Startup Forensics: The Fall of Jawbone

Jawbone raised more than US$900 million and was valued at US$3.2 billion in September 2014, then liquidation was reported in July 2017. Here is why Jawbone failed: a wristband that had to work every day exposed a hardware business that kept needing new money. The figures below show where the model broke.^[2]

Our read is that the flaw was structural, not only a run of bad luck. Reliability problems, a down round and existing debt created obligations that more funding could not clear.^[2]

The Patient: Jawbone Funding and the Promise of a Wristband That Worked

Jawbone began in Bluetooth audio and moved into wearable health tracking. Its devices measured activity and connected to software, so its value depended on hardware that worked, not only on an app.^[2]

Reuters reported more than US$900 million in funding: more than US$500 million of equity and more than US$400 million of debt, per PitchBook. Reuters put the September 2014 valuation at US$3.2 billion.^[2]

A later down round, led by the Kuwait Investment Authority, came in lower. Investors and customers were buying into a product that had to work on a person's wrist every day.^[2]

• The problem: a wearable that measured activity and connected to software, with value tied to hardware that worked.^[2]
• Why buyers and investors bought in: the product had to work on a person's wrist every day, and the company began in Bluetooth audio.^[2]
• Total funding: more than US$900 million in equity and debt. Key backer: the Kuwait Investment Authