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

Host: Lindsay Graham
Guest: Charles Duhigg, Investigative Journalist and Pulitzer Prize-Winning Author
Release Date: October 8, 2024

Introduction and Context

In this riveting episode of American Scandal, host Lindsay Graham delves into the infamous rise and fall of Theranos, questioning the role of venture capitalists in the company's meteoric downfall. Charles Duhigg, a renowned investigative journalist and Pulitzer Prize winner, joins the conversation to provide an in-depth analysis of the venture capital ecosystem and its influence on high-stakes startups like Theranos.

Understanding Venture Capital

Defining Venture Capital (04:46)
Charles Duhigg begins by demystifying venture capital (VC), explaining it as an investment model where affluent individuals or groups provide capital to young companies in exchange for equity. This setup allows startups to scale rapidly without the burden of traditional debt repayment. Duhigg traces the origins of organized venture capital back to the 1940s, highlighting its pivotal role in fostering innovation and entrepreneurship.

"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," Duhigg explains (04:46).

Venture Capital’s Role in Tech and Silicon Valley

Historical Impact and Focus on Technology (06:48)
Duhigg elaborates on why venture capital is predominantly associated with the tech industry. He attributes this to the rapid scalability and significant returns potential inherent in technology ventures. Silicon Valley's genesis is closely tied to venture capital, with early investments in companies like Hewlett Packard laying the foundation for today's tech giants.

"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," Duhigg remarks (06:48).

Changes in Venture Capital Dynamics

Shift in Power Dynamics (08:42)
The conversation shifts to the evolving landscape of venture capital. Duhigg highlights a significant shift where entrepreneurs now wield more power compared to traditional VCs. With an influx of capital, VCs are more eager to invest, allowing founders greater control over their companies. This reversal has led to scenarios where entrepreneurs can dictate terms, often sidelining the rigorous oversight that VCs historically provided.

"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," Duhigg notes (08:42).

Venture Capital’s Impact on Companies like Theranos

Case Study: Theranos (12:12)
When discussing Theranos, Duhigg points out that mainstream venture capitalists largely avoided investing in the company due to insufficient due diligence. Instead, Theranos secured funding from individuals unfamiliar with the biotech sector, such as media mogul Rupert Murdoch and Betsy DeVos, who lacked the expertise to critically assess the company's technological claims.

"Mainstream venture capitalists did not invest in Theranos... it was individuals who are not professional VCs who gave Theranos its money," Duhigg asserts (12:12).

Critiques and Responsibilities of Venture Capitalists

Accountability and Governance (24:41)
Duhigg critiques the current venture capital model, emphasizing the lack of accountability when massive investments falter. Using WeWork as an example, he illustrates how VCs sometimes continue to pour funds into struggling companies to salvage their initial investments, often at the expense of minority shareholders and the company's long-term viability.

"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," Duhigg explains (19:14).

Board Influence and Fiduciary Duty (32:39)
The discussion moves to the responsibilities of VCs on company boards. Duhigg underscores the fiduciary duty VCs hold to protect all shareholders, not just themselves. He criticizes instances where VCs prioritize their profits over the company's health, contributing to scandals like WeWork's downfall.

"If I'm on the board... I have an obligation to say no to that deal to protect the minority investors," Duhigg emphasizes (32:39).

Regulatory Considerations

Need for Enhanced Regulation (35:52)
Addressing the prevention of future scandals, Duhigg advocates for stronger enforcement of existing regulations rather than the introduction of new ones. He suggests that better oversight and accountability mechanisms could deter fraudulent activities and ensure that VCs fulfill their responsibilities diligently.

"We just need regulators that are willing to do it," Duhigg states (38:10).

Potential Impact of Regulation (38:18)
Duhigg speculates that increased criminal prosecution of negligent VCs could revolutionize the industry, making VCs more cautious and responsible. This shift, he believes, is essential for restoring trust and integrity within the venture capital landscape.

"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," Duhigg predicts (38:18).

Conclusion

In concluding the episode, Lindsay Graham and Charles Duhigg reflect on the intricate relationship between venture capitalists and startup successes and failures. While venture capital has undeniably fueled innovation and growth in the tech sector, its current practices and accountability mechanisms require reevaluation to prevent future scandals like Theranos and WeWork.

Notable Quotes:

• "Venture capital is any time that a group of pretty rich people, for the most part, get together..." — Charles Duhigg (04:46)
• "Most of the VC dollars that we're aware of are going to tech..." — Charles Duhigg (06:48)
• "Venture capital has made it much easier to start new companies..." — Charles Duhigg (08:42)
• "Mainstream venture capitalists did not invest in Theranos..." — Charles Duhigg (12:12)
• "Venture capitalists will have put money into a company and they'll be so committed..." — Charles Duhigg (19:14)
• "If I'm on the board... I have an obligation to say no to that deal..." — Charles Duhigg (32:39)
• "We just need regulators that are willing to do it." — Charles Duhigg (35:52)
• "The first time one of those guys gets arrested and it's on TV..." — Charles Duhigg (38:18)

Final Thoughts

This episode of American Scandal offers a compelling exploration of the venture capital industry's role in shaping the trajectories of ambitious startups. Through Charles Duhigg's expert insights, listeners gain a nuanced understanding of the systemic issues that can lead to monumental failures and the critical need for accountability within the venture capital ecosystem.

Note: This summary excludes advertisements and non-content segments to focus solely on the substantive discussions between Lindsay Graham and Charles Duhigg.