The Prof G Pod with Scott Galloway - What Happened to 23andMe? Why Harris’ Plan to Tax Unrealized Gains Makes No Sense, and Time Really is Money

Episode Date: September 11, 2024

Scott speaks about the business of 23andMe, specifically how it illustrates what happens when growth companies don’t meet their growth expectations. He then discusses Kamala Harris’ plan to tax unrealized gains and why he doesn’t support it. He wraps up with a conversation on ways he spends his money to increase his productivity.  Music: https://www.davidcuttermusic.com / @dcuttermusic Subscribe to No Mercy / No Malice Buy "The Algebra of Wealth," out now. Follow the podcast across socials @profgpod: Instagram Threads X Reddit Learn more about your ad choices. Visit podcastchoices.com/adchoices

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This and other information can be found in the Innovation Fund's prospectus at fundrise.com slash innovation. This is a paid advertisement. Welcome to the Prop G Pod's Office Hours. This is the part of the show where we answer your questions about business, big tech, entrepreneurship, and whatever else is on your mind.

Hey, Prof G. Hey, Scott and team. Hey, Scott. Hi, Prof G. Hey, Prof G. Hey, Prof G. Hi, Professor G. If you'd like to submit a question, please email a voice recording to officehoursatprofgmedia.com.

Again, that's officehoursatprofgmedia.com. So with that, first question. Hi, Prof G. This is Mitch. I work in tech in the Bay Area in Silicon Valley. And I see a lot of different companies doing really great things in this area. And one of them, which I invested in a few years ago, is 23andMe, when I was trading at $10 a share. I really believed in its promising technology and strong leadership. However, now it's now trading below $0.50 a share, which has been a tough pill to swallow.

I was wondering how this could happen to a company with such potential and a growing industry, and what it says about the future of personal genomics and similar tech-driven healthcare companies. I'd also love to hear your thoughts on whether this space still holds promise or if there are any underlying challenges that investors might be overlooking. Thanks for all your insights and books and fostering a thoughtful dialogue on so many important topics. We all appreciate it. Thanks, Mitch. Thanks for the question and your transparency. So first off, the first lesson is, first and foremost, forgive yourself. The

second is, think about diversification. Now, let's talk about the business itself. 23andMe was founded in 2006 and is primarily recognized as a genetic testing company that offers consumer insights into their ancestry and health risks through mailed-in saliva samples. It also operates as a data company. The company has built a massive database of DNA from about 10 million people who agreed to share their genetic information for research. Beyond testing, 23andMe has ventured into the pharmaceutical industry, developing its own drugs based on findings from its genetic data. So it was obviously very promising, but it's struggling.

It's gone from a $4.5 billion equity valuation down to $200 million. So its value is limited 98% from its peak. And NASDAQ has said that the stock, which now trades below $1, could be delisted. Now, CEO Ann Wojcicki is trying to take 23andMe private at just $0.40 per share. The company's main revenue stream, consumer DNA testing, has fallen short, raking in only about $220 million last year, far below expectations. When you have a growth company that is investing at these kinds of levels to create sort of a 10x better product, especially I would imagine around research and genetics and healthcare and data, that is a capital-hungry monster. And if the company is growing 50%, 60%, 70% a year, then eventually the revenues, the top line will take

care of itself. And you'll get to a point if you have, assuming you have positive gross margins, where you start to make a lot of money. The problem is, is that if you miss, typically what happens in a small business is you miss on the top line, but you never miss on the expenses. What do I mean by that? Even though maybe your revenues came up 40 or 50% off plan, you managed to spend what you planned to spend. And that's where growth companies get into huge trouble. And that is if they don't register the growth that the investment was expecting or that justified the investment.

So all roads lead to the same place here. They're probably going to take this thing private, and they are probably going to lay off, I would imagine, 50%, 70%, 80% of the workforce and focus. I don't think this company ever had any business being in drug discovery. That is a decades-long business. It requires billions of dollars. I think the average drug takes over a billion dollars to bring to market. And also, they just misestimated the demand for this. The hack didn't help. I'll give you a personal example. I would never do 23andMe because I was a sperm donor in college. I was getting called back three

or four times a week for about a year, which was very exciting for me because that was a lot of money back in 1985 or whenever it was. I have somewhere between one and 7,000 children, or at least biological children. And with 23andMe, they can figure out it's you. You could also go to a website, submit your name, address. They send you a certified letter. If you send it back, an email goes out to your biological children with your contact information. I would do it if I had 10 or less, or I knew I had 10 or less, but that's the thing. You don't know because it was totally unregulated back then. My mom made me stop doing this after about a year because she said, you realize your

daughter could end up marrying her brother and not know it, and she forced me to stop. Anyways, that's my story and why I don't use 23andMe. But to bring this all back to 23andMe, this was a tech company that required a massive amount of investment, and the growth basically petered out. And as a result, it just can't justify the current investment, and they're going to have to totally recalibrate the company. This happens a lot. The question now when they take a private is, will they be able to cut costs? Will they be able to pare it down such that this company has some hope of creating positive cash flow, or will they find another means or another adjacent business that offers some sort of growth? But at 50 cents, the assumption is they're going to go out of business.

