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Bankrupt uBiome Says Founders May Have Misled Investors

Xconomy San Francisco — 

[Updated, 9/5/19, 1:17am. See below.] Less than a year after reeling in a $83 million investment round, privately held microbiome startup uBiome has filed for bankruptcy and says its founders might have misled those investors amid other potential improper business practices.

The allegations of impropriety, made more dramatic by an FBI raid earlier this year, included billing multiple times for a single product.

The San Francisco firm began in 2012 as a “citizen science” project boosted with crowdfunding and almost immediately began raising ethical questions.

It sells home kits that allow customers to link their gut microbes to health conditions by sending in fecal samples. With the latest round of funding, uBiome was pushing into the pharmaceutical world, looking to glean therapeutic insights from its growing store of customer data. The firm planned to establish its drug-hunting division in Cambridge, MA.

Soon after the raid of uBiome’s San Francisco offices in April, in which agents seized computers and business records, co-CEOs and founders Jessica Richman (pictured above) and Zac Apte went on leave and have since left the company. Interim CEO Curtis Solsvig, who has bankruptcy and restructuring experience, took the helm in late June. The company announced today that it plans to sell itself within 75 days.

In the bankruptcy filing, Solsvig writes that the founders “implemented certain business strategies” that had “operational (but not scientific) flaws and, in some instances, were of questionable legality.”

“These issues included improper insurance provider billing practices, improper use of a telemedicine physician network, overly aggressive and potentially misleading marketing tactics, manipulation of customer upgrade testing, and improper use of customer inducements,” according to the filing.

Solsvig also writes that “certain information” in uBiome’s fundraising pitches “may have been incorrect and/or misleading.” San Francisco venture firm 8VC holds nearly 22 percent of uBiome, while Andreessen Horowitz holds 11 percent, the filing shows. The firm was also backed by OS Fund, Y Combinator, Dentsu Ventures, and others. Ex-Novartis CEO Joe Jimenez joined uBiome’s board last year.

Through a spokesman, 8VC partner and uBiome board member Kimmy Scotti sent this statement: “We have taken significant action to put the company on stronger footing and believe in the strength and potential of uBiome’s scientific achievements and IP. We remain committed to supporting the company as it pursues an orderly sale of its assets for the benefit of all stakeholders.”

[Updated: An Andreessen Horowitz spokeswoman said late Wednesday the firm had no comment.]

While a recent news report questioned the validity of the company’s tests, today’s filing defends the underlying science.

“Although uBiome believes the science and technology behind uBiome’s business model in this developing area is sound, these issues—among others—have resulted in significant legal exposure for the [company],” the filing says.

The firm is cooperating with the federal investigation, according to the filing. It is no longer selling one of its products, SmartGut, which was marketed as a diagnostic tool to help doctors treat patients.

But uBiome continues to market its Explorer product, which it says the drugstore chain CVS could begin selling in October.

The filing says 13 potential buyers have done diligence on the company but none have made a move toward a transaction. To stay open and retain about 100 of its employees, uBiome has lined up nearly $14 million in debt financing—but it will only receive the full amount if it finds a buyer. According to the filing, Solsvig has tried to restructure the company without bankruptcy, but the legal cloud is too risky for investors. “Simply put, uBiome needs a clean slate and a fresh start to save the business and 100 jobs,” he writes.