from previous tests that were in some cases just done with a traditional technology that hospitals and labs are using everywhere right now, and have been for 20 years.
Ray Zinn: Yeah. She was faking the results. In other words, the machine wasn’t working, and so she used conventional technology to output the results. And then she presented that as the data from the machine.
Rob Artigo: You mentioned that she had this gift of gab, but she also styled herself as the female Steve Jobs.
Ray Zinn: Yes, she did.
Rob Artigo: And she famously wore a black turtleneck, which everyone knows was Steve Jobs’ thing. And she’s attractive, she’s blonde, and she presented herself very much as the unicorn Silicon Valley type leader that could do these things. And it was easy. Do you think that investors are easily swayed by a cult of personality in the tech industry?
Ray Zinn: Well, they look at the whole package. I mean, that’s what Tim Draper did, is he just looked at the whole package. She’s attractive and she’s young. She’s energetic and she had all the earmarks of a successful person, dressed like Steve Jobs, talked with a real low voice like this, a real low voice.
Rob Artigo: Very low.
Ray Zinn: Yeah. And so she had her persona, and that persona sold people and she knew that. And she built on that persona, and that’s why people still followed her. And they wanted to believe. They wanted to believe it would work. I do know of other ideas where people are trying to get into these CVS or Walgreens with a real simplistic technology that would allow them to measure certain things of the body, and then it would be emailed to a physician. Physician would look at it and then say, “Okay, you have this problem or that problem,” and then a prescription would be created. And then the pharmacy would then issue you that prescription based on those results. The problem is that it can be highly cheated or made fraudulent because you don’t know who did those tests. Maybe somebody’s looking for maybe some Oxycontin or hydro … What that stuff is.
Rob Artigo: Yeah, hydrocodone and any one of those opiates that you can get.
Ray Zinn: So the person could fake all the data that you needed to get that prescription, and then you would get it. Now supposedly, it’s a tele video, it’s like a FaceTime kind of thing, or Zoom. And the doctor would then look at you and make sure that it was you that was actually ordering the prescription. But those kinds of things sure open themselves up to fraudulent behavior. So any time there’s no real face to face and the doctor himself is not performing those tests, you do have that risk. But there’s a lot of those out there. I mean, there’s, I don’t know, must be 10 different labs now that are coming up that are going to be doing this in person visit to the pharmacy. And then you would then run these tests, and then that would be sent off to the doctor. Without having some credible doctor monitoring that as you are giving those tests or taking those tests, you open yourself up again.
Ray Zinn: But this whole podcast is about how far should you be regarding transparency. And as Judge Judy used to say, “If you tell the truth, you don’t have to have a good memory.” And so at some point, you’re going to get tripped up. You can fool some of the people some of the time, but you can’t fool all the people all the time. And so at some point, you’re going to get tripped up.
Rob Artigo: So let’s roll back the clock to the 1990s when dot coms were exploding everywhere. I know you’re perfectly familiar with this. Anybody who lived through this time remembers how crazy it got. There were tech developers launching doomed online products, literally spending millions of dollars for Super Bowl ads, some of them involving monkeys, where they even boasted, I don’t know if you remember this, but in some cases in these ads, they boasted that they didn’t do anything. And yet, they have all this money to blow a million dollars on an ad. They literally were that robust with their being out front. Look how much money we have, and it was raining money in Silicon Valley. And it happened repeatedly until the bubble burst. So the question I have for you, Ray, is: Looking at these situations, who makes money and who ends up on the losing end when people in tech sell fantasy?
Ray Zinn: If you do go to jail, you don’t make any money.
Rob Artigo: Yeah, ultimately.
Ray Zinn: Right. So the biggest fraud that I know of that precedes Theranos is Webvan. Webvan was just like Door Dash, some of those out there now. But Webvan in its time sounded like a good program. It was delivering items to your door, and of course, that’s done repeatedly now. I mean, there’s a big industry on that.
Rob Artigo: Yeah. Amazon does it all over the place.
Ray Zinn: Yeah. So but Webvan when they started it back in the early 2000s, the problem I saw there that I thought was fraudulent was Webvan knew they weren’t going to succeed, but they had $400 million, and rather than giving it back to the investors, they just spent it. And then they went out of business. So that’s the age old thing, if you got the money, you don’t go out of business. And what happened was is they were out of business from a perspective point of view, but they had the money to keep themselves going, and they spent every dime of it. And I think that’s fraudulent to spend that money when you know that you’re not going to succeed. And that was what Webvan did, is they spent that money, $400 million, they could’ve given it back to the investors and at least saved people a lot of money, but they didn’t. They went ahead and spent it until the last dollar they had. And I think they should’ve gone to jail for that one.
