Wearables Devices - The Future And The Past

Wearable Devices have generated interest from consumers and investors alike: Fitbit has shipped more than three million fitness trackers, the Pebble smartwatch has raised more than $10 million in the most successful crowd-funded project on Kickstarter to date, and Google has released Google Glass to beta developers with great fanfare in early 2013. Hundreds of millions of dollars of funding have been poured into Fitbit and Jawbone over the past five years. And major athletic brands like Nike and Under Armour have staked out initial positions in the race to quantify personal fitness. But is this an area where angel investors should tread?

The initial fitness appliances have been targeted towards walking and biking. Trackers to quantify additional activities such as weightlifting or swimming are in the works, and the race is underway to put sensors and hardware on every imaginable place of a person’s body. In what initially appears to be a race to scale the distribution of their hardware, the winners will be tightly integrating hardware and software to build a ubiquitous platform. The goal is to successfully repeat Apple’s journey from the iPod device to the iTunes platform.

Wearables of course are not a new category per se. Personal accessories like watches and glasses have been around for centuries, and watches were digitized in the seventies. What is new is that modern accessories collect much more data using miniaturized sensors and are tethered to smartphones to make this disparate information transparent. Fibit, Nike Fuelband, Jawbone, Lumoback and many others bear testament to this current wave. But with all the data gathered from accelerometers and other sensors, one wonders how much physical information is really needed until everything is quantified for every sport and every motion in every imaginable activity.

Back to Apple and the smartphone. The mobile phone emerged as a personal accessory in the 1980s and has become the central hub to collect and process all kinds of information. In fact, smartphones disrupted the market for wrist watches to such degree where the emergence of a new platform for wearable devices seems somewhat improbable, and displaying smartphone information on a wristband seems like a limited step at best.

However, more aspirational uses cases for wearable devices beyond the quantified self are emerging. Studies by educational researchers suggest that approximately 83% of human learning occurs visually, and the remaining 17% through the other senses. To date, Google Glass seems to be the device with the highest potential to change user behavior and the potential to become a stand alone platform. And yet, use cases for Google Glass still seem few and far between.

As Marc Andreessen has stated, hardware is hard. While there is a new crop of engineering graduates combining ME, EE and CS backgrounds, success in wearable devices requires expertise in manufacturing, design, inventory management and distribution, making success highly uncertain. And yet, there are three areas that could offer attractive opportunities for early stage investors:

• Wearables for enterprise applications. A successful Kickstarter campaign can launch a product in the consumer space, but capital intensive marketing, distribution, and inventory are required to participate in the battle for the consumer space, let alone to become the one winner. In contrast, B2B spaces can have multiple winners, and avoid much of the channel and marketing cost.
• Portable and detachable devices. These devices can be used in stationary or mobile modes, for example in laser distance measurements.

• New software platforms. KPCB’s investment in MyFitnessPal and UnderArmour’s acquisition of MapMyFitness are examples of investors and acquirers hoping to replicate Android’s success in the wearable device space while avoiding capital intensive hardware.

Andreessen Horowitz has decided to forego early stage investments in wearables and instead double down in the later stages. This should not deter angels from investing in this exciting space.

2013 - For This Angel Investor, A Good Ending After Some Initial Detours

In 2012, a disappointing Facebook IPO cast a shadow on tech IPOs and angel investments. Success in 2013 seemed to be an uncertain proposition, and in fact, the year got off to a slow start. But for the stock market, start-ups, and my own portfolio of angel investments the year turned out to be much better than initially expected.

Facebook shares surpassed their IPO price in late July 2013, and the IPO pipeline reopened in a big way. Twitter launched a successful IPO in November and saw its share price triple. Enterprise SaaS company Veeva Systems successfully IPO’d in October and returned more than 300x of the $7 million invested. The Dow Jones Industrial Average gained over 3,000 points and 26% to end just north of 16,500. 

Total money flowing into early stage investing even exceeded 2012, and 2013 saw the highest amount of seed deals since 2009. To wit: the Band of Angels made a larger number of investments in 2013 compared to 2012. Start-up valuations continued to decline, but overall angel and seed investing activity continued to be strong, perhaps supporting the claim that many valuable companies have indeed been started in the past years. The introduction of so-called Angellist Syndicates and Backers to crowdsource investments has made participation in start-up fund raising accessible to a much larger set of investors.  Companies such as Crunchbase, CBInsights and eShares are making significant headway in providing more transparency for early stage investors.

My own portfolio of early stage enterprise focused software companies started off with six start-ups. Given the high valuations of 2011/12 and somewhat uncertain outlook at the beginning of 2013, I expected to see difficulties raising follow-on rounds. But while valuations largely went sideways, the companies that needed to raise more money were able to do so. I also met with more than 50 start-ups, and made investments in three new teams

• Tylr Mobile turns the inbox into a platform for mobile work. CEO and co-founder Ryan Nichols is passionate about workplace productivity, has been an early team member of two successful start-ups. The company was part of the Alchemist accelerator,  and Ryan was with SAP before the last two start-ups.
  
