How SmileDirectClub went from $9 billion to dead overnight
In this deep‑dive video, Michael Girdley chronicles the rapid rise and spectacular collapse of SmileDirectClub, the direct‑to‑consumer teeth‑aligner startup. He begins with the 2012 founding by two teenage friends, Jordan and Alex, who leveraged a home‑whitening trend to create a tele‑health model that shipped impression kits for $1,900, backed by a well‑connected investor family (the Katzmans). The company secured a 19% stake from Align Technology (Invisalign) in 2016, then exploded in revenue (200% growth 2017‑2018) and entered retail partners like CVS and Walgreens, while spending roughly half of its revenue on aggressive marketing. A family‑controlled dual‑class share structure gave the Katzmans 66% voting power, which later limited outside investor influence. After a disastrous IPO on September 12 2019 (valuation $9 B, stock down ~30% on day one), SmileDirectClub faced mounting regulatory push‑back (state bans, FTC briefs), a damaging Hindenburg Research short‑seller report exposing product failures and a systematic NDA‑based customer‑silencing scheme, and a $500 k fine from the New York Attorney General. The business relied heavily on sub‑prime consumer financing—$1,895 treatment financed at 17% interest via a JPMorgan line of credit—creating a fragile revenue model that collapsed as delinquencies rose during the COVID‑19 pandemic. Losses swelled from $111 M in 2019 to nearly $900 M through 2022, while competitors (Align’s own stores, Byte, etc.) and dentist‑backed low‑cost alternatives eroded market share. In 2023 the stock was delisted, the company filed Chapter 11, failed to find a buyer, and by December 2023 entered Chapter 7 liquidation, with assets sold to SmileSet. Girdley closes by reflecting on the perils of financing customers and the broader lesson for fintech‑enabled business models.
Chapters
On September 12th, 2019, two 30-year-old friends stood on the front of the Nasdaq Stock Exchange. Their company had just gone public and it was worth $8.9 billion. But here's the thing, by the end of the day, they would lose $2 billion of that valuation. 3 weeks later, an analyst would publish a report about their company called SmileDirect, and it was titled "Moving Fast and Breaking Things." in people's mouths. This analyst actually predicted that the stock would go down by 85% over the coming months. Well, it turns out that analyst was wrong. They were just wrong the wrong way. It would go down much more than that. 4 years later, SmileDirectClub was shut down. Uh, it was dead and shut down overnight. Uh, it had served nearly 4 million customers along the way, but when it closed, nearly 10,000 of its customers were mid-treatment. And it had $900 million in debt. This is a wild story of the rise and fall of SmileDirectClub.
Oh, and by the way, thanks to Xero for sponsoring this video. More on them later.
Oh, and this is an apropos video. I'm doing it today. And if you can look at my mouth, which I don't recommend, I chipped 2 teeth over the past month. So today is a big day for me. I'm going to the dentist. I'm getting them fixed. I'm very excited about this. There's nothing more annoying than something wrong in your mouth. And yeah, that's me today. But anyway, I take each and every one of these videos and do a deeper dive on them. You can download that for free on my website, girdley.com/youtube. In 2012, two high school friends named Jordan and Alex were young entrepreneurs and they were looking for their next business idea. And they'd both gone through something as teenagers that many of us have gone through, including me, getting braces. And during this time there was a revolution in a thing called teeth whitening, which I do, by the way. I enjoy my white teeth. It's the one physical thing that people actually compliment me on besides being tall. But anyway, these guys saw that Crest White Strips and home kind of remedies for whitening your teeth were getting really popular.
Crest 3D White White Strips remove over 10 years of stains by going below the enamel surface.
