During our careers, we’ve invested in a number of companies that sell consumer-electronics devices. In the past several years, we’ve invested in companies like Sling Media, Pogoplug, Smith & Tinker, Pie Digital, Sifteo, and most recently, FitBit and Orbotix.
In recent years it has become dramatically less expensive to design, build, and bring a consumer electronics device to market. The emergence of low-cost and low-power processors, DSPs and SOCs (systems-on-a-chip), the declining cost of all forms of memory, and Asian-based outsourced manufacturing (primarily in Taiwan, China and increasingly, Indonesia) has made investments in companies offering a consumer-electronics device a much more compelling opportunity from a VC perspective.
These cost-savings have enabled the companies we’ve invested in to maintain 40% – 60% gross margins on their products (while selling at sub $300 price points) sold into the retail channel, even at wholesale pricing levels. When these companies sell direct-to-consumer via their websites, the margins can be even higher. Contrast this with earlier venture-backed consumer-electronics companies like TiVo (whose DVR we essentially a PC in different packaging), which initially had to sell its product at negative margins and hope to make up the difference with service/subscription revenues.
Most venture capitalists would not agree with our view that gadget companies can present compelling investment opportunities, and there are certainly challenges associated with a business model that involves building widgets overseas and shipping them around the world to third-party logistics companies, distributors, and retailers. To name but a few: there is more operational complexity around manufacturing, distribution and sales, there are increased working capital requirements, the margins are lower relative to software or SaaS models, the cost of product defects is much higher, and there can be less real-time visibility into sales and the customer base, given that a retailer sits between the company and its users, at least up until the point of purchase.
There are some special things that we look for in a consumer electronics investment. First and foremost, we focus on the software element of the consumer electronics product. When we were on the road raising our fund, we’d often be asked by potential investors what it was the made the Slingbox special, and why we had decided to invest in a device play. We’d reply that the magic behind the Slingbox was the software and that Sling Media was a software company that just happened to package its software in a cheap plastic box.
Second, for any consumer electronics device to be successful, it must be dead simple to use and to set up. The out-of-the-box experience has to be seamless and just work, hiding all configuration complexity from the user. Not to pick on TiVo again, but rumors are that in the early days of TiVo, the return rate was well over 50%, primarily because of the great complexity of setup. Customers gave up in frustration before they were able to experience the magic of TiVo. Even today, upwards of a third of wireless routers are returned to the store because of difficult setup procedures.
We think the Slingbox set a new standard of usability and ease-of-installation in its day, while the setup process of the Pogoplug currently sets the gold standard for an install – it can be done in under two minutes, requires zero knowledge of network configurations or firewalls, and is literally as easy as typing in a URL and signing up for an account. Naturally, most any modern device should be network-aware and work closely with web-based services to provide an integrated experience. A software-powered consumer electronics device should also evolve – regular software updates mean that a good gadget gets better over time.
Finally, we also believe that for a consumer electronics company to be interesting to us as an investment opportunity, it should be establishing a new category of device. Sifteo’s Siftables, Cloud Engines’ Pogoplug. and Sling Media’s Slingbox are a few examples from our portfolio that illustrate this point. A startup has very little to offer in an established category – the world doesn’t need another audio player, smartphone or router. Leave those categories to established players who have the manufacturing, marketing and distribution muscle to compete. As a startup, rising above the noise in an existing category is difficult and expensive. Granted, establishing a new category of device has its own set of challenges, but innovation and disruption are the core mission of startups.
If you’re making a product out of atoms (powered by software magic) that fits the above description we’d love to hear from you. Atoms are the new bits.
Foundry Group Version 2.0
We are very happy to announce today the closing of our second fund, Foundry Venture Capital 2010, L.P. The fund is the same size as our last one: $225,000,000 in limited partner commitments. We are pleased to be working with a great group of investors.
We will continue to do exactly what we have always done: invest in seed and early-stage investment opportunities in the software and IT space that are located across the United States. We’ll also continue to pursue a strategy of Thematic Investing that has served us well over our investing careers.
We very much look forward to working with another group of great entrepreneurs and portfolio companies.
– Jason, Ryan, Seth and Brad
Foundry Group Invests in Orbotix
We recently led an investment in Orbotix, a Boulder, Colorado company that graduated from the TechStars Boulder 2010 program, Orbotix is creating a new game platform that combines common physical objects, smart phones, and a software marketplace. Their first product will “reinvent the ball” through the creation of a robotic ball controlled by a smart phone.
As we’ve explored the theme of human computer interaction, we’ve observed the incredible opportunity to integrate ordinary toys with computers. The ball is one such object as it is an extremely versatile and popular toy. However, up to this point, attempts to do clever electronic things with balls have been limited to simple things like incorporating motion-sensing blinking LEDs into the ball.