• Paystik captures impulse payments in an easy and intuitive way and was founded by James Ioannidis and Mary Minno. The deal was sourced through the Band of Angels.
  
• A6 Corporation is mapping the Internet topology to build a superior advertising exchange. Founder and CEO Bill Urschel is a serial entrepreneur, and returned to the Band of Angels for financing.

At the beginning of 2014 the stock market is trading at historical highs and the IPO pipeline is stocked with high profile companies. Money is still pouring into angel and seed investments as evidenced by Angellist and the ever growing number of Superangels and MicroVCs. But the shadow Series A crunch still has to play out, and having to raise $5 million in the next round - whether it is called Series A or Series B - will be the time where the wheat separates from the chaff. For entrepreneurs not much has changed: Hit your milestones, and Always Be Raising!

The Series A Crunch Has Officially Been Postponed. Here Is Why Professional Angel Investors Should Take Note:

Adeo Ressi predicted the so-called series A crunch in late 2011: A dearth of available Series A money caused by the concentration of venture funds in the top venture investment firms and the inability of many smaller venture firms to raise new funds from their limited partners. In fact, at the June 2013 PreMoney conference Naval Ravikant from Angellist confirmed that there is a gap in the market to write a $250 thousand to $1 million check, and to lead a round for a company that is not ready yet for Series A.

But not as many young start-ups have shut down as might have been expected. Instead, many have been able to raise follow-on rounds from their initial seed investors. These investors are willing to double down and provide additional funding hoping that significant traction can be achieved in another 9 to 12 months. 

As opposed to traditional Series A territory these rounds often are not priced. Y Combinator (YC) in particular has changed how entrepreneurs have raised funds: In 2010 Paul Graham infamously tweeted that ‘the convertible note has won’, and start-ups beyond YC have raised $1 million or more of initial seed funding using a capped convertible note structure.

The vast majority of the follow-on investors seem to be perfectly happy to further invest using these note structures. Rather than demanding debt conversion into equity or a loan repayment, they are willing to extend the duration of the initial loan terms, and caps may be raised further. Actual price setting and governance are pushed out into the future. Implicitly, these additional raises are expected to last long enough to meet all milestones assuming execution is flawless.

Fast forward by a few years: Entrepreneurs will ask VCs for equity investments where multiple millions of dollars have already been spent and the corresponding valuation expectations from founders will be high. In fact, Aydin Senkut of Felicis Ventures spoke of a 'shadow series A crunch based on convertible notes'.

Professional angel investors can afford to just sit and watch if they so choose to. But the Series A crunch may present an enormous opportunity for experienced angel investors to exercise leverage, provided they are willing to take the lead. Professional angel investment groups in particular are in a unique position to exert leverage by pooling resources and applying their institutional and operational know how. With relatively little capital, professional angel investing groups have the opportunity to top up a follow-on seed round, convert debt into into a priced round, and take a board seat.

Ron Weissman implored angel investors to look in the mirror when it comes to angel investing in the seed round. But the postponement of the Series A crunch raises an additional question: Angel investors now have to ask themselves whether they are ready to fill the void created by the convertible note shadow Series A crunch and lead start-ups to the next stage.

The best way to end up with $1m as an Angel?

At the 500 Startups’ PreMoney Conference in June 2013, Superangels and Series A investors discussed trends and disruptive models for modernizing venture capital. 

Accelerators such as Y Combinator are providing start-ups with operational expertise by connecting current classes with their alumni, creating significant impact despite relatively little capital invested.

VCs are under pressure from their LPs to reinvest their management fees and add value to their portfolio companies, and ever shorter technology cycles reduce the half life of the VC’s own operational experience. First Round Capital has taken the YC model and has launched a closed network for all employees in their portfolio companies. Andreessen Horowitz has hired more than 50 people to help their ventures scale.

Investment sizes and participants in the early funding stages continue to undergo significant shifts. The Series A investment sizes of the top VC funds have increased and entrepreneurs are being forced into larger rounds. As Paul Graham succinctly stated, ‘Series A has become the de facto Series B’, and Marc Andreessen added ‘the seed funds are becoming the new VCs’.

Angels have piled into an unprecedented number of opportunities in the past years, resulting in a significant overhang of funded start-ups. Aydin Senkut from Felicis Ventures identified ‘the shadow series A crunch based on convertible notes’ as one of the unresolved and untalked about issues for the coming years.

So what is the best way to end up with $1m as an angel? As for the here and now, Elad Gil answered his own question with ‘start with $2m’ and concluded ‘it’s a bubble when the good looking people start showing up at tech parties.’

Postscript: Jeff Lawson of Twilio gave the most inspiring talk called 'we are software people'.