You didn't have to go to the dentist's office to do them. So they thought, well, what if you did that but for teeth straightening? Until then, you had to go to the dentist to get something like Invisalign. It would cost you thousands of dollars. So the idea that these guys hatched in Jordan's Tennessee mom's basement was that they would do it all and ship it directly to you. For the cool price of $1,900. There'd be no office visits, no trips to the dentist, just some telehealth stuff. And you'd scan your teeth, right, with basically an impression type kit that they'd ship to your house. Jordan, it turned out, wasn't some just random kid. He was pretty well connected. His dad had actually been an incredibly successful businessman and investor. At one point, he'd been vice chairman of Quicken Loans, been part of the Cleveland Cavaliers ownership group, and he'd been behind 1-800-CONTACTS. It wasn't just some random investor that was about to put money in the deal. He was a guy who really understood direct-to-consumer. So while Jordan and Alex were the co-founders of the company, the real money behind it and suddenly the takeover of the business was being done by David, who installed himself as CEO, and he installed one of his other kids as president. And this is a pattern you'll see often, and I'll come back later in this story. When a family by itself runs an entire business, it creates a very interesting dynamic. And helped play in the downfall of the eventual business. And they did something pretty smart. In 2016, they went to the company behind Invisalign and they got them to invest in SmileDirectClub. They bought in for a cool 19% of the business. And we talk a lot about the ability for companies to deal with oncoming disruption of their business. And here was a good move by some of the Invisalign folks. If suddenly the deployment of their technology were gonna start to happen in people's homes over the internet and that kind of thing, they wanted to be ahead of that game. And it was pretty smart. But this partnership alongside the family dominance of the business would come back to haunt the whole story. One of the great things about America, we love our white straight teeth. It is the surest symbol of us just showing that we have the ability to manage ourself and be put together and we're part of a social elite than anything else. Other countries don't look this way. You go there and you'll see very high-end folks, upper crust folks with kind of messed up teeth. America is pretty unique in this thing. If you talk to a lot of parents, including me, I would give my kids straight teeth before I would send them to college in terms of priority. I'm going to do both. But that's how important teeth are. And that caused SmileDirectClub to take off like a rocket ship. People want straight teeth. Between 2017 and 2018, revenue nearly went up 200% at a huge scale. They went from $146 million to close to $300 million in revenue year over year. In 2017, they shipped about 90,000 of these kits. And then it started to reach the quarter of a million kits per year up in 2018. And then they did that number in the first half of 2019. CVS and Walgreens came calling. They asked SmileDirect to put what they called SmileShops where people could get their mouths scanned inside of their businesses. CVS by itself had locations within 3 miles of 70% of the American population. But here's the thing. Even as stars like Draymond Green from the NBA invested and became spokespeople, Underneath the entire business, they basically were spending massively on marketing. Nearly 50% of revenue was going out the door each year on growing the brand and getting new customers.
My bottom teeth, they were really crooked and I just wasn't getting braces again. Then I discovered SmileDirectClub. It's easy to just grab it and go and I can change it on the road. I did photo shoots with my aligners in and you can't see them. A smile is a first impression. That's why I think having a great smile is so important.
There's a problem with this business is once it works and people have straight teeth, they don't need you anymore. And so it's not like they were spending a bunch of money on customer acquisition for revenue that was going to be continuing and long-term. This is a one-time hit. In October 2018, some big-name venture capital firms invested, and also a firm I've never heard of, some kind of Clayton, Dubliner, and Rice type thing. But anyway, they raised $380 million at a $3.2 billion valuation. Then by this point, SmileDirect was easily the number one player in the industry. They They had serviced over 700,000 customers, but the story was about to take, well, a wild turn. Before we get into that, I wanna talk about today's video sponsor, Xero.
