Neal's Deals (Vol. 48) - Unraveling 23andMe's double helix of success and struggle ???????

Hey everyone - This week, we're diving into a trending topic making waves in the tech world: the dramatic downfall of 23andMe, a biotechnology company renowned for its direct-to-consumer genetic testing services. For those who may not know, these services utilize saliva samples to provide reports on ancestry and genetic predispositions to health-related conditions. Once hailed as one of the hottest startups globally, 23andMe went public in 2021 with a valuation exceeding $6 billion. Its valuation has since plummeted by over 98%, prompting Nasdaq to threaten delisting the stock.

The narrative of 23andMe offers valuable insights for startups, emphasizing the importance of a sustainable revenue model, prudent cash management, data security, and vigilance against overinflated valuations. In this edition of Neal’s Deals, we'll explore the company's meteoric rise, pinpoint what led to its downfall, and extract the key lessons.

Ok, you have me hooked. How does 23andMe work and how did it become so popular?

Simply spit into a test tube and send it off to their testing facilities. Once your saliva sample is received, 23andMe utilizes genotyping techniques to analyze your DNA. This process entails investigating specific locations within your genome that display variability among individuals. From there, they transform these findings into personalized genetic reports covering ancestry composition, traits, and genetic health risks. That way you can learn that you are 1% [insert random ancestry] and brag about it to your friends.

The rise of the company can be largely attributed to one of its founders, Anne Wojcicki. Coming from a background deeply rooted in Silicon Valley as the daughter of a former Stanford University physics department chair and a high-school journalism teacher, Wojcicki's journey began after her time at Yale. She delved into analyzing healthcare companies for hedge funds and private-equity firms, where she observed the crash in healthcare stocks and the subsequent stagnation in innovation. Driven by a desire to empower consumers in managing their healthcare, Wojcicki swiftly gained prominence in Silicon Valley. Instrumental in shaping 23andMe's brand, she organized events like "spit parties" to gather DNA samples, even attracting celebrities like Barry Diller, Rupert Murdoch, and Diane von Furstenberg.

In 2009, she orchestrated a move to take full control of 23andMe, and with additional venture funding in 2012, the company drastically reduced the price of its DNA test to $99, leading to widespread adoption. Following FDA authorization, 23andMe's test became a viral sensation, amassing eight million customers within three years. Finally, in 2021, amidst the SPAC boom, the company went public hitting that lofty $6 valuation, marking another major milestone in its journey.

What went wrong?

Flawed Business model - Customers typically undergo the test once, and only a minority receive life-altering health insights. Consequently, there's a high turnover rate and limited user retention, giving the impression of a passing trend rather than a valuable product. To establish a sustainable revenue stream, Wojcicki has shifted towards subscriptions. Mirroring the trend of media companies introducing streaming "plus" channels, Wojcicki introduced 23andMe+, providing personalized health reports, lifestyle recommendations, and unspecified new reports and features for an initial fee of $229, with annual renewals priced at $69. When the company last disclosed the number of subscribers a year ago, it had less than half the number it had projected it would have by then.?Shocker.

Data Security - The ongoing repercussions of last year's hack persist. The company has acknowledged its failure to detect the data breach for over five months, providing malicious actors the opportunity to pilfer the ancestry data of approximately 6.9 million out of its 14 million users. While genetic data remained untouched, the hackers accessed users' display names and information, which, in certain instances, included ancestry details, birth years, locations, photos, and relational links. The hack specifically aimed at users of Ashkenazi Jewish and Chinese heritage, a matter of deep concern, especially since the compromised data has been shared and sold on the dark web.

Cash burn - Unlike typical small biotechs, which often focus on a limited number of drug discovery areas, 23andMe delved into treatments for dozens of diseases. While the potential payoff is substantial, the development of any single drug can entail costs in the hundreds of millions and take a decade to navigate through clinical trials. The company's extensive exploration of drug opportunities resulted in spreading themselves too thin, leading Wojcicki to halve the development team last summer. Additionally, approximately three dozen class-action lawsuits linked to last year's hack have prompted mass legal expenses. Despite raising roughly $1.4 billion in venture funding before the hacking incident, reports indicate that approximately 80% of this capital has been spent.

