Apple’s launch of its smart watch made it the latest tech giant to enter the wearable technology space. But unlike the California blue-chip technology giant, not everybody has access to billions of dollars in cash reserves.
For startups, funding can be difficult to come by with many not knowing where to turn for much-needed capital. Many good ideas remain on the drawing board due to risk-averse banks.
While self-funding can be an option in the early stages, to gain traction in the fast-moving and extremely competitive technology market, other sources of funding are often needed.
With global retail revenue from smart wearable devices set to reach $53.2 billion by 2019, according to technology analysts Juniper Research, it’s easy to see why investors might be tempted.
Increasingly, venture capital (VC) is one area where entrepreneurs seek startup capital.
“Investors are currently very active all over the place. The market is buoyant at the moment. VC funds are not short of cash, and looking to back across trends and specific industries and technologies,” says Stephan von Perger, an investor at London-based VC fund Wellington Partners. “Fundamentally well-run and innovative companies that have ambitious founders are what we are looking for.”
It’s not just VC funds that are considering investing in early-stage wearables companies. Crowdfunding websites, such as Kickstarter and Indiegogo, have been instrumental in getting projects off the ground. As an example, the Pebble Watch was able to raise more than $10 million in pre-orders in 2012.
“Within the last 18 months or so there has been an increased interest from both consumers and investors in the wearable technology space,” says Nick Levine, head of business development at Crowd2fund.com.
“Equity campaigns in the space usually qualify for HM Revenue & Customs’ Seed Enterprise Investment Scheme, which offers generous tax incentives. Such early-stage equity investments are high risk, but also potentially may be able to provide a huge return in the future.”
Despite the obvious conflict with VC, some investors have seen the advantages that crowdfunding can bring to startups.
“This is good for companies looking to get off the ground before VC money and expertise comes in, and I think this has been a positive trend rather than a threat to the VC industry as such. Crowdfunding has its uses in funding early-stage companies, especially when there is product hardware risk, but it can’t provide the expertise and networks that VCs can,” Mr von Perger explains.
Although attention and funding has been focused on fitness wearables in recent years, lately the shift has been towards smart watches. As the Apple Watch buzz showed, there is demand for new products in this area. But some are already looking towards the next wave of wearable devices.
The feeling among technology entrepreneurs and investors is that the smart-watch phenomenon is probably just a fad
“The feeling among the technology entrepreneurs and investors I deal with is that the smart-watch phenomenon is probably just a fad,” says Ciaran Rooney, solicitor at law firm Blake Morgan. “At a basic level, the watches duplicate the functions of smartphones or other existing products, but have a less friendly interface and limited connectivity. Consumers will not be blind to these facts.”
Mr Rooney says there is real excitement around wearables with a medical or business application, and which monitor, record and report on personal health information. “Wearables with applications in difficult, dangerous or inefficient working environments also have huge potential,” he says.
There are a number of other areas where wearables might come to dominate, including clothing and “smart jewellery”.
“Companies that previously focused on technology are now buying in or tying up with companies that have design skills,” says Jonathan Jackson, intellectual property partner at D Young & Co. “For example, fashion accessory retailer Fossil and chip maker Intel are teaming up to develop wearable tech products.”
However, it is thought that the price of hardware will have to come down before wearable tech clothing really begins to make a mark.
While much of the focus on wearable technology from a retail perspective has been on the physical hardware, more investors are interested in the underlying software backing up the devices.
“Since all the wearables are hardware used by end-consumers by default, it is much more of a consumer-focused space,” says Wellington’s Mr von Perger. “The difference between whether or not something will take off might, however, be driven by quality of middle layers which process all the data and that is, of course, 100 per cent enterprise stuff.”
Indeed, hardware often requires levels of capital available to larger tech players or crowdfunded developers, where delivery expectations are much later. For some investors, there is greater attraction to software backing up devices, where investment can be scalable and the product used across more than one device.
“The real value is in the software and network effect of a large user base. Jawbone has already amassed the biggest sleep study data set in history. It is this data that is of interest to the healthcare industry, not the device that collects it,” says Mark Hawtin, an investment director at GAM.
The outlook for the wearable technology space is optimistic. The boundaries for its development and application seem only bound by developers’ imaginations. Yet, as the sector matures, there’s likely to be more challenges and opportunities.
“Generally I feel we haven’t seen much mergers and acquisitions activity in the wearables space, which seems surprising because clothes, jewellery and consumer hardware producers and brands should probably be a little more acquisitive to stay in the game,” says Mr von Perger.
There are also signs that the technology is becoming cheaper, with existing wearable solutions being produced at lower cost by Chinese developers, highlighting the need for greater intellectual property awareness. Others have questioned whether hardware will remain the main focus for the industry, with some expecting the technology to be incorporated into existing products.
“Visible, discrete and specific wearable devices are likely to disappear as quickly as they have appeared as the data collecting sensors and software are hidden deep within existing watch straps, fashion bracelets and the like,” GAM’s Mr Hawtin concludes.