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Remember that partnership with Align Technology, the guys behind Invisalign? Well, they decided they didn't want to be part of SmileDirect anymore. In 2017, Align took the knowledge they had learned as an investor and partner of SmileDirect and started to open their own competing stores using the exact same business model. This is where the courts tend to step in in the United States, and SmileDirect sued Align. And the court sided with them, saying that Align had broken their non-compete and had basically used proprietary trade secrets in a way they shouldn't have. In the settlement, Align was forced to shut down all of their stores, give back their investment basically at cost, and agree to stay out of competing with SmileDirect until at least 2022. This was going to prove pretty critical because so far we haven't heard anything about these devices people putting in their mouth not working well. It turns out Align had a long history of making sure that these devices were safe and functioned well. And suddenly, well, they weren't in the partnership anymore. But before that would come back to haunt them, smile direct, they filed to go public in August 2019, fresh off $373 million in that first half year's revenue. They were growing like crazy and they were about to issue shares to you and me. On September 12th, the shares went public at $23 initial price, valuing the company at nearly $9 billion. And they raised $1.6 billion to put on the balance sheet of the business. On paper, these two young co-founders at 30 years old were suddenly billionaires. But here's one thing that happens a lot in these companies. When they do a deal and sell shares to you and me, they often make sure that they get taken care of really well. And one of the ways they did that was by creating what's called a dual share class structure, meaning the family and the insiders got 10 votes in the boardroom for every vote that you or I got, meaning they were firmly in control no matter what happened. It was so bad that the NASDAQ prospectus, the one that goes to investors when they take a look at the deal, had to list the company as what's called a controlled company because the Katzman family controlled 66% of the voting shares. For a company that just raised $1.35 billion from investors, suddenly that meant that money didn't have any share whatsoever in the big decisions of the company. No matter what was going to happen, the Katzmans were going to control everything. The stock went public at $23, and that day it started to slide like crazy, ending up down nearly 30%. On the first day. This would be the first, the worst first day showing for an IPO in nearly 12 years in the United States. In fact, it was so bad that the founders called Chase Bank CEO Jamie Dimon that afternoon and asked what was going wrong. Here's the deal, the Wall Street banks, they did their part. There's a whole scam that happens with taking companies public. The banks take enormous amounts of fees and their own cut, and then they turn around and give special treatment to their biggest customers. In this case, part of that is The big banks are supposed to give buy ratings to the stock, but nobody was paying attention to that. They were all selling it. And it was all kind of crazy because SmileDirect is growing like gangbusters. People apparently want the product. They're making money. Like, why is the stock getting pummeled? Well, fundamentally, there were problems with the business. See, what's happened in the United States over the past decades is we've gone from a strong union country to one where the government has basically stepped in and functionally unions were key to keeping wages high and protecting job rights and all that kind of stuff. They basically kept the supply of different types of folks limited. So companies had to pay more because there just weren't that many of them. Well, the government over the past couple of decades has stepped in and does that. And now they regulate everything from hairdressers to HVAC technicians to plumbers to, well, also dentists. And so those dentists, well, they don't want somebody coming in on their turf like SmileDirectClub. So they started to go to the actual local governments of states to make sure that there were regulations put on SmileDirectClub, some of which made the business entirely illegal in some states. Alabama and Georgia created rules actually where a licensed professional would have to be present whenever a scan was done of people's mouths. In other words, they made SmileDirectClub totally illegal in their states. Well, unless an orthodontist was present or a dentist. SmileDirectClub actually tried to protect themselves. They filed briefs and sued against these states And it was even so bad that the FTC, the Federal Trade Commission, that normally is, you know, fighting to keep kind of companies at bay. Well, they actually filed a brief on behalf of SmileDirectClub saying what was happening in Alabama and Georgia looked more like a handout to dentists than it was something good for consumers. With this in the background, a few weeks after the IPO, a short seller named Hindenburg Research published this report that I talked about earlier in the video about SmileDirectClub. Which basically highlighted something else about what was going on with the business, which was it wasn't necessarily very functional. When they went in and dug into the business, Hindenburg did, and did a bunch of first-person research, they discovered that people were losing teeth, getting tooth damage, gum damage, getting just problems using the whole product. There had been 1,200 Better Business Bureau complaints about the business alone in the last year. SmileDirectClub basically came out and said it was a hit job, but it turned out like these guys weren't making this stuff up because behind everything, SmileDirectClub had been systematically silencing unhappy customers. In fact, if you settled with them and got a refund and that sort of thing, you're required to sign an NDA, a non-disclosure agreement, that you couldn't tell people what happened. The penalty for breaking it was $10,000 per violation. 17,000 customers ended up signing this NDA. They were barred from even acknowledging that they had been customers of the company. The government caught wind of this, and in Washington, D.C., their Attorney General sued Smile Direct Club and basically got them to take away this onerous NDA program. And pay a $500,000 fine. But what was really hurting the company was the price tag. It was $1,895 to get the teeth straightening treatment done. But here was the problem. Most consumers don't have $1,895. So SmileDirectClub had dealt with it by creating a lending program where basically they would finance the teeth straightening program for their customers, but they did it in an entirely onerous way. After a $250 down payment, you would make monthly payments while you're using the service. At a 17% interest rate.
So join the club and get a smile you'll love for $85 a month with $250 down. It really is that simple at SmileDirectClub.com.