Rob Artigo: And Ray, I’m sure you have examples like that, and there are other examples where somebody knew a technology was going to work out. They just hadn’t worked out the kinks yet, but they were confident that it was going to, and it did have a high possibility of success. And that’s how you end up with breakthroughs. How do you know as an entrepreneur? Obviously, these guys at Webvan knew what they were doing. They knew they were spending the money into oblivion and weren’t going to return anything to the investors, and they were just going to spend it until they were done.
Rob Artigo: But there are other people who are facing doom, but staving it off a little bit in order to have a little bit more time to continue the development until they get that thing right. How do you know as a business operator that you’re not throwing good money after bad? You want to make sure that whatever you’re doing is going to be effective and that you truly believe, not just believe in the fantasy, but believe that technology just needs to have a kink or two ironed out, and boom, you’re going to have the product that you’ve been working so hard for, your innovative, real forward thinking product.
Ray Zinn: Well, that’s the key. I mean, if you’re not profitable in some period of time, now depending upon what the technology is you’re doing, now in my mind, Webvan should’ve been profitable within a matter, or at least demonstrate they can be profitable within a few months, no longer than a year. And so if you’re designing something and there’s a design in time, and then there’s an adoption time, and a lifecycle associated with it, then it may take longer. It may take three years or so. But certainly, if you’re not profitable within the first few years, even if you have your own idea, your own product, you probably are not going to succeed anyway. So look at a company’s profile. Look at their substance of their business and see if in fact they can be profitable, or show how they’re going to get to profitability within a reasonable period of time.
Ray Zinn: And if they can’t do that, if they can’t show that, don’t look at their grandiose projections. Look at the nitty gritty. Look how they’re going to be able to get to profitability and see if it makes sense. Your gut will tell you almost what the data won’t. So if your gut doesn’t give you that feeling that they’re going to succeed, then run for cover.
Rob Artigo: Yeah. I remember this when I was a kid, we watched The Brady Bunch. And Mike Brady, the dad on the show, said he taught the kids about caveat emptor, let the buyer beware. Right?
Ray Zinn: Right.
Rob Artigo: And so the idea being, make sure you’re educated on something if you’re going to turn your money over to somebody, make sure … I would say I understand investing in people, but just investing in cult of personality because you think the person is a mover and shaker, if you’re putting all of your eggs in that basket, you might be talking to the next Bernie Madoff. Who knows?
Ray Zinn: That’s how they compare Elizabeth Holmes, is to Bernie Madoff. I mean, some of these people are so good at how they come across that you can be easily deceived. Be skeptical. In other words, if something is too good to be true, run for cover. Get out of there as fast as you can because you’re going to be taken. This is one of those things that it’s just going to take a matter of time and they’re going to blow up. This whole dot com implosion that we had back in 2001, I predicted was going to happen in May of 1999. And I told the investors, I said, “Look.” I actually showed them the graph. I said, “This is not possible. You can’t grow this fast for this long. This is just strictly a brouhaha. And they just, “You’re wrong. This internet thing is going to take off. This whole internet of things is going to be the next thing, and communications and all that stuff is going to take over the world,” as you would.
Ray Zinn: And I said, “Well, but the data doesn’t support that.” And sure enough, after the first of the year, Y2K, and toward the end of 2000, things were imploding like you would not believe. I mean, they just started … That’s what we call the dot com implosion. And so again, if something is too good to be true, it is. Flat out, it is.
Rob Artigo: Great discussion, Ray. I really appreciate your time on this one. And I’m sure we’ll talk more about it later when Miss Holmes is sentenced. We’ll see how that goes facing 20 years in prison. So you’re listening to the Tough Things First Podcast. I’m your guest host, Rob Artigo, privileged once again to have an opportunity to sit here and talk with Ray, who has practically unmatched level of experience in building businesses and managing successful portfolios of organizations. So Ray, again, you’re listening to the Tough Things First Podcast with Ray Zinn. Rate this podcast on your favorite platform and make sure you visit toughthingsfirst.com. Pick up Ray’s book, Tough Things First. Continue your education and increase your chances of entrepreneurial success with Ray’s advice and great information. Also, check out Ray’s books, The Zen of Zinn series. Thank you again, Ray.
Ray Zinn: Thanks, Rob. Good to talk to you again.