23andMe's Fatal Flaw | Great Expectorations | 1
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Wondery Plus subscribers can binge all episodes of Business Wars Netflix and The Fall of Television early and ad-free right now. Join Wondery Plus in the Wondery app or on Apple Podcasts. September 2008. It's New York Fashion Week and inside the twisted towers of the IAC building in Chelsea, a party's underway. Rock music blasts from the speakers. Waiters flit through the crowd with plates of tiny delicate canapes.

The guest list is star-studded. Ivanka Trump is here, so is Wendy Murdoch and, sheesh, Harvey Weinstein. Places heaving with the great, the good, and the not-so-good. All dolled up in tuxedos and high-fashion evening gowns, and they're all spitting. Not in an old West Saloon way, but in a dribble-into-a-test-tube sort of way. And that's because 23andMe organized this party.

23andMe is a hip new startup. It sells DNA tests by mail. Its customers are people who are curious about their genetic makeup. Generally, these customers are rich. 23andMe's tests cost $999. Or they did until tonight. Tonight's party is to celebrate 23andMe slashing its prices by $600. Now its DNA tests cost $399.

That's still some way off from an impulse buy, but it's moving in the right direction. What do you get for your money? The chance to spit into a test tube and send your saliva sample into a lab so your DNA can be examined. No, it's not graceful, but 23andMe is leaning into it. Hence tonight's event, which it calls a spit party.

23andMe isn't the only company selling DNA tests, but it's got a flair for attracting attention. It hopes tonight's gathering of hawking celebrities will build hype for its price drop. Right now, a tuxedo-clad guest is trying to summon enough saliva for his test tube. You've got to produce a whole teaspoon of spittle. Might not sound like a lot, but it takes most folks five to ten minutes, and that's when you're not wearing a cummerbund and surrounded by Hollywood high-flyers.

You can't eat or drink for some time before doing the test either. Food and drink can interfere with the sample. You don't want your results to come back 50% Moet and 50% Shandong. As the guest summons spittle, the woman who invented the spit party is holding court. She's Ann Wuchitski, the CEO of 23andMe. Her vibe is eccentric genius.

She always seems busy with new thoughts, new ideas, and she's passionate about genetics.

DNA is our own personal footprint. It's found inside every cell in our bodies. It dictates your eye color, hair color, and tells you where you're from. People should know what their DNA says about them. It should be like reading a book. It's the future. She notices that her guest has nearly finished delivering his sample. Nice work there. Now have a canapé. Is the future going to involve this much saliva? No.

Yeah, I know it's strange, but it's a one-off. Your genes don't change, so one good spit session is all we need and you're set for life. Despite the strangeness of the spit party, there's a buzz in the room. 23andMe feels like the next Silicon Valley startup on the road to a multi-billion dollar IPO, but unknown to everyone here, including Wojcicki. 23andMe is already destined to fail.

It's got a fatal flaw in its business plan, one that's as hardwired as the human genomes it tests. Question is, what is that fatal flaw?

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Upfront payment of $45 for three-month plan, equivalent to $15 per month required. New customer offer for first three months only. Speed slow after 35 gigabytes if network's busy. Taxes and fees extra. See mintmobile.com. From Wondery, I'm David Brown, and this is Business Wars. In this season, we put 23andMe under the microscope. It billed itself as the pioneer of a DNA testing revolution, winning billions in funding, only to end up broke with its promises unfulfilled.

To understand the rise of 23andMe, we need to go back to the early 2000s. DNA was the science and tech buzz of the moment. It promised to unlock some of biology's greatest secrets, and fascination with it gripped the entire world.

In 2003, the Human Genome Project completed its push to sequence more than 90% of the human genome. It was a scientific landmark. The genome contains the genetic instructions for making a human being, and the job of mapping it had taken 13 years, around $3 billion, and teams of scientists based all over the world. That breakthrough fired the public imagination.

It promised a world of personalized medicine where drugs are tailored to each individual and people getting forewarning of diseases they might be predisposed to so they can take preventative measures. It also promises big money for the companies that make that world happen, which is where 23andMe comes in. It became one of the first to market one of the most familiar brands of the genetic revolution and fetid by investors.

only to plunge into Chapter 11 bankruptcy in early 2025. This is the story of how the most promising startup of the DNA revolution became a multi-billion dollar miss. This is Episode 1, Great Expectorations. Monterey, California, 2005, three years before the spit party.

In an upscale restaurant, literary agent John Brockman is hosting his exclusive Billionaires' Dinner. It's an annual gathering of thinkers from scientists to captains of industry to discuss the big issues of the day. And this year, Ann Wuchitski's attending. She's a health industry analyst for a venture capital company, and she's trying to get the others at her table excited about urine. You know, this asparagus has me thinking.

Can any of you smell the difference in your urine after eating it? The man sitting next to Wuchitski grimaces. He's Sergey Brin, the co-founder of Google and Wuchitski's boyfriend. He puts down his fork. Anne, trying to eat here.

That smell difference? That's down to genetics. Some people notice it, some people don't. Just like some people are left-handed and some have freckles. It's all in the genes. Everything that makes us who we are as individuals is in there. It's just there, waiting for us to read it. Like the Human Genome Project? Yes, but for each of us.

If people could have a test that would allow them to understand their genome... We'd all know whether we can smell asparagus when we pee. And more. We'd better understand our ancestry. We'd know where our genes came from and how our ancestors traveled the world. And we'd know what might lurk in our future, too. What diseases we might be at risk of, so we can take preventative action to avoid them. Wuchitski's been thinking about this for a while.

The pharmaceutical industry is already tailoring drugs for specific genes. What if all the available genetic data about us was in a single source? What if by getting ourselves tested, we contribute to a bigger pool of data that researchers can use? It could improve our own and everyone else's health.

One of the other guests responds. But there's still the cost of sequencing. It might be falling, but you're still looking at millions of dollars. But does it have to be sequencing? Sequencing maps every gene. All 20,000 of them. But there's another way.

genotyping. You test for individual gene mutations. Well, that's more like checking specific page numbers in a book and reading a single paragraph on those pages. It's testing, not mapping. That way, you can offer customers targeted results at a fraction of the cost. Bryn nods, suddenly thoughtful. Cheaper and more targeted? As trade-offs go, that sounds like a win-win. I see what you're getting at.

Kind of makes me think about my mom's Parkinson's. And, well, I guess I have to assume I'm genetically at risk myself. But I'd pay big money to know for sure. But what if you didn't have to pay big money? Wuchitski is sure that there's a business in this idea. But to do it, she's going to need help. Luckily for her, it's not just billionaires at this dinner. There's also a journalist who's writing a book about Google.

In the book, he briefly mentions Wuchitski's DNA dinner chat. And that mention catches the attention of one reader, a biologist named Linda Avey. Inspired, she asks to meet Wuchitski. Avey is an executive at a company that makes tools for genetics research.

She's also thinking about starting a consumer-facing DNA testing business. And she's been working on it with Paul Cusenza, a former colleague who lives on the East Coast. Avey and Wuchitski hit it off immediately. They and Cusenza agree to work together on a business that sells DNA tests to the public. It's a bold idea for 2005. Almost a pipe dream.

Most DNA testing businesses cater to the research and healthcare markets. They sell to businesses, not to everyday people. And that's because of the costs involved. Fully mapping people's DNA like the Human Genome Project? That's a non-starter. But Wuchitski's plan is to test, not to map DNA, to check just 90 of the 20,000 genes in our DNA. This is still very expensive.

But the hope is the costs will tumble as technology improves. Just like computers went from multi-million dollar business machines to cheap PCs. But if they're going to bring these expensive tests to Main Street, Wuchitski and her co-founders will need serious funding. So, Wuchitski sets up a meeting with her boyfriend Bryn and Google's other founder Larry Page to get some initial funding. Bryn is super keen on this idea and he tells Wuchitski to move fast

Speed is king in Silicon Valley. The mindset is get ahead of the curve, grab all the market share you can as fast as you can, then figure out how to make money out of that advantage. Genetics is all the rage. Someone's going to make a lucrative breakthrough sooner or later. Get in there quick. It could be you.

And let's be honest, it's not just a great idea that's swinging this. Connections make a big difference in business. And if your network includes two Google co-founders, you're probably going to get funding. Even if your startup idea is, let's sell spit kits like their iPhones. And that's exactly what happens here. Bryn throws in $2.6 million of his own money. Google adds another $3.9 million to the total.

Armed with millions in funding and an office in Mountain View, California, Wuchitski and her co-founders form 23andMe. The name comes from the number of chromosome pairs in human cells. Chromosomes are the thread-like structures that contain our DNA. 23andMe spends months in stealth mode, laying the groundwork for their business from Mountain View.

By late 2007, the company is ready to break cover and start selling its genetic tests to the public through its website. As the countdown to launch day approaches, Wuchitski and Avey meet with 23andMe's board of scientific advisors to review its website before it goes live. Wuchitski's in an upbeat mood, having just got back from her honeymoon with Brynn. She lays out her plan to make genetics understandable to all.

She reasons there's no point giving customers a scientific printout of their results and expecting them to understand what all those graphs, numbers, statistics, and letters mean. Instead, 23andMe wants to offer a service that's friendly and fun to interact with. So, the company's created animated FAQs to explain the basics of genetics. 23andMe's also decided it needs to avoid entangling customers in complicated scientific concepts like linkage disequilibrium.

Nope, I'm not sure what that means either. The meeting gets into a discussion about what genes 23andMe will test for and the limitations of its tests. They all agree that the results shouldn't be marketed as medical tests. That could get them into trouble with healthcare regulators. Instead, 23andMe will promote its tests as being for nothing more than personal information. The excitement in the room is palpable. 23andMe is no longer a pipe dream.

The teams at that special moment in a business's life where the future is wide open, where the frontier stretches away in every direction and every day the promise of affordable genetic tests edges nearer. By June 2007 the price of mapping an entire genome had fallen to around a million dollars and dropping fast. That's great news for 23andMe. It might be focusing on DNA tests for now.

But it's also got one eye on a future where anyone could have their entire genome mapped for the cost of an evening out. Now, looking back with 20/20 hindsight, this wasn't so much a business plan as it was a bedtime story for venture capitalists. And you know, like most fairy tales, everything was bliss until the dragon showed up asking about unit economics. But that's all in the future. For now, the pre-launch meeting ends with excitement, expectation,

and the board members racing around the office on Segways. Of course it does, right? Didn't I mention this was 2007? In November 2007, 23andMe launches its mail order personal genome service. The price? A cool $999. And still far from an impulse buy for most people out there. There's clearly a sweet spot for this kind of product. And this isn't going to be it.

It's a luxury product for sure, but with the price of testing falling fast, backing from Google and the buzz about genetics rising, well, few doubt that 23andMe will succeed. It's even tapping into the new excitement around social media platforms like MySpace and Facebook. The company's website also encourages people to share their results and compare them with the results of other customers.

Wachitzki's also openly discussing the results of her own DNA tests, like how she quit alcohol after learning she was at a higher risk of breast cancer. 23andMe promises it takes data security seriously, but Wachitzki hopes that people will share their results so that the whole world will come to understand its own genetics.

But to make that happen, 23andMe must first convince enough early adopters to pay top dollar for its tests. And with that $1,000 price tag, that won't be easy.

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Where do we come from? Who is our wider family? Everyone seems to want to know the answers to these questions, including Jimmy Buffett, the tropical rock superstar known for hits like Margaritaville. And that's why in 2007, he's hanging out with Ann Wuchitski at 23andMe's head office in Mountain View, California. Buffett's already spat into a test tube and had his DNA tested. He wants to know if he's related to the billionaire investor Warren Buffett.

On her computer, Wuchitski walks him through the results. Bad news, Jimmy. It's not a match. But now the tropical rocker's curious about the rest of his DNA. He watches Wuchitski click through the findings to bring up a colorful pie chart summarizing his ancestral genome.

Turns out that Buffett's got a strong connection to the British Isles through his mother. So, the women came over from the Saxon invasion. Pretty cool. There's also a strong connection to the Basque region of Spain. No wonder I like Basque food so much. Mystery solved. For the next few minutes, the two of them look through Jimmy's health data. Eventually, the singer leans back in his chair, mind blown.

Wuchitski can tell he's impressed. And remember, this field is moving so quickly. We're built to react to that. Every time new research comes out, you'll be able to log on and see how it affects our understanding of your genes. I get it. You guys are mad scientists. Feels like there might be a song in this DNA stuff. Dang shame the words are all so long. Anyway, I imagine people are banging down your door to get these tests, huh?

Wuchitski smiles confidently. Business is trickling in for 23andMe, but it's still very much a novelty for the well-off. Yeah, our customers are learning all sorts of things about themselves. Hey, would you like to know what type of earwax you've got? Wait a minute, we don't all have the same earwax? Identifying people's earwax group may be quirky, but it feeds customers' curiosity and drives interest.

23andMe sees value in this sort of novelty, brings a dash of social media appeal to its service and sets it apart. 23andMe rivals like Decode and Navigenics emerged from the genetic research industry. They're more haughty and medical in their outlook. 23andMe's corporate culture and brand image is pure Silicon Valley. The dash of showbiz glamour.

Wachitzki wears Lululemon to work. They hold spit parties and ride Segways around the office. The 23andMe website is full of cute visual touches and bold colors. No wonder Jimmy Buffett's so at home here. Curiosity is a shaky foundation for customer retention. I mean, if your business relies on party tricks,

you risk running out of buyers faster than you say spit kit. Novelty might recruit a customer, but the real question is what keeps them coming back? While 23andMe wants to make DNA tests fun, it's still checking for genes linked to specific diseases. And that's caught the attention of healthcare regulators. In June 2008, California and New York's public health departments intervene in the emerging DNA testing industry.

They hit 23andMe and its rivals with cease and desist letters demanding they stop recruiting new customers until they comply with existing regulations. The regulators say the DNA testing companies are offering medical tests without a license and with no doctor involved. 23andMe responds by pushing back. It refuses to stop selling tests.

It counters that it doesn't conduct DNA tests itself. Instead, it outsources the test to clinical laboratories that have the appropriate licenses. Therefore, 23andMe doesn't need a license. It also doubles down on its marketing message that its tests aren't medical but informational. 23andMe simply tells customers the risk of them developing a disease, not whether they have the disease. It's a standoff.

In California, 23andMe reaches a deal and gets licensed, but New York proves less amenable. Its laws prohibit unlicensed labs from accepting samples from New York State. The result is a mess. 23andMe can sell and ship its kits to New York State residents, but to get their spit tested, 23andMe customers can't provide or ship their spit inside the state.

So now, 23andMe has to ignore any samples sent from a package postmarked New York. But for those who can get their results, the health insights are a big deal, including for Wuchitski and her husband Sergey Brin, the co-founder of Google. In September 2008, Brin gets 23andMe to test his DNA. He's long worried that, like his mom, he might develop Parkinson's disease. The results confirm his fears.

He tests positive for a mutation in a gene called LERC2. That mutation is associated with increased risk of Parkinson's. Uchitsky sees this as a positive development, proof of how 23andMe can help its customers. Brin's test has provided clarity and provided him with a chance to take action now.

And as the multi-billionaire co-founder of Google, Bryn is in a position to take action. He pours huge sums of money into research on how to treat Parkinson's. He also makes lifestyle changes to try and head off that risk. But there are no proven ways to prevent the disease. Still, the life-changing potential of being able to see what might be coming down the line is enough for 23andMe to be named the invention of the year by Time magazine.

Though the company's knack for publicity and support from a Google co-founder might have helped, too. It's the kind of advertising that cannot be ignored, and it cements 23andMe's position as the leader of the home DNA test pack. There's more good news on the business side of things, too. Around this time, in an attempt to spur sales, 23andMe cuts the price of its tests by $600 to just $399.

Now, finding the right price point is always a challenge, and that's especially true if you've got a novel product or service to sell. But products find their prices in the push and pull of what people are willing to pay for them. At $1,000, 23andMe's sales are understandably slow. People just don't feel the tests are worth it. They'd rather spend that money on vacations, cars, or rent. Curiosity about your ancestry and hard-to-act-on medical insights won't cut it.

The new price, though, might be just the incentive they need. It's a price more likely to make 23andMe's test an impulse or gift purchase, perhaps. But when your pricing strategy goes from Neiman Marcus to H&M in under a year, well, that's either a brilliant disruption or a red flag. A bit like an early panic sale dressed in a lab coat? Eh, that may be too harsh. Hard to know how to price an answer to a question consumers haven't been asking.

Especially when all you really know is that you're asking too much to get buy-in. But in late 2008, that price tag starts to look aggressive and confident. 23andMe is undercutting its rivals and putting DNA tests within the reach of millions more people. The buzz is building. All Wuchitski needs now are customers.

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23andMe is just two years old, and it's trying to introduce a never-seen-before product to Main Street, one that she believes has the potential to be transformative. So, instead of fretting about the sales figures, she's now leading 23andMe through its Series B investment round.

You've probably heard about investment rounds, right? They're a mainstay of Silicon Valley and help ambitious startups get the funds they need to grow fast. When companies start, they often seek seed funding. 23andMe went through that process in May 2007, securing around $9 million from Bryn and Google. Now, it's ready for another investment round.

These rounds of investments help companies grow fast in their early years. After initial funding, further rounds allow new players to come and invest money in the business in return for equity. That's their own slice of the pie. The business makes its pitch, and the people with checkbooks line up to buy in before things get really big. Or at least, that's the hope.

The Series B investment round is traditionally there for companies that have launched, displayed growth and now want to scale. So, Uchitsky has to hope that investors will look past 23andMe's low sales figures. So, as she tours the venture capitalist offices delivering 23andMe's pitch, she foregrounds how much excitement there is around the work the company is doing, without too many real customers.

Investors will be buying into the same thing time did: Wuchitski's vision of the future. There's also the hope that a future price cut will lead to a sudden surge in sales. At $399, the kits are still expensive. But these kits are only one potential source of revenue for 23andMe. As customer numbers grow, the company will accumulate more and more valuable genetic data to license to researchers and pharmaceutical companies.

There may even be a sweet spot where 23andMe sells its DNA tests at a loss to make its store of people's genetic information even more valuable. At heart, the idea is to give venture capitalists FOMO, fear of missing out. Do you really want to pass on owning a piece of the company that's set to change the world of genetics? Well, it turns out investors don't want to miss out.

23andMe walks away from its Series B investment round with $27 million of additional funding. It's a huge success for the fledgling business. But it comes with a price. Because one day, 23andMe is going to have to show their investors some decent returns. A few months before 23andMe secures the new investment, co-founder Linda Avey leaves the business. She wants to focus on Alzheimer's research.

The other co-founder, Paul Kucenza, is already gone. He left after just a few months because he didn't want to move to the West Coast. Now, Wuchitski is the last co-founder standing and in full control of a cash-rich startup on a mission to change the world. Armed with millions, the time has come to take 23andMe to the next level. That sounds great.

But a company can't thrive on investment alone. At some point, it really does need people to buy its products. And so far, attracting large amounts of those people is proving hard. There's still a lot of media interest in genetics. DNA is all over the news every day. But the price is still off-putting. In late 2009, you can buy two iPhones for the price of a 23andMe test. Come March 2010,

Only 35,000 people will have used 23andMe's kits, and at least a quarter of them got the kits for free or at a discount. That's disappointing for a company that's pulling in so much investment, but it's got a plan to lift those numbers.

In March 2010, 23andMe introduces a new feature that allows people to find and contact distant cousins identified using its test. Ancestry data is like the big deal. Hopefully one day we can put together the entire human tree. It'll be easier for everyone to find interconnections. I found out that I was actually related to an African American professor at Stanford. We're distant cousins.

It's an evocative pitch, especially coming from an era in which an email from a distant cousin doesn't immediately signify that you're about to get scammed.

This feature also gets straight to one of the strongest selling points of 23andMe. Your genetic information isn't just molecules strung together on a genome. And it isn't necessarily bad news either about Parkinson's or diabetes, let alone what kind of earwax you have. It's something that reaches right down into who you are as a human. Ideally, it can bring you together with people you didn't even know you have something in common with.