This is subprime lending territory. These are not the people that you loan money to and you expect that you're going to get paid back at a high rate. So in the background, Smile Direct Club was borrowing money from JPMorgan. They had a large line of credit and they were turning around and loaning that money to high-risk customers. It's not like they hid this, but it was in the fine print of their IPO prospectus. They had told people that delinquencies and people not paying on their program and their borrowing from the company could be a significant risk. But as the economy started to tighten in 2022 and 2023 and people were stuck at home post the COVID era, well, guess who stopped paying? Well, the types of people they had been lending to. As my grandfather used to say, loaning money is the easy part, it's getting paid back that's the hard part. And that's what started to happen to Smile Direct Club. So heading into 2020, you have Smile Direct Club as a business that's built on a shaky foundation of consumer lending with a product that doesn't work that well, under attack by regulators in different states. And that was precisely the ingredients that were not going to be great when COVID came in March 2020. While SmileDirectClub had been telling everybody that it was a teledentistry pioneer, you could do all this stuff remotely. Fundamental to each and every treatment was that you had to go into a shop and you had to get your teeth kind of measured. And then there had to be adjustments to that sort of thing. And suddenly, if people were trapped at home in 2020, you wouldn't be able to do any of that. And also, like, you wouldn't be going into CVS and see a SmileDirectShop there because, well, people weren't leaving their homes. By late 2020, the company had been forced entirely to do the home aligner kits where people would be sent a kit, do the fill out, and then send it back in. The problem was when you'd send those things out, there was a very low conversion rate. So for a business that already had been investing crazy in growth, this came at a really bad time. In 2019, they did nearly $750 million and lost about $111 million on that. But then losses under the COVID era started to accelerate, started to lose nearly a quarter billion dollars a year through 2021 and into 2022. Between 2020 and 2022, the company lost in aggregate nearly $900 million. And remember, 2022 was when Align Technology, the people that did Invisalign, were going to be able to come in and compete. And those guys, they had been ready to pounce as well. And one of the first things they did was sue Smile Direct Club. Had broken their original agreement and an arbitrator agreed with them and awarded Align $63 million at a time when SmileDirectClub couldn't really afford it. And seeing all the revenue that these folks were doing, a ton of competitors had entered the market. Folks like Byte and I don't know, a bunch of other kind of Gen Z type names. I don't really remember. And at the same time, dentists, they got pissed too and started to offer their own lower cost versions, straightening treatments in office. And by October 4th, 2023, all this showed in the stock trading for Smile Direct Club. And by that point, the stock was trading for pennies and being delisted from the NASDAQ stock exchange. And on September 29th, 2023, the company showing $900 million or so in liabilities and unable to show cash flow they'd be able to handle it, declared Chapter 11 bankruptcy. And I'll give it to David Katzman and the co-founders. They committed to each put up $20 million, and in the case of David, $60 million to help keep the company afloat. Even David came out and said at this time he was optimistic about the future for Smile Direct Club. The first thing they did was go try to find a buyer. Nobody was interested. By December 8th, 2023, out of money, the lawyers in bankruptcy court told the judge that they just didn't really have a good couple of months and weren't going to be able to keep going. And that's when the whole company shut down suddenly. They stopped servicing existing customers and stopped taking on new ones. Everything just closed overnight like it hadn't been there at all.
Our consumer watch this morning. SmileDirectClub announced this week that it shut down operations after filing for bankruptcy in September. The invisible teeth aligner company also closed its customer service center, leaving existing users and customers in the dark.
But interestingly enough, the financing arm that had loaned money to folks who were undergoing treatment, well, they kept asking for payments from, from the consumers. Eventually, the New York attorney general had to step in, get them to stop doing that. In January 2024, the case switched from Chapter 11, which is reorganization, to a Chapter 7 bankruptcy, meaning liquidation, and the assets of the company were put up for sale. What was left of the company was bought by a company called SmileSet. But what had been SmileDirectClub was gone. Companies like SmileDirectClub can grow crazy when you basically finance your customers making purchases for you. Some of that's going on right now, by the way. Take a look at the whole AI kind of circular financing stuff going on between NVIDIA and all those types of folks. When you start to finance your own customers, well, suddenly it doesn't cost them anything to buy from you and they'll buy a lot. But the problem comes up when you try to get paid. And as my grandfather said, again, loaning money is easy. Getting paid back is the hard part. All right. That's it for this video. Glad to be back in the drainage ditch. If you liked it, let me know in the comments below. It'll encourage me to make more. Catch you next time.
