In today’s Finshots, we explore how a once high-flying health tech company is on the verge of getting chucked out of the NASDAQ index.
If we tell you a tech company went from being valued at $6 billion to a measly $300 million, you’ll think of the F-word immediately, no?
We’re talking about fraud, of course!
But that’s not a label you can slap on US-based 23andMe.
Rather, it looks like its business model, which once seemed like a goldmine, is the problem. And the Wall Street Journal says the company is quickly running out of cash.
To understand what went wrong at what was once the hottest startup in Silicon Valley, we need to take it from the top.
See, there’s something you should know about Americans. Almost the entire set of people who live there aren’t actually from those lands. Their roots are elsewhere — usually Europe where people migrated from. So Americans, by nature, are quite curious about their origins.
And in the mid-2000s, a company called 23andMe sprung up to capitalize on this innate American sense of being able to start a story with something like, “Once upon a time, my ancestors came on a boat from xx…”
One of its marketing ideas was ‘spit’ parties!
Yup. We’re not kidding.
Imagine a person dressed in a white suit (just our imagination) going around at the World Economic Forum in Davos — where the world’s biggest business leaders are talking shop — and asking them to spit into a cup (this part is true). Then the white suited chap would take all this saliva and get the lab to process it. And maybe tell a European-looking business honcho, “Hey, did you know that you are 5% Indian?”
Of course, he’d be surprised. But it makes for a great story at his next cocktail party. Also, Indian media would have a field day claiming yet another CEO has Indian roots.
Anyway, that was the core business model — Anyone could sit at home and order a kit. Spit. Discover what their DNA says about them.
And despite some initial hiccups, by 2018, 23andMe was a roaring success. Millions of people were spitting into its test tubes for a peak into their ancestry. It took 9 years to reach 1 million spitting customers. But by the 12th year, it had 8 million saliva samples in its database. Heck, the kits were one of the top-selling items on Amazon during a Black Friday sale weekend. And Oprah Winfrey even named the 23andMe DNA test kit as one of her favourite things.
Its initial investors, including Google, would’ve been mighty pleased.
But 2024 looks like quite a different kettle of fish for 23andMe. The startup has lost around 98% of its value. And you have to ask — where did it all go wrong?
For starters, maybe there were flaws in ancestry testing itself.
For instance, an employee of the media company CBC sent her and her twin sister’s DNA kits to 23andMe in 2019. And the results were odd.
According to 23andMe’s findings, Charlsie has nearly 10 per cent less “broadly European” ancestry than Carly. She also has French and German ancestry (2.6 per cent) that her sister doesn’t share.The identical twins also apparently have different degrees of Eastern European heritage — 28 per cent for Charlsie compared to 24.7 per cent for Carly. And while Carly’s Eastern European ancestry was linked to Poland, the country was listed as “not detected” in Charlsie’s results.
That meant one twin could go around claiming she had a bit of the French in her. But the other twin, who had statistically similar DNA, couldn’t say the same. Instead, she could claim Poland.
So why would you trust the algorithm?
Also, unlike blood and diagnostic tests, people won’t keep coming back for these tests. It’s one and done. So there’s no recurring revenue for 23andMe. It would have to keep getting newer customers.
But there was another worry. 23andMe had started using DNA information to predict future health problems. And even that bit was problematic.
A few years ago, the New York Times carried a story about a person who conducted a genetic test with 23andMe. The results threw up a genetic mutation called PSEN1. It was bad news. It meant he was at risk for an early-onset form of Alzheimer’s. And he saw his well-planned future slipping away in front of his eyes.
But the thing was — this disease was hereditary. And his parents were hale and hearty.
So he took another genetic test. From another company. This time, PSEN1 was missing.
Now he was confused. He didn’t know what to believe. So eventually, he managed to convince his doctor to run a clinical test for the gene. And that came out negative. He could breathe easy again.
And it wasn’t a one-off.
A study found that these sorts of genetic tests are at a high risk of producing false positives. A diagnostic company looked at data from 49 people (a tiny sample size, yes). It found that 40% of the variations the tests had claimed were wrong. It said that the variant was present when it wasn’t.
And apparently, the mistakes in these reports can be as high as 600 per customer.
That could create quite a panic, no?
And who knows when the regulators could finally clamp down on all this testing. They’d done it before and shut 23andMe down for a while. So it was a big risk.
Also, there was a cybersecurity issue.
Imagine the DNA data of millions of Americans just floating around. Probably in the cloud. What if it gets into the hands of dubious individuals?
Lawmakers and the FBI were worried that people would use stolen DNA information to create biological weapons targeting only certain ethnic groups too. A lawmaker had even pointed out 23andMe’s database when talking about this threat.
And a hack last year made things worse. Ancestry data for nearly 50% of 23andMe’s customers were published on the dark web and the company didn’t detect the data breach for nearly half a year.
But wait…it gets worse.
The hack targeted users of Ashkenazi Jewish heritage. And with a lot of anti-Jew (antisemitism) rhetoric in the world, it was a problem for 23andMe.
So, ancestry tracing was often flawed. Genetic disease predictions could throw out really crazy results. And the fallout from a hacking scandal was high.
You can see why investors would be hesitant to pour more money into the company.
But the real downfall was that 23andMe wanted to actually become a drug maker.
23andMe has over 10 million DNA samples. DNA that can reveal all sorts of health quirks and ailments. The easy thing to do would’ve been to sell the data, in typically tech company fashion, to Big Pharma. But 23andMe wanted glory. It wanted to develop drugs on its own.
But you know that drug discovery and trials often take decades, right? For instance, in the 1990s, deCODE genetics in Iceland recruited about half of the country’s adult population into a genetic study. But, 20 years later, it still hadn’t managed to create a drug.
And unfortunately for 23andMe, it hasn’t had groundbreaking luck so far either.
So yeah, put all these problems together, and you can see why investors haven’t been amenable to doling out any more money to 23andMe.
And only time will tell if it can dig itself out of this hole.
PS: Reliance Industries acquired a Bengaluru-based company called Strand Life Sciences in 2021. It provides genome sequencing kits too. Now it’ll be interesting to see this business model play out in India, don't you think? Would you get a test done?
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