The Background
NowRx was an on-demand pharmacy that promised same-day free delivery of medicine without the hassle of having to visit a drugstore. It was (and still is) a potent and promising disruptive idea.
And NowRx seemed to be making it work, using its approach to expand from California to several other states. Investors were impressed. During its last raise (which ended in June), NowRx successfully raised $27 million at a $275 million valuation. KingsCrowd rated that raise as a Deal to Watch. And the funding round before that was a Top Deal. It was an exciting company that looked primed to disrupt traditional pharmacies as we know them.
But over the course of last week and this week, NowRx announced that it is in the process of selling off its assets. Alto Pharmacy has acquired the rights to NowRx’s patients in California. Capsule has acquired the company’s patient files for Arizona. We can expect other assets of the company to be sold off in the next few weeks.
Once NowRx finishes selling its assets, there might not be any money left for people who invested. NowRx first has to pay off its bills and debts to creditors. If there is any money left after that, it will be returned to preferred shareholders (which includes crowdfunders). I hope there will be money left for shareholders, but the odds of that happening are likely long.
Perhaps the bigger question here is: What happened? I talked to founder and CEO Cary Breese to find out.
Unseen Funding Risk
The short answer is that NowRx ran out of money. But considering that $27 million round we were just talking about, you’re probably wondering just where all that capital went.
The truth is that NowRx was in a dire capital position far before it closed that round.
According the financials NowRx provided in its last raise, the company has $9 million in the bank. But that was old information, based on financial statements from 2020. And NowRx had a monthly burn rate of $1.5 million. By the time its raise actually began, it had far less money on hand. During the raise itself, NowRx took advantage of standard bi-weekly closings — where capital from committed investors is transferred from the individuals to the company — to fund its current operations. It also had to pay for raise-related fees and marketing along the way.
By the time the raise ended in June, only $8 million was left. At its current burn rate, that money could be expected to last a little more than five months.
And that’s how it turned out. The company ran out of money in December.
Could NowRx Have Spent Less?
I asked Cary that very question. He answered with an unambiguous no. And that’s due to the nature of the pharmacy business.
Margins in the pharmacy business are much smaller than in most industries. And the smaller a pharmacy company like NowRx is, the more that large wholesalers charge it for the drugs it provides to its customers. Supply chain issues put even more pressure on thin margins.
The imperative to expand is not just driven by seeking more revenue but also by the enormous cost benefits that scaling brings. Cost of goods sold goes down as scaling proceeds. Delivery routes become more efficient. Margins increase. The ability to compete on price improves — as it must.
But, of course, scaling takes money. The imperative to scale quickly turns into the imperative to raise capital. NowRx took on that challenge willingly. But might it have adapted its expansion plans to account for a difficult fundraising environment?
In hindsight, it’s tempting to say yes. If we do, though, we have to ask if that’s realistic. Startups that can’t show growth can’t attract capital. Asking for money without showing growth would have been a surer path to capital starvation than the path Cary chose: acquiring capital to fuel expansion. And demonstrating expansion to attract capital.
It’s a proven startup strategy. And NowRx had more reason than most startups to pursue it.
But why was running out of money a death sentence? It’s not for many startups. Determined founders can and do find ways to survive. But NowRx’s options were limited for three reasons:
1. Legal strictures. Running out of money and paring down to a skeletal staff triggered regulatory consequences. In such circumstances, a company is no longer considered able to service its patients, and a distressed transfer of the patient files becomes necessary. Legally, NowRx had no choice.
2. Inability to raise more money. On the face of it, this is perplexing. NowRx’s upside was intact. Its management team was proven. It was one of the leading disruptors in the space. Why couldn’t it get somebody — anybody — to step up to the plate?
What really hurt its chances was that the investing group most able to help them — the venture capital (VC) community — was just not interested. From the very beginning, NowRx decided against potential VC investment in favor of using crowdfunding. It was the right decision at the time. But it left the company with no VC insiders to champion its cause. So NowRx’s best option to capture quick funding became a non-option.
3. The competitive environment. When I first saw NowRx, it was one of the earliest movers in the online pharmacy space. But today, it has competition — well-funded competition. Capsule recently raised $300 million. Alto Pharmacy recently raised $200 million. The competitive environment is formidable. Unless you spent time looking under NowRx’s hood, the investment opportunity NowRx represented had lost some of its shine.
Was NowRx’s downfall inevitable? I don’t think so. With the benefit of hindsight, different choices might have made a difference. Expansion plans could have been scaled back. Spending (on things apart from expansion) also could have been cut.
Alas, there are no mulligans in the business world. We make the best decisions we can in real time based on the information available to us. NowRx made no obvious bad decisions.
But did we as investors? What did we miss that we shouldn’t have?
The one thing that stands out is the funding risk. Frankly, it was much greater than I thought it was. I will be paying more attention to funding risk and burn rate in the future.
At the end of the day, NowRx was not a victim of bad decisions. Rather, its victimization is explained by a well-known Wall Street maxim: Sometimes, bad things happen to good companies and through no fault of their own.
I believe this was the case with NowRx.