Orbotix (previously called Gearbox) was one of the teams in this year’s TechStars Boulder program. The co-founders Ian Bernstein and Adam Wilson are genius-level hardware and software hackers who have been working on robotic control systems for years. Early in the TechStars program they decided to see if they could create a robotic ball that was controlled remotely by a smart phone. This is an extremely tricky piece of software and hardware engineering. With smart phones, much of the computing power is transferred to the phone. As a result, Ian and Adam were able to take a fresh and unique approach to the mechanical control system in the ball.
The result is magical. Three months ago Ian and Adam put up a simple video on Youtube showing them remotely controlling a ball with a smart phone.
One of Ian and Adam’s TechStars mentors was Paul Berberian, a multiple-time entrepreneur and long term friend of Foundry Group. Brad previously sat on the board of Paul’s second company, Raindance Communications, which went public in 2000 and was ultimately acquired by West Corporation. As Paul got to know Ian and Adam the three of them began discussing teaming up. By the end of the summer, Paul had decided to join the company as CEO.
Orbotix expects to get to a production level unit by the end of the year with product availability in 2011. In addition to the physical hardware, Orbotix is creating an API layer that allows anyone to write software that controls the ball. Furthermore, Orbotix plans to release a series of games for multiple players, including racing and sumo type games.
Foundry Group Invests in Fitbit
We recently led a $9 million investment in Fitbit. Based in San Francisco, Fitbit is creating pioneering consumer products in the field of human instrumentation. Its first product is a $99 device containing a 3D motion sensor that accurately tracks your calories burned, steps taken, distance traveled, and sleep. The Fitbit tracker is smaller than a belt buckle and is easily worn on your waist, in your pocket or on undergarments. It includes a wireless base station which, when connected to your PC, uploads your data to the Fitbit web site where a user can track progress and compare results from other users. From the company’s website, users can track their activities, compare them to friends or the general population of Fitbit users and track other activity-related information (including diet).
Over the past few years, there have been a steady stream of new computer-connected products that measure various human activities. Many of these, such as glucose monitors, came from the medical device arena. Others were sports-oriented, such as heart rate and GPS distance monitors. These devices were interesting, but addressed a very specific set of human activities and measurements.
As we studied the area of human computer interaction, we developed a belief that in the future humans will increasingly instrument and measure their activities. Over the past year, we bought numerous products in a search for the best company in a market – human instrumentation – that we believe will explode over the next decade. With Fitbit, we believe we have found it.
Human instrumentation implies that we want to measure and track varies aspects of our body, health, and life. The initial Fitbit device directly measures calories burned, steps taken, distance traveled, sleep quantity, and sleep quality. This data is uploaded to the Fitbit web site which also allows the user to enter additional information, including food, activities, weight, heart rate, blood pressure, and glucose levels. All of this information is presented in multiple views – daily, weekly, monthly, average, low, and high. The Fitbit web site also contains all the expected social features such as allowing you to share your data with friends and have competitions around any of the measurements.
Sifteo, one of our portfolio companies located in San Francisco, is seeking a Marketing Lead to help deliver a new interactive play and learning system to consumers. They are looking for someone who can develop and execute a focused messaging and outreach plan, who can build and deliver a quantitative marketing program, who can build the right channel relationships, and who is excited about jumping into a start up environment. You’ll be working with the co-founders and the product team, and you will be responsible for the full marketing program for the product on a start-up budget.
You’ll be coming up with the taglines, building the marketing metrics, devising pricing strategies as well as making CES happen end-to-end and helping out on customer service phone calls.
Siftables are gesture-sensitive video tiles that form a smart, distributed system for games and education. The technology has been spun out of the MIT Media Lab and has been featured on the Science and Discovery channels, presented at the TED conference, and has been written up by Engadget, Gizmodo, New Scientist and Wired.
The following is what they are looking for in an ideal candidate:
– 5+ years of professional experience in marketing consumer electronics and/or interactive games (this isn’t your first rodeo)
– organized: you are thoughtful and meticulous in all you do
– agile: you are willing to dig into (and adapt) our target customer profile as we learn more about product/market fit
– creative: you love to execute low-cost, grassroots outreach events
– writing skills: you can dash out tight copy with your eyes closed
– communication skills: you love talking to engineers and designers (maybe you are or were one), understanding their ideas, and working with them to deliver a great product
– resourceful: you can win big results on tight budgets
– decisive: you can pare away good ideas from the great ones and focus on measurable plans
Please send resumes to jobs@sifteo.com with subject “Marketing Lead”
