#6 Akili's heel; how a deal with The Dictator led to Akili's demise
plus... $8m for Aussie psychedelics, the US company tackling severe mental illness and all the latest news in mental health innovation
Hi friends,
Just 21 months ago, Akili Interactive went public with a valuation of over $500 million. But last week, Akili was sold to Virtual Therapeutics for just $34 million.
What the hell went wrong? What can we learn from another large-scale failure in digital therapeutics? And how did a certain billionaire nicknamed ‘The Dictator’ contribute to their demise?
That’s what we get into in this week’s Deep-Dive.
This week in The Hemingway Report;
- Akili’s heel: how a deal with The Dictator led to Akili Interactive's demise and what we can learn from the failure
- More funding for Aussie psychedelics: Psylo closes an $8m seed round
- Tackling Severe Mental Illness (SMI): the company taking a comprehensive, hands-on approach to caring for people with SMI
- And all the latest news in mental health innovation
A deal with the dictator - What happened to Akili Interactive?
Right, quick backstory on Akili so we all have context…
Akili was founded in 2011 to create video games as therapeutic tools for cognitive impairments. Their flagship product was EndeavorRx, a game helping children with ADHD.
They were trying to tackle a big problem and started raising a bunch of money too. By 2018, they had raised over $110m from VCS.In June 2020, they got FDA approval for EndeavourRx. In fact, it was the first FDA-approved video game for treating ADHD, a pretty significant milestone for digital therapeutics.
And off the back of this approval, they raised even more money, an additional $110m in a Series D.
So they were cash rich and FDA approved.
But if Pear Therapeutics taught us anything, it’s that FDA approval and raising a bunch of money does not guarantee success. But more on that later..
Akili had built an evidence-based product and raised money from top investors, but the problem was they weren’t yet able to turn their product wins into commercial wins.
That didn’t stop them from spending their war chest. In 2021, they had $62 million of expenses while making less than one million in revenue…
However, it’s what they did next that ultimately led to their demise.
Enter Chamath Palihapitiya.
Chamath is a former Facebook exec turned investor, now known as ‘The Dictator’ on the popular All-In podcast.
And since 2021, he had been on a SPAC rampage.
SPACs (Special Purpose Acquisition Companies) are a new way to take a company public. Essentially, you create a shell company, take it public and raise money for it based on a high level proposal for a company it will one day acquire.
The shell company potters along while trying to find it’s target and then one day, it selects the private company it wants to acquire … and tada! That private company is now public.
The whole idea was that it was an easier way to go public, avoiding the IPO rigmarole. In reality, it’s been one of the most successful destroyers of capital and businesses of the last several decades.
Around this time, Chamath’s investment company, Social Capital, had spun up a bunch of these shell companies and had used them to raise hundreds of millions of dollars from investors during those frothy capital market years. They were making Chamath a bunch of money - he previously disclosed he had made over $750m from such SPACs…
He used these SPACs to take a bunch of companies public, however, their performance has been spactacularly bad…
- Virgin Galactic: down 70% since post-SPAC highs
- OpenDoor: down 80% since post-SPAC highs
- CloverHealth: down 91% since SPAC
- SoFi: down 31% since SPAC
But the SPAC king wasn’t done yet.
He had his sights on Akili and teamed up with a Hedge Fund called Suvretta to create “Social Capital Suvretta Holdings Corp: I”.
Catchy.
Then, in January 2022, Akili announced its plans to go public via a merger with Chamath’s SPAC.
On the surface, this deal was a win for Akili. It valued them at over $500m and combined with a PIPE (private investment in public equity) delivered a fresh $162m of cash into the business.
And there you go, Akili was now a publicly traded digital therapeutics company.
The only problem?
Akili was still losing money.
A lot of it!
In fact, at the time of the deal, Akili was losing about $17m a quarter.
Similar to Pear, Aklili had built some interesting products, got regulatory approval, but had completely failed to commercialise them. And unfortunately, the public markets had no time for it.
Some of the Akili employee Glassdoor reviews at the time tell this story better than I could…
“Akili is a start-up with a single launched app, that has gone public in a down market without yet having substantial revenue.” (Source: Glassdoor).
The public markets quickly took an axe to Akili’s share price. Within a week, it had fallen by approximately 70% and within 3 months, it had lost 90% of it’s value.
An absolute train wreck.
Private markets may tolerate companies that don’t make money but public markets (especially in the downturn of 2023) are a lot less tolerant.
What made the executive team and board at Akili think this capital raise was a good idea? Akili said the fresh funding round would allow them to;
“support the commercial launch of EndeavorRx®, as well as advance clinical development pipeline across multiple neuropsychiatric diseases”.
When you read the SEC filing (yes, this is how I spend my time) you can see that they still had no commercial traction for their products at the time of the SPAC.
All they really share is a Go To Market plan consisting of three pillars; sell direct to parents, sell to healthcare providers (HCPs) and then sell to payers. I wanted to understand a bit more about how they were approaching each of these and why they didn’t work.