23andMe is offering to connect you to the rest of the world. And as hundreds of people use 23andMe to learn about their distant cousins, the company steps up its push to build a DNA database that can be licensed for medical research. The hope is that this database will lead to lucrative deals with drug manufacturers and even the creation of new therapies. But 23andMe's competition is getting tougher.

It's May 2010 and a new competitor, Pathway Genomics, is now on the scene. It's also from California and it's just struck a deal to sell its test kits in Walgreens. It's a huge deal. Walgreens has close to 8,000 stores in the U.S. So now millions of customers browsing those store shelves for mouthwash and shampoo can just pick up a DNA test.

It also puts 23andMe on the back foot because it's still selling kits by online mail order. But Pathway Genomics' big win.

is about to backfire on the whole consumer DNA test industry. Walgreen says for now, it has decided to hold off on selling a personal genetic testing kit. On Wednesday, the Food and Drug Administration contacted Pathway, the company behind the do-it-yourself tests. Selling a test over the counter without an FDA clearance or approval, particularly for the type of claims that they have, is not legal.

Despite 23andMe's run-ins with New York and California, DNA testing companies have largely flown under the regulatory radar. But the news that DNA tests are going to be on the shelves of Walgreens gets the attention of the Food and Drug Administration, the FDA.

The FDA is the federal regulator that's tasked with protecting public health through the control of various products including tobacco, food and prescription drugs. And now it's moving to rein in the growing collection of companies offering DNA testing services. The FDA makes clear that it regards DNA tests as medical devices. And that means 23andMe and all its competitors need FDA approval before they sell their kits to the U.S. public.

The FDA isn't just being stubborn here. Its concern is that DNA testing companies aren't being sufficiently transparent about how they interpret the genetic data that they test for. Many tests identify gene mutations that are associated with increased risks of disease, but lifestyle and environment also play a huge role. This stuff is nuanced and complicated.

Elsewhere, some geneticists worry that 23andMe is giving people data they might not interpret correctly. For example, a result stating that breast cancer risks are not high could lead some customers to stop getting mammograms. The tests might also tell customers things they don't want to know, such as the risk of developing Alzheimer's.

All 23andMe does is let customers check their results on a website. It doesn't offer counseling depending on what the data actually tells them. As it's always said, it's just personal information. 23andMe is now in trouble. It has to now either apply for FDA approval for tests that it's already selling or explain why its tests do not require approval. Faced with this,

23andMe opts to downplay its potential as a source of medical or health information and focuses on ancestry. But that reduces consumer appeal. The timing is terrible, too. 23andMe had just seen a genuine spurt in sales. For on April 23rd, 2010, the company marked DNA Day with a promotional price drop.

It slashed the cost of its kits to just $99 and instantly sold out of its entire stock. But now, the FDA is making it harder to build on that momentum. With customers few and regulations tightening, Wuchitski needs to do something. She promised investors they were buying into the Facebook of genetics, where people could share and compare their genotypes with friends and family. Instead,

They've pumped millions of dollars into a small business that sells an expensive novelty product. If she's going to make good on those great expectations, she needs to make a big play. And she needs to do it soon, or her DNA dream will be over. On the next episode...

Everyone from Lizzo to Barbie throws in with 23andMe. The FDA steps up its regulation of DNA testing. And Wuchitski learns some bitter lessons about making medicine. From Wondery, this is episode one of 23andMe's Fatal Flaw for Business Wars.

A quick note now about the recreations you've been hearing. In most cases, we can't know exactly what was said. Those scenes are dramatizations, but they are based on historical research. I'm your host, David Brown. Kristen Donlan of Yellow Ant wrote this story. Research by Marina Watson. Sound design by Ryan Potesta.

Kyle Randall is our lead sound designer. Fact-checking by Gabrielle Drolet. Voice acting by Chloe Elmore. Our managing producer is Desi Blalock. Our senior managing producer is Callum Plews. Produced by Tristan Donovan of Yellow Ant and Kate Young. Our senior producers are Emily Frost and Dave Schilling. Karen Lowe is our producer, Americas. Our executive producers are Jenny Lauer Beckman and Marshall Louis for Wondery. Wondery.

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