Comment counts: key considerations for starting a wearables company

Wearable technology is an exciting new sector for fashion and technology entrepreneurs, but there are multiple challenges and obstacles to confront and overcome in order to successfully take a product to market, writes Timothy Coghlan, a China fashion, retail and technology industry specialist.

fitbit

It has been more than three decades since Adidas launched its Micropacer sneaker to tie-in to the Los Angeles Olympic Games in 1984. Now a collectable for sneakerheads, the Micropacer was one of the very first computer-embedded fashion devices developed to calculate distance, running pace and the calories burned by the wearer. Fast-forward to today, and hundreds of “wearable technology” products are available for sale in a market estimated to be worth $16.1bn in 2015, according to Visiongain, and predicted to hit $53bn by 2019, according to Juniper Research.

Other compelling evidence that the wearables sector is coming of age is the multi-billion dollar exits (cash outs) achieved by notable wearables companies over the past 18 months, including the $3bn acquisition of Beats by Apple in 2014, and Fitbit’s $4.1bn IPO in June 2015.

The wearables sector is luring entrepreneurs from both sides of the fashion and technology divide, yet the tech industry mantra that developing “hardware is hard” (as opposed to software) reigns true. Budding wearables entrepreneurs will encounter multiple setbacks in taking their ideas from concept to sellable product. Here are some of the key issues to consider in order to effectively developing and bring to market new products and brands…

Developing functional products

The recent wave of wearables began to swell in 2013 with devices including the Nike Fuelband, Samsung Gear, and Google Glass all hitting the market. These early devices gained traction with health enthusiasts and the technology early-adopter pack who used them to measure, track and record daily activities such as jogging distances and sleep data.

However, for most people who were not hardcore athletes or quantified-self fanatics, the value proposition of these early “wearable 1.0” devices was negligible – especially given the fact mobile phones could perform a lot of the same measurements. Moreover, many of the devices were plagued by functionality problems such as short battery life plus interface and syncing issues that caused users to discard them after only a few weeks.

apple-watch

Product iterations and developments over the past two years have seen many of these user (tech hardware) issues improve, as was apparent with the launch of the Apple Watch in April 2015. Yet, even with most of the hardware issues now solved, the question still remains of what actionable data and information these wearable devices provide that enhances the wearer’s life, rather than simply reporting on it.

Benjamin Joffe, general partner of the HAX (hardware) Accelerator program based in Shenzhen, China, says that despite the recent progress we are not yet in the “2.0” era of wearables: “It’s great for a device to track your lifestyle habits and give data, but that data has to have a call-to-action or tell you what to do, like a watch that announces ‘You’ve sat down too long or you’re stressed, maybe you should you stand up or take a break for a while’. The next ‘2.0’ generation of wearables will have specialised analytical capabilities that will have wider implications for both employers and end users, but developing these will require ‘real science’ with new [embedded] sensors and the trouble with this is that there are very high barriers to entry.”

Sunny Vu, CEO of Misfit Wearables says wearables should be measured against the “turnaround test”, in terms of proving the usefulness of a device to a user. That is, if you had left home and were already halfway to your destination and you realised you had forgotten your phone, keys, or wallet, would you turn around and go home to get them? Probably. But would you turn around to go home and get your wearable device? Probably not.

For Vu, it was vital to make something compelling. Simply creating an activity tracker wasn’t sufficient because it wouldn’t pass this test. “Going into the future, ‘wearables 2.0’ can’t be single purpose devices. The [Misfit] Flash device is built to be a button that doubles as a remote control for your phone to take selfies and perform other tasks. What’s interesting is that [in the future] perhaps devices will enable you to control things in your life, like calling Uber.”

The immediate challenge for aspiring wearables entrepreneurs is to go beyond the current product offerings and create something functional and with a compelling user proposition for consumers.

Funding your start-up

For wearable start-up founders, there also comes the question of funding, as hardware is far more costly to develop and bring to market than software.

Crowdfunding websites like Kickstarter and Indiegogo have become the de facto global portals for entrepreneurs to test their ideas and raise funds from individual backers who pledge money to be part of the project. The most successful wearables Kickstarter campaign to date has been the Pebble Watch, which made headlines by first raising over $10m and then raising another $20m on the site in early 2015. Pebble founder and CEO Eric Migicovsky says quite simply: “The key to successfully raising large amounts of crowdfunding is to first make a good product and then figure out how to explain it to the world before even putting it on Kickstarter.”

Pebble

Vu of Misfit Wearables also turned to crowdfunding after he had already raised an $8m Series A round of venture capital funding from Founders Fund and had developed and tested early versions of their products. In an Indiegogo campaign in 2013, the company raised over $800,000 from almost 8,000 people.The Misfit Shine activity tracker launch followed, and then another Series B round of venture capital funding of over $15m from Horizon Ventures.

The amount of Misfit’s crowdfunding was small compared to other venture capital funding rounds, though a vital aspect of crowdfunding is the feedback loop gained by interacting directly with potential customers to see if people want your product before you invest other resources into actually building it. As Vu said: “Failing to raise crowdfunding is a strong indication that your product isn’t the right [market] fit and maybe you shouldn’t make it.” In mid November 2015, Misfit was acquired by Fossil Group for $260m.