Just some quick tax planning here. If you were fortunate enough to have some other investments that worked out, you may want to think by the end of the year of selling down the stock and registering or taking the loss against any gains you might have. So the kind of the silver lining here is you have a tax loss, which has some value. If you invested 10,000 bucks and you've lost 95%, you have a $9,500 write-off when you sell the share. So wait till a year where you have some gains and then take the loss, or sooner if you want to get your capital out, such that you can take advantage or offset your capital gain. Thanks so much for the question. Again, let me finish where I started.

Forgive yourself. Question number two. Hey, Prof G. This is Colin from lovely Marietta, Georgia. Appreciate you taking my question. I'm looking at some of the new policies laid out under the Harris-Walls campaign, and the latest thing about taxing unrealized capital gains seems pretty insane to me. I'm a social liberal fiscal conservative. I like to think of myself as an independent voter. But to tax unrealized gains makes literally no sense to me. And the fact that it's people with 100 million or more seems to be the dividing line. Even that doesn't make sense to me. Why, if they're trying to stop the uber-wealthy from leveraging their securities, why would they not look at something like fees for loans against securities as collateral, as opposed to taxing something that hasn't happened and can result in losses. I would be curious about your take on this and your thoughts on what levers they should really be trying to pull instead of this

or whether you agree with their stance. Appreciate your answer. Thanks, bye. Thanks for this. Yeah, it's getting a lot of discussion. So according to our website, our campaign supports parts of President Biden's earlier budget proposal,

which didn't get through Congress. The reality is this tax would probably only affect a tiny percent of America's wealthiest people, those with over $100 million in wealth. That's about one in 10,000 people who aren't paying at least a 25% tax rate on their income. It mostly targets individuals with most of their wealth in tradable assets. The reasoning is that it's meant to fix a tax system where the super rich often pay lower rates. The middle class folks, according to NBC News, the top 1% has 40% of their wealth tied up in unrealized capital gains. Also, according to the Treasury Department, it will raise about $500 billion in tax revenue over the next decade. But the bottom line is, this makes no fucking sense. And okay, it's worth talking about

conceptually. This is never going to happen. There are both moderate Democrats and the entire Republican Party are just not going to let this happen. There's real issues with this. One, if you're going to tax unrealized capital gains, then you get into the business of, all right, you're going to have to value all these assets in the near year. You're going to have to do a mark. Every year I spend the better part of a full day with the folks at Goldman who manage my money trying to put a mark on my private investments. How do you value those things? It's like I have investments that I could value at X or 5X, and I can make an argument

for either of those things. So because the tax would be on a quote-unquote number of value now obviously the value of the stocks you hold can be easily marked or calibrated which in my view would make private assets much more attractive so all of a sudden you would be creating asset classes that are much more attractive than other asset classes and then what happens if those assets go down in price do you purposely mark them down? It just makes no fucking sense. And the over $100 million thing is just populist bullshit, in my view. I just don't think there's any way this can work. And also,

one of the real benefits, I think, of thinking long-term that I like is you should buy assets and never trade them and hold onto them. And one of the greatest wealth creators in history, and it sounds stupid and easy, but it's true or simple, is just the tax-deferred structure of holding on to assets and not trading them. That is kind of the key to wealth building, is buying shit and forgetting about it. Like so many things the Democrats do, the intentions, the philosophy, the theory behind it are absolutely right. And that is rich people are not paying their fair share. Let's go to the 25 wealthiest people in America. They pay somewhere between 4% and 8% tax rate because the loopholes in the tax code are extraordinary. Everyone's focused on tax rates because that's just a

literally weapon of mass distraction. The key is the tax code, which has gone from 400 pages to 4,000 over the last several decades. And those 3,600 pages are there simply to fuck the middle class by creating all sorts of loopholes for corporations and wealthy individuals who are paying the lowest taxes since 1939, corporations, and the wealthiest individuals who have seen their taxes plummet through all kinds of crazy tax avoidance. And one of those pieces of tax avoidance you referenced, and that is basically the strategy is buy, borrow, and die. What do I mean by that? I own a bunch of Amazon and Apple stock. I don't sell it. It keeps going up, tax deferred. Well, what happens? Maybe I need some money. I can borrow against it at very low rates. And then that money keeps compounding