Direct to Parents;
Akili wanted to target consumers directly. Which may have worked, if their product didn’t require a prescription…
They wanted this strategy to drive “awareness and activation” with parents (i.e., either get parents to suggest EndeavourRx to their doctors or for prescriptions that have been written, increase the fulfilment rate and subsequent usage of the product). Unfortunately, this only works if you have people prescribing your product in the first place.
Apparently their plan was to invest in a channel that can’t actually drive revenue. I really hope they didn’t spend much money on this but the ‘broad influencer program’ makes me think otherwise…
The lesson here is that your commercial strategy has to match your product and regulatory strategy.
HealthCare Providers (HCPs);
As a digital therapeutics company, this was the channel you have to nail. Unfortunately, their SEC filing didn’t share much on how they actually planned to do this.
It did say that they planned to hire 80-100 sales reps to go after this market, but I fail to see what gave them the confidence to pursue this strategy - pro tip by the way, before you hire 100 of anyone, make sure there’s enough work for one of them…
This was always going to be the primary commercialisation avenue for Akili, but eleven years and approximately four hundred million dollars later, they still didn’t have any evidence this could work OR a appear to have a decent plan to make it work. This is hard, I get it, but if you’re going to be a public company you need to be able to figure our hard stuff like this.
Payers;
Look, as with any serious healthcare business, you need a strategy for ultimately being adopted by payers.
Unfortunately for Akili, their strategy was more of a “hope”.
They planned to target a reimbursement model but again, had extremely limited evidence that this was something payers would ever reimburse. I don’t fault them for trying this. They had to go for it. I just question the judgement to invest in a strategy with so little objective support that it would work.
Their SEC filing assumes commercial success in these channels and forecasts an explosion in revenue over the coming years - check out the graph below.
I think perhaps my favourite part of this entire document is the footnote on the X axis - “Timeframes are estimates and are subject to change”.
Subject to change indeed…
If I saw that in a Series A pitch deck, I’d suggest the founders should use their digital therapeutics to give themselves a quick dose of reality.
As a plan for a public company raising hundreds of millions of dollars, it’s ridiculous.
So what happened post IPO?
First, Chamath Chair of Akili’s board. And initially, Akili moved along a similar track to it’s pre-IPO performance.
EndeavourRx was still failing to generate revenue. Yes, ADHD in children is a huge market but Akili was likely bumping up against the same problems as Pear - i.e., the triple threat problem of getting providers to prescribe the treatment, patients to adopt it and payers to reimburse it.
Despite having no clear revenue streams or path to commercialise their flagship product, they continued to incinerate cash try in an attempt to drive adoption. This was all happening at a time when Chamath was on the All-In podcast every week saying companies needed to tighten their belts…
In 2023, Akili spent a whopping $45m on SG&A and the terrifying thing, is that this was $16m less than they spent in 2022.
What the hell were they spending this money on?
In 2023, Akili decided to change tack.
They figured they were done dealing with triple threat of delivering a prescription product and pivoted to the adult DTC market instead, launching EndeavorOTC, an app to help adults with ADHD without needing a prescription.
This actually started to get a bit of traction. Despite only launching in 2023, it generated $1.2m in revenue, more than double that of EndeavorRx.
They made some layoffs to try cut costs but unfortunately, it was too little too late. The business was in deep waters, struggling for air and there was no-one coming to save them.
As another employee said on Glassdoor;
“The product doesn't sell, reimbursement DOES NOT exist, and poor managerial decisions cost money and people's jobs”.
In October 2023, Chamath resigned as Chair of the board and six months later, in April 2024, the Akili board announced that it was
“currently evaluating potential strategic alternatives to maximize shareholder value”.
Translation: “we’re f**ked and need a way out”.
Finally, last week (May 2024) Akili announced it was being sold for parts to Virtual Therapeutics for $34m (an enterprise value of approximately negative $17m)...
A painful fall from the mighty heights of August 2022.
Oh how quickly things can change in just 21 months.
So what can we learn from this?
Similar to Pear, I commend Akili for having a crack at this problem and I’m definitely not here to dance on their grave. But we have to learn from these failures.
Whether we like it or not, these high profile crashes taint the perception of a market and may damage the prospects of future players in this space if they don’t have a good story for why they are different. In the early days of my time at LetsGetChecked, we had to do so much work just to show people we weren’t another Theranos.
So what can businesses take away from this story?
Your capital markets strategy has to match the properties of your business.
Akili was a pre-revenue company with one half-decent product. Doing a deal with The Dictator to go public was the wrong decision. They did not have a proven business model and it’s questionable whether they even had product market fit. The demands of these investors and the public markets created a set of pressures that forced their decision making. They had to go for broke. And go broke they did.
You see there’s really three stages in a company’s life cycle and businesses should match their capital markets and investment strategy accordingly (of course, there may be exceptions to this rule, especially for startups like drug development companies, but these largely hold true).
- Finding product market fit. Until you have a product people love, little else matters. It’s impossible to predict how long this will take, so keep your expenses low and raise very little money.