What now?

As previously noted, 23andMe's valuation has dropped by 98% from its peak, raising concerns about cash reserves depleting by 2025. With shares trading at just ~73 cents, raising funds through share sales would pose a significant challenge. So to know one’s surprise here, the company's survival is uncertain. What is surprising, however, is the lack of attention given to these issues earlier. Yet, as we've come to understand, not all businesses reveal their true genetic makeup at first glance! Ok I am done here.

Let’s get to it:

HEAL Security, a Menlo Park, CA startup that focuses on protecting healthcare organizations from cyber threats, raised a $4.6 million pre-seed round led by Health2047.

Why this is interesting: 23andMe could have used this one. Health systems face significant cybersecurity risks due to the sensitive patient data housed in electronic health records (EHRs). According to reports, breaches in this sector have resulted in approximately $7.8 billion in losses since 2016. This pervasive threat has compelled some institutions to return to paper records, impeding the digital progress of healthcare and complicating physicians' responsibilities. Despite an influx of cybersecurity startups, there has been a lack of tailored solutions that fully understand the intricacies of the healthcare industry. With the emergence of new technology and AI aiming to harness the vast data within EHRs, the risk of cybersecurity issues is poised to escalate further. This is an exciting opportunity, given the whitespace in the market and the fact that neither adoption nor customer education will pose significant challenges.

Krepling, a Chattanooga, TN startup that allows SMBs to build and manage e-commerce stores without needing to code, raised a $3.3 million seed round led by Brickyard and LAUNCH.

Why this is interesting: Positioned as a democratizing force in the e-commerce landscape, Krepling aims to provide functionality similar to that offered by other e-commerce 3.0 and headless platforms like Fabric and Nacelle. As e-commerce sales in the US surpass $1 trillion for the first time, platforms like Krepling are increasingly valuable to smaller retailers seeking to compete globally. The company targets both early-stage and established businesses, particularly in the mid-market segment, offering a no-code solution to level the playing field. Their infrastructure accommodates merchants regardless of whether they prefer using a multitude of workflows or just a couple. Regardless, the competition and the risk of being overshadowed by larger players like Shopify in the mid-market segment are significant concerns. Despite this, the consumer demand for flexibility is evident, and Krepling's willingness to address this may carve out a niche in the massive market alongside competitors.

Aster, a San Francisco, CA startup that enables women’s health practices to manage, grow, and scale their practices while also improving clinical outcomes, raised a $2.4 million pre-seed co-led by Cake Ventures and Cornerstone VC.

Why this is interesting: The pregnancy and childbirth experience can often be traumatic for families, with many having firsthand experience of unfavorable outcomes. Shockingly, up to 80% of pregnancy complications leading to maternal death are preventable, largely due to inadequate support and attention during pregnancy and postpartum, contributing to our country having the highest rate of maternal mortality among wealthy nations. Technological advancements, including medical devices and specialized clinics, are emerging to support maternal health, yet policy changes have compounded existing fragmentation in care delivery, exacerbating the gap between patients, providers, and positive outcomes. Aster aims to reverse the trend with a comprehensive women's health patient management platform, focusing on maternal care from conception to postpartum. I am excited about this opportunity as it fills a clear need and offers an alternative to disliked legacy electronic healthcare record incumbents like Epic and Cerner.

Deals in the Works:?If you want to learn more - feel free to reach out

1. Platform to track and submit reimbursements for eligible HSA/FSA expenses without needing receipts or claims
2. Developing the lightest, most insulating materials on earth for chemical and energy storage use cases
3. Hardware infrastructure for high performance artificial muscle actuators
4. White-label platform to build mobile apps and digital solutions for festivals/events
5. AI native video creation platform

_____

Quote of the week:

“Don't Wait for Opportunity, Create it.”

—George Bernard Shaw

_____

I am hosting a Neal’s Deals Tech party in the coming weeks with 100+ VCs, founders, and operators. Reach out if you want to learn more :)

Have a great weekend everyone!