off the whole base because it doesn't get taxed. I don't have to send 23 to 40 cents of it to Uncle Sam. It keeps growing off a much bigger base. And then I put it into a trust. And then when I die, it transfers to my kids tax-free. That is how the wealthy get even wealthier and build dynasties, which is bad for America. So what is a way around that? An alternative minimum tax. And that is, at the end of the year, if you're a wealthy person, and I would lower it to say anything over $10 million a year in income, you pay an alternative minimum tax of 40%, or maybe even 30. And that is, you say, look, we don't care what loopholes you've been able to figure out, you're going to pay at least 30%. You're making a shit ton of money. And whatever things have been slipped in by lobbying groups of the Republican Party to give small business owners their first 10 million tax-free,

to create a donor advisor fund where you actually haven't given the money away yet, but you get to write it off. Yeah, we got to get rid of that shit. Now, can you get rid of that shit? Probably not. So rather than trying to get rid of that shit, all right, let's just any money borrowed or something like that that says, all right, it still incentivizes people to borrow money, invest, buy shit, grow the economy. But instead of paying on a margin loan 4% or 6%, they're paying 6% or 8%. And it generates some tax revenue that way. We have an alternative minimum tax. But trying to tax unrealized gains, good luck with that. Thanks for the question. We have one quick break before our final question. Stay with us. Welcome back. Question number three. Hi, Prof G. This is

Brendan from Hood River, Oregon. I often think of wealth as the ability to spend your time doing the things you want to do. It's fairly common to hire someone to maintain your yard, do your taxes, manage your investments, or have a house cleaner come by once every few weeks. But being in the high net worth space, I'm curious what services you use in your personal life to free up you or your family's time. Big thanks to you and Ed for providing great entertainment for all of us listeners. Hey, Brendan, that's a great question. And their entire podcast is sort of focused on productivity. I think my approach to life and spending probably is not that relevant to a lot of people. So I'll start with trying to look at this through the lens of when I was younger, what I did when I didn't have any money, and what I think you should

do. The first is I wouldn't invest in single stocks. I wouldn't try and talk yourself or delude yourself into thinking you're a better investor. I would focus on your career and exercise and relationships, and I would outsource all investing and buy low-cost index funds and just not worry about it. So that's one thing. Pre-cooked meals. If you love cooking, then do it. But if you don't, try and find a routine around food you like that's pre-cooked, pre-done, if you will, and that's healthy. I think it's a great idea to get an app around working out and set a road schedule. And I like doing intense 20 to 30-minute workouts. I used to go to the gym, and then I would spend an hour and a half there. I'd probably only exercise for 20 minutes, just kind of wandering around,

futzing around. By the time you get to the gym, change, all that shit. I like the idea of having an app that is very intense. I think the first kind of purchase I would make as a young person in terms of paying somebody else would be pay them to clean your apartment unless you enjoy that kind of stuff. Some people do. But I think it's important to feel for your own mental health like you live in a nice, clean space. I think people should live in a small space when they're young that's inexpensive, that's near work, so they can just use it almost like a hotel or just a bed. I don't believe in hanging out at home. I got a lot of shit for saying this on TikTok. But I think your time at home is inversely correlated to your success professionally and personally. I don't think you want to be at home

much. Under the age of 30, I think you want to be out of the house kind of 15, 16 hours a day. And then as you get older, what I find is really helpful. I have an assistant who I pay very well, but there are assistants available in remote areas, Costa Rica, Mexico. There's a whole rising genre of outsourced PAs who can work two, four, you know, if you need it, eight hours a day. Essentially where I am in my life right now is that there are a small number of things only I can do. Only I can do. Only I can record this podcast right now. But I don't do the sound engineering. I don't do the special effects. I don't write the scripts. I don't contact the guests. I don't follow up with the guests.

I do none of this. I don't bill Vox. I don't get the numbers. I don't get the analytics. What I am doing right now is the only thing I do for this podcast. And that's the way it should be, because there is someone who is better than me at everything else, but I am the best at this. So what you want to do is take what you are best at and leverage it across as many things as possible while outsourcing everything else. But I love the way you're thinking. And again, I bet there are just a ton of sites that focus on this, but I appreciate the question and wish you a ton of prosperity and free time. And also, I think it's really important on a regular basis to do nothing, to literally do nothing.

I have times on the weekend and I plan them out. My favorite thing is nothing, and that's fine. Doing nothing is fine as long as it's planned. Thanks for the question. That's all for this episode. If you'd like to submit a question, please email a voice recording to officehoursatproptimedia.com. Again, that's officehoursatproptimedia.com. This episode was produced by Caroline Shagrin.

Jennifer Sanchez is our associate producer. Andrew Burrows is our technical director. Thank you for listening to the PropG Pod from the Vox Media Podcast Network. We will catch you on Saturday for No Mercy, No Malice, as read by George Hahn. And please follow our PropG Markets Pod. That's right, the PropG Markets Pod, wherever you get your pods for the new episodes every Monday and Thursday.