What’s The Future for M&A In Wearable Technology?

By on February 27, 2014

google-glass-wallpaper-hd-logoEditor’s note: On September 30th, 2013, the Glazed Conference brought the best and the brightest in wearable tech / wearable computing to San Francisco to discuss the state of the industry and what the future holds.

Exitround founder and CEO Jacob Mullins led a panel on M&A / BD opportunities for early-stage startups in the wearable space. The panelists were: David Blumenfeld of Westfield Labs; Jeff Eddings of Turner Broadcasting; David Liu of Jefferies; and Stephanie Palmieri of SoftTech VC. The following are highlights from the discussion.

Jacob Mullins: So, what’s it going to take for wearable computing to become ubiquitous?

Jeff Eddings: There’s a cost/benefit analysis. If the device provides enough value to you as a consumer then you can be hooked by anything–you can overcome looking dorky outside. A lot of people are saying “Hey, I don’t know about Google Glass.” But what I really think they’re saying is I don’t think there’s enough value for me. What can I do with this that I can’t with the smartphone in my pocket? That’s a great fact for a wearable startup to consider, and something that, if done right, will easily get the attention of bigger companies.

Jacob: How do you view the startup ecosystem in relationship to what you’re trying to do? If you see an enterprise use for an application, do you build yourselves or do you look outside?

David Blumenfeld – Westfield is a digital lab, but we can’t develop all of our own technology. Even if we could we’d miss an opportunity to work with companies who are specializing. We very much look at partnerships in the ecosystem of app developers to enable the kinds of services we want to make available, whether that be wearable tech or other.

Jacob: Glass and Pebble are hardware that shifted us toward a software conversation. Now startups don’t have to build hardware–many can focus on just the software. From an investment or advisory point of view, is there a strategic advantage or disadvantage to focusing on software when you’re playing in the hardware ecosystem?

Stephanie Palmieri: When Fitbit launched it did one thing really well: track steps. It didn’t sync wirelessly, it didn’t do much with the software, but it worked. It makes sense for others to follow this model. Focus on hardware at the beginning; just get something out that works. Then, as you hit scale, begin to develop more functionality, to do successive releases on the software that enhance interaction with that device. Or you have partners who do it, your own mini ecosystem. But it’s hard to do all of that well as an early-stage company.

Jacob: Let’s cover some transactional thoughts, and how startups might work with folks like you. What do you think about when you consider buying or building, partnering or investing? What do you actually want from a startup in those cases?

David Liu – We’re seeing an intersection of lots of dynamics, and any startup I look at would have to be taking advantage. First is the ability to be a software company in disguise, to have a hardware product but think like software guys. Second is crowdfunding platforms, which give the opportunity to pre-market a product, and to determine market. They also offer working capital, which is a natural for investors/financiers. Lastly is the ability to forecast whether a product might appeal to a specialized power set of users or else go mass-market. If you’re in the middle it’s a challenge to see it as a successful M&A or IPO candidate.

David B.: Westfield Malls reaches 1.1 billion shoppers annually, so it’s a natural test bed. Our model is to do pilots and, if they work, expand and extend, at which point we could capitalize on the distribution we have to offer. So startups should definitely search for pilot opportunities rather than straight retail.

Jacob: There are some huge players in the market with wearable hardware: Google, Apple, and potentially Microsoft. Jawbone has raised $310 million, Fitbit has raised $43 million. To an early-stage startup those numbers can be daunting. When you advise them, when you find things that are really interesting, how do you rationalize that?

Stephanie: I was thinking about this when you brought up Kickstarter. Investment via Kickstarter means there’s an early community that wants to adopt your product. But there’s a big gap between that early backing and mainstream, widespread distribution. A few years ago it was easier to make this jump; today there are just so many more companies. So I think a lot about what it’s going to take for that core team to make it from a distribution standpoint. Can your team make that leap to mass marketing and sales? Can you survive until you hit that big retail channel? I’m looking at that core team to see if they have the talent to take a product from early indicators of market to the next level: building a brand following without the support of the Apple store or Best Buy.

Jacob: How do you see the wearable market evolving? How long before the large players start to get acquisitive and we really start to see big acquisitions?

David L.: There are always tech companies willing to buy other tech companies, and we’re going to see more of that in the wearable category, from a wide swath of companies. This could be a startup with a great product, or whose team provides expertise.

The last bucket is the mega-acquisition, the hundred-million dollar market, and here I think the wearable category is in that last mile. The last-mile strategy is to be able to know exactly who you are and what your preferences are. If wearable gets us to a truly quantified self then that’s the holy grail, because this is the essence of the big Internet company’s business: selling their data to advertisers and merchants.

If a company can crack that code and harness the network effect–you’re wearing it and I’m wearing it and we’re both engaged, so we pass the tipping point for mass market–then you’re going to see big companies step up and pay a big number.

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