With Beats’ $3bn acquisition by Apple and the $4.1bn IPO debut by Fitbit, there is growing evidence that wearable companies have the potential to make large returns for their investors. As Rui Ma, Beijing-based China Partner for 500 Startups, a Silicon Valley venture capital seed fund and start-up accelerator, explains: “Due to the nature of hardware start-ups they need big investments and for 500 Startups, when considering start-ups to invest in, we look at companies that sell globally [regardless of where they’re based].” Omate Watches is one wearables start-up that 500 Startups has invested in.

For entrepreneurs, it is important to weigh up the different funding options. Not all funding is equal. Venture capital comes at the cost of giving away a percentage of your company whereas crowdfunding doesn’t. As related by Sunny Vu: “Venture capital funding makes most sense when interests align and there’s a tie-in to growing the business so the investors can become strategic partners for the company.”

For Misfit Wearables’ most recent $40m Series C venture funding round in 2014 from China-based GGV Capital, Xiaomi and JD.com, each investor offered great advantages for Misfit to grow its retail base rapidly in China, where there is a massive market potential. In October 2015, just two weeks prior to announcing it was being acquired by Fossil, Misfit chose Beijing as the location for the global launch of its Shine2 product.

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Manufacturing wearable devices

With both a compelling product offer and funding secured, wearables entrepreneurs can then proceed to the manufacturing phase of product development.  

Whereas fashion designers can sketch their designs and have them made into samples with relative ease around the world, developing wearable device prototypes embedded with technology is much more complicated. It thus follows that many wearables entrepreneurs underestimate the arduous and multi-phase nature of the manufacturing process that could take (far) longer than expected to get a product ready for shipping. This is why many successful crowdfunding projects do not stick to their original promised delivery dates.

beats

China is the leading country for large-scale production of wearable technology devices. In researching the manufacturing process for hardware devices in Shenzhen China, Ma from 500 Startups told TechCrunch that the process may take up to 14 months for the delivery of a new product. The difficulties of manufacturing is something Vu from Misfit echoes: “You can’t just send CAD files to the manufacturer and expect them to understand your specifications and everything go smoothly… and you have to design a product to be made at 1,000 units per hour.”

To help navigate the convoluted manufacturing process, one option for fledgling wearables start-ups is to join a program such as the aforementioned HAX Accelerator. HAX offers multiple benefits to start-ups including investment, office space, sourcing, prototyping and guidance on finding retail distribution as fast as possible. Companies participating in HAX spend 3.5 months in Shenzhen working on strategy and sourcing. Upon graduation, the program helps them pitch their products to potential investors and also launch their products to the media.

Joffe says: “For program participants, one week in Shenzhen is equivalent to one month in Silicon Valley where there is no large-scale manufacturing ecosystem for prototyping products.” From Joffe’s experience: “Chinese manufacturers are pretty flexible with unit numbers and a lot of problems can be worked out on the factory floor. Plus, eventually to achieve scale in the hardware business you will need to manufacture in China.”

Succeeding at retail

With manufacturing complete the final element to achieving commercial success for a new wearable device is executing effective retail distribution. This is another area where wearables start-ups often stumble, especially for entrepreneurs astute at engineering but not experienced at elements critical in retail, including PR, marketing, branding and customer service.

Few, if any wearables companies these days have the scale and resources to open their own physical retail stores, and so they rely on being sold through other doors whether that be department or electronics stores, fashion boutiques or various online platforms. Even for those who crowdfund to get fans and followers, and test their products, the majority still aren’t discovered by consumers until they’re in the retail environment. For real long-term, large-scale success, wearables start-ups have to build a brand in the same way that Beats, Fitbit and Misfit have done.

MisfitFlash

For wearables start-ups that do make it this far and find retail distribution they still won’t be able to rest there. As Joffe from HAX shares: “Many wearables start-ups think they can just put their product on the shelf, but it won’t sell by itself and in most retail formats the sales staff don’t have enough expertise to explain and sell it on your behalf anyway. So the company continually needs to build awareness and create demand on its own.”

Ma from 500 Startups echoes this sentiment: “Retail is a big challenge for hardware start-ups and it’s a totally different game [from software] because it takes much longer to sell physical products and achieve high sales volume versus just selling APPs and software online. This is also something VCs consider when investing in hardware start-ups because we look for companies and products that display rapid exponential growth opportunities.”

Taking Misfit Wearables’ operations as an example, Vu says: “For wearables start-ups, life doesn’t even start until you attempt to sell the completed product. Customers won’t care which famous VC firm funded you or where you went to school, they just care about amazing product experience at an amazing price – so you need to give that to them.” Misfit has complex operations encompassing a wide variety of core products plus accessories available in multiple colours and with retail distribution in over 30 countries and speaking around 20 languages, he explains. “Succeeding with wearables is just as much about being crazy good at business as it is with having the right product,” he adds.

Overall, the wearables market is an exciting new sector for fashion and technology entrepreneurs to develop product ideas, yet as laid out here, in each phase of development and in bringing the items to market, there are multiple challenges and obstacles to confront and overcome. Being aware of these issues and making the right decisions at each phase will give wearables entrepreneurs the best chance of success.

Timothy Coghlan is a China fashion, retail and technology industry specialist based in Beijing.

Comment Counts is a series of opinion pieces from experts within the industry. Do you have something to say? Get in touch via info@fashionandmash.com.