- Finding a business model. You’ve got product market fit. Fantastic. Now you need someone to pay for your product AND you need a way to acquire those customers. You can raise some money but again, you don’t yet have a predictable way of deploying this capital to generate returns. That changes once you have a successful business model. You know customers will pay and that you can make good gross margins from those sales. You also have a sustainable and (very important) predictable way of acquiring more of these customers. If you raise money now, you know with a large degree of confidence that you can deploy it into those channels and it will generate returns for you.
- Becoming financially sustainable. The Holy Grail. You’ve got product-market fit, a sustainable business model, have scaled your reach. You can now return a profit each quarter. It’s not until you hit this third milestone, or at the very least, just before it, that most companies should go public.
Of course, Akili got this backwards…
If you’re going to do something this hard, you need staying power.
Building an FDA approved treatment is hard. Building a mental health treatment that needs to get reimbursed by payers. Getting providers to adopt and prescribe a new product is hard. Getting patients to actually use your product is hard. Creating an entirely new category is hard.
Doing all five is INCREDIBLY hard.
But hard is good.
We learned that from Ross Harper at Limbic. Mental Health is a massive, messy problem and building any meaningful solution is going to be really hard.
But the only way to do something this hard is to have staying power.
A main contributor to staying power is a long financial runway. More than anything, you need time to figure all this stuff out. Money can buy you time - as long as you keep your spending in check and your investors are aligned with your timelines.
But the day Akili agreed to go public at a $500m valuation, they started a countdown timer.
They now had to justify their valuation not just to a handful of private investors, but to the public markets. To be fair, this pressure probably started before the SPAC, due to the large amounts of capital they had raised, but going public certainly intensified it.
When you’re under that kind of pressure, you make decisions differently. Your risk tolerance changes. You don’t have time to figure stuff out. You need to place bets that could deliver tens of millions of dollars asap.
Big bets come with big costs, shortening your finanical runway and speeding up that timer. Tick-Tock!
So what now?
Akili’s IP will likely survive under Virtual Therapeutics, but I doubt much else will. It’s another tough blow for the digital therapeutics category, but like I said about Pear, all is not lost. If a product can deliver great clinical outcomes, it has a great chance of being successful, eventually…
The next batch of companies in this space just need to make sure they crack the business model and avoid deals with dictators!
Mental Health Funding Database
We’ve added some fresh funders to our database of mental health investors and grants for mental health organisations. Check it out.
Hopefully this saves you a few hours of googling!
Mental Health News
Here’s your roundup of the top news in mental health this week;
- Psylo closes an $8m seed round to develop a new treatment for depression and other mental illnesses. (Capital Brief)
- Feel Therapeutics launches wearable device using AI for emotional & mental health monitoring based on psychophysiological insights (Feel Therapeutics)
- One of the U.S.’s largest autism therapy company Behavioral Innovations was acquired by Tenex Capital Management for $300m (BHBusiness)
- Brandon Capital rasies a new AU$270m fund to invest in 15-20 startups in drug development, health tech and medical devices across Australia and New Zealand (Endpoints)
- New data shows that in the US, payers reimburse behavioral health hospital services at 34% below costs (BHBusiness)
- Buyers of behavioural health businesses have started using unconventional deal structures such as sellers notes and earnouts to bridge the gap between seller and buyer valuation expectations (BHBusiness)
- Biotech company Rapport Therapeutics plans to raise $136m in their recent IPO terms announcement, by offering 8m shares at $16-18 per share on Nasdaq (Renaissance Capital)
Company Spotlight: Amae Health
- What they do: All-in-one clinical treatment and compassionate social support for people with severe mental illness
- Headquarters: Los Angeles, California, United States
- Founders: Sonia García and Stas Sokolin
- Founded: 2022
Amae Health is focused on delivering high quality in-person treatment for people with severe mental illness. In their LA clinic, they specialise in schitzoaffective disorders, first-episode psychosis, suicidal thoughts and attempts, co-occurring substance use disorders, bipolar disorder, and borderline personality disorder.
They bring the best and necessary resources within the behavioural health system all within one clinic for holistic care — including family and individual therapy, social workers, psychiatric care and medicine management. They all work as one team to provide personalised treatment plans for patients.
Amae takes an iterative approach to improving how people with severe mental illness receive care. Instead of re-inventing the wheel, they worked on taking the existing behavioural health model and improving on it, and are using AI to find ways to continue this process.
Given their in-person model, they are taking a slower and more sustainable growth path, which has detracted some investors. However, Sonia and Stas are okay with this because they are hyper-focused on delivering high quality care over anything. It’s one of the reasons they were attracted to Quiet Capital, who led a $15 million round in April of this year.
Currently, they have one clinic in Los Angeles but are working on opening another in Raleigh, North Carolina.
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That’s all for this week.
Keep fighting the good fight!
Steve Duke
Founder of The Hemingway Group
P.S. feel free to connect with me on LinkedIn
