Neal's Deals (Vol. 84) - Failing the Innovation Test: What Chegg’s Collapse Teaches About AI Disruption ?? ???
Hey everyone – Not too long ago, Chegg was the lifeline for countless high school and college students navigating their most stressful exam seasons. Fueled by a pandemic-driven shift to virtual learning, the company saw its subscriptions surge and its stock hit record highs.
Fast forward to today: Chegg’s stock has plummeted by over 99%, and as of last week the company is conducting yet another round of layoffs, cutting 21% of its workforce. The culprit? A seismic shift in how students find academic assistance, driven by the rise of AI tools like ChatGPT and other large language models (LLMs).
For years, Chegg thrived as the go-to resource for students needing homework help—or a shortcut to answers. But the arrival of ChatGPT gave students a free, effective alternative that rendered Chegg’s meticulously curated answers obsolete. What was once called "Chegging" quickly transformed into “asking ChatGPT.” Subscriptions were canceled en masse, and the exodus was swift.
This story isn’t just about a single company. It’s a cautionary tale about the disruptive power of AI. While AI has enabled unprecedented productivity and democratized access across industries, it has also proven to be a merciless competitor to legacy systems that fail to innovate. In this case study edition of Neal’s Deals, we’ll explore Chegg’s abrupt fall, analyze how AI reshaped its industry, and draw valuable lessons for companies navigating similar challenges.
The history:
Chegg started in 2000 as a message board for Iowa State students, created by three undergraduates who named it after the "chicken and egg" problem. The platform evolved into a business tackling the high cost of textbooks, adopting a Netflix-inspired model to rent out both physical and digital academic resources affordably. Over time, Chegg expanded its offerings to include study guides, answers to frequently asked questions, and real-time tutoring services with human instructors.
The company was perfectly positioned to thrive during the pandemic, as the shift to remote learning drove demand for study assistance. Chegg's premium subscription base surged from 2.3 million in 2019 to 5.3 million in 2022. However, the rise of free online AI tools like ChatGPT soon reversed this growth trend dramatically.
The struggles
Once again, Chegg’s challenges came into sharp focus a few weeks ago when it reported third-quarter losses of $212.6 million, fueled by a drop in subscribers to 3.8 million. This marked a steep decline from its peak of 5.3 million in 2022, with each subscriber paying around $20 per month. With 2024 losses already at $830 million, Chegg’s market cap has plummeted from over $14.5 billion in 2021 to less than $160 million this week.
Initially, some employees believed Chegg could weather the rise of ChatGPT, citing the chatbot’s early tendency to provide incorrect answers. However, internal evaluations quickly revealed that GPT-4 often outperformed Chegg’s human experts in accuracy. As students increasingly turned to ChatGPT as a study aid, Chegg’s subscriber base continued to erode.
To counteract this trend, CEO Dan Rosensweig teamed up with OpenAI CEO Sam Altman to create “Cheggmate,” a service that combined Chegg’s extensive library of answers with GPT-4. While there was initial optimism about the project, its announcement coincided with warnings of slowing subscriber growth. The result? A single-day stock drop of 48%….
Zooming out, Chegg’s struggles can be traced to its failure to innovate proactively. In 2022, during a surge in subscriber demand, employees urged leadership to invest in AI and automation to address the growing workload. Leadership dismissed these requests, relying on the traditional model.
Only when revenues began to decline did Chegg pivot, exploring partnerships with OpenAI and later Scale AI to develop chatbot tools. Now testing a new bot developed with Scale AI, the company is making a last-ditch effort to remain relevant—but for many including myself, it feels like a case of too little, too late.
Lessons learned
Chegg’s story offers a stark reminder for business leaders: staying complacent in the face of emerging technology is a recipe for disruption. The rise of AI tools like ChatGPT presented early warning signs—free alternatives gaining traction among customers, feedback about AI outperforming internal solutions, and growing pressure from employees to innovate. Ignoring these signals allowed competitors to seize market share rapidly.
Leaders across industries should recognize the importance of proactively assessing potential disruptors and adapting early, even when the current business model appears robust. Some areas particularly vulnerable to AI-driven shifts include education, customer support, content creation, and data analysis, as these rely heavily on repetitive tasks, scalable knowledge, and real-time responsiveness—domains where AI excels. Businesses in these fields especially must stay ahead by continuously investing in cutting-edge technology and remaining attuned to customer behavior shifts.
The main lesson is clear: innovation isn’t optional—it’s a survival strategy. Identifying and responding to the "early signs of takeover"—like declining engagement or the rise of more efficient alternatives—is critical to retaining relevance in an ever-evolving landscape.
Don’t be the next Chegg.
Let’s get to it:
Fanstake, a San Francisco startup that offers a platform that allows college sports fans to financially support athletes they want to see play for their favorite teams, raised a $3 million round co-led by Susa Ventures and Will Ventures.
Why this is interesting: The launch of Fanstake introduces a novel way for fans to actively shape their favorite college teams while helping athletes earn fair market value through Name, Image, and Likeness (NIL) deals. Unlike the traditional complexities of NIL frameworks, Fanstake taps into grassroots support, allowing fans to pledge financial backing directly to athletes they want to see on their team. This democratized approach resonates because it aligns fan passion with athlete empowerment, creating a transparent marketplace where players can gauge their true market value and make more informed career decisions. From an investment standpoint, if Fanstake establishes itself as the go-to platform for collegiate athlete financial backing, its likely take-rate business model could generate substantial revenue while transforming athlete recruitment and fan engagement as we know it.
Juna.ai, a Berlin startup that develops AI agents that help factories monitor and optimize energy consumption in real-time, raised a $7.5 million seed round from Kleiner Perkins, Norrsken VC, and John Doerr.
Why this is interesting: AI agents are rapidly gaining traction across industries, evolving from simple chatbots into task-oriented tools with varying autonomy. Startups like Juna.ai exemplify this shift by leveraging AI to optimize industrial operations. Juna.ai transforms manufacturing facilities into self-learning systems, offering real-time guidance to operators for improving machinery settings, boosting throughput, cutting energy consumption, and minimizing waste—a win for both profitability and sustainability. A key challenge for AI agents, however, is adoption. Automation often faces resistance due to fears of disruption or job displacement. What makes Juna.ai particularly promising is its alignment with the manufacturing sector’s familiarity with automating system controls. This natural extension of existing practices ensures a more seamless integration, reducing friction and paving the way for widespread adoption.
Jimini Health, a New York startup that offers online mental health therapy that combines human therapists with an AI assistant, raised a $8 million pre-seed round from Zetta Venture Partners, LionBird, PsyMed, BoxGroup, Arkitekt Ventures, and SCB.
Why this is interesting: Jimini Health is pioneering a new approach to therapy by combining human expertise with AI for a continuous, clinician-guided care model. Unlike traditional therapy that leaves patients unsupported between sessions, Jimini integrates its AI assistant, Sage, into treatment plans to keep patients engaged with tailored prompts and activities under therapist supervision. While this hybrid approach is compelling, its ability to deliver better outcomes for patients is unclear. Moreover, with established mental health platforms like Grow Therapy, Alma, and Headway already connecting providers and patients at scale, it’s unclear whether Jimini’s AI-driven model offers a defensible edge if larger players adopt similar solutions. The mental health industry is riding strong tailwinds, but it remains to be seen if Jimini’s approach is differentiated enough to stand out long-term.
Deals in the Works:?If you want to learn more - feel free to reach out
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Quote of the week:
"The line of progress is never straight. For a period a movement may follow a straight line and then it encounters obstacles and the path bends".?
Martin Luther King Jr.
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Thanks and have a great weekend everyone!