Case Study: Bootstrap vs. Venture Funding

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(Last Updated On: December 1, 2015)

How did FitBit Bootstrap Its Way to a Market Leader

Leadership team that mostly bootstraps a successful new business excels in execution, customer acquisition and operational efficiencies. In contrast management excels in easy venture capital raise, can be lulled into complacency.

Bootstrap vs. raise money from venture capital investors

Because of media attention on external funding, a number of first time startup co-founders believe that raising money from venture capital investors is the key to a success, so they actively start seeking investors early on in company development cycle. On the other hand, a vast majority of new companies are not fit for outside investment for variety of reasons which leaves everyone else to capitalize the operations from personal funds, with the help of friends, family and in some cases angel investors, which has its benefits on its own. We argue that startup’s core management is more focused on customer acquisition and execution excellence compared to a management team that can raise outside investment without too much effort. We believe that in the long run, management team that grows the company off the ground with little outside financial assistance is forced to detect any managerial, operational or marketing issues early and apply appropriate corrections. On the other hand, the team that has well capitalized company may not be able to detect any mismanagement problems for a while; once the do, it may be too late to respond to losing market share.[ninja-inline id=819]

To support our observation that management team that is bootstrapping the company, compared to one that is overcapitalized is more successful in the long run, we explore the successes and failures within very popular product category: wearable fitness trackers. Specifically, we compare FitBit, Inc Aliphcom, Inc, dba Jawbone. FitBit has raised only  $83.8M from investors and have captured 70% of the market within three years. In contrast, their rival Jawbone, has raised well over $518M and captured only 19% of the wearable fitness trackers market.

Wearable Fitness Trackers Market Overview

Wearable fitness trackers exploded to the market place in 2011 when FitBit and Jawbone, both hardware startups, launched their products in the later part of the year, in time for holiday sales. Nike, a large and established multinational corporation, entered this lucrative and fast growing market just few months later with a launch of their first product, Nike FuelBand in January of 2012.

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Wearable fitness trackers market share, 2014
Wearable fitness trackers market share, 2014

It did not take a long time for FitBit to emerge as a clear winner in this category even though the company was the youngest, smallest and the least capitalized. Only three years later, by 2014 FitBit annihilated its competition for wearable fitness trackers as it took 70% of the market share. Jawbone had 19% of the market share, while distant third and discontinued as of April 2014, Nike FuelBand had 8% of the market. These three companies commandeering 97% of the market have shipped about 70M units combine in 2014. If we assume that average retail price for one tracker is $100, then the market size is an incredible $7B.

Future trend: 2015 — 2018

As people are more self-aware about their fitness habits and patterns, the sale for wearable devices will continue, but single purpose wearable trackers that focus mostly on counting steps will be replaced by feature packed smartwatches. Most analysts predict that in the next few years, smart watches will take at least half of the market share for wearable fitness devices. With AppleWatch successfully entering the market in April of 2015, it will be very interesting to see how incumbents respond to such significant competitor with an impressive balance sheet and billions of dollar in cash at their disposal.

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FitBit, Inc Company Overview

FitBit, Inc has been founded by James Park(CEO) and Eric Friedman (CTO) in 2007, San Francisco, CA.

Following initial launch of FitBit fitness trackers by the end of 2011, the company has raised second round of $9M in 2012. At that time, the company had 75 employees. If we assume that annual payroll expenses is $250k per employee in San Francisco area (salary, benefits, taxes), then the company would need $250*75 = $18.75M just for payroll. Clearly, there’s a huge discrepancy between the Series B round of $9M and well over $20M in expenses required to run the company. The difference clearly comes from sales, from paying customers, so FitBit is a great example of startup company that bootstraps itself.

Jawbone (Aliphcom, Inc) Company Overview

Aliphcom, Inc, dba Jawnone, is a privately held company, founded in 1999 by Hosain Rahman, a current CEO. As of 1Q2015, the company has received well over half a billion dollars in investments, which is about 6 times as much at their competitor, FitBit.

The company traveled classic technology commercialization path, by winning federal research grants and then finding the path to the market for the products based on the intellectual property developed. In 2002, the company won DARPA grant for noise-canceling communication. Hosan Rahman realized that a need for noise-free communication is not limited to military personnel, so he set on designing an attractive consumer wireless headset. In January 2007, the company revealed its wireless Jawbone headset at CES in Summer 2008. Up to this point, the company has not raised significant amount outside capital. The quest for a beautiful, consumer friendly design continued and the UP lifestyle tracker and app system was launched in November 2011. Amid numerous positive reviews, Jawbone halted production of the product a month later and announced “The UP No Questions Asked Guarantee” in response to widespread customer claims of issues with charging, syncing, and in some cases, product failure.

Case Study: Bootstrap vs. Venture Funding from Dragana Mendel on Vimeo.

This year marks the period of the intense venture capital investments into the company, pursuit of beautiful design, and lack of focus on rigorous hardware development process and quality control.  From 2006 till 20014, Jawbone has raised well over half a billion dollars from venture capital funds and private equity groups. That is 6 times more than FitBit. Half a billion dollars is a lot of money to receive from investors. Just to get a sense of proportion, in 2013 the whole wearable devices market, not just fitness trackers, in Europe was only $308M, although growing rapidly at about CAGR=40%. Overcapitalization masks problems within company management because the financial cushion doesn’t force management to scrutinize every single operational process.

Go-to-Market Strategy

Size of the Ecosystem Matters

Fitness tracker in itself has only motion sensor and accelerometer, so it needs to send raw data to another device to display physical activity information (steps made, distance traveled, calories burned, etc) to the user. Jawbone embraced iOS iPhones as the primary platform to display data collected by a tracker. In 2012, Gartner estimated that about 40% of smart phones in the US were powered by Android OS, so Jawbone management chose to ignore a large segment of their potential customers. In contrast, FitBit developed much broader ecosystem from day one.

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Hardware Constraints

Even though marketing message around fitness trackers is to present the user with a holistic view of their physical activity, the bottom line is that all these wearable devices are simply counting steps and not much more. The reason for such limitation comes back to the issue of battery as people still have not figured out how to make powerful, small, compact batteries that will hold the charge for a long time and not lose ability to recharge fully over time. A lot of people these days carry an extra charger for their smartphone because powerful processors and myriad of apps they use throughout the day drain the battery in less than 24hrs. This problem with batteries carries over to wearable devices too, because physical space within a wrist band doesn’t let itself to a large battery.
The battery issues plagued Jawbone from day one.

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Quality: Design vs. Function

Even though Jawbone UP product line had superior design over FitBit, and the mobile app has received numerous praises for its usability design, fitness trackers themselves were plagued with subpar quality from day one. Just one month after a launch, Jawbone had to issue “The UP No Questions Asked Guarantee” policy in response to widespread customer claims of issues with charging, syncing, and in some cases, product failure. The standard manufacturer’s warranty for both FitBit and UP trackers is one year, but it is rare to find a customer that did not have to ask for a replacement during the first year. It’s hard to find specific data, but anecdotal evidence and chatter on forums suggest that FitBit trackers last about six months, while UP last about two to three months! In either case, companies are losing money because they have to honor their warranty terms.

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Sections on: B2B distribution channels, customer service and summary

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About Dragana Mendel 85 Articles

Dragana Mendel is a President and Principal Consultant at ANAGARD, LLC. In her role, she provides management consulting services to small and medium size businesses on the best strategy to achieve their short and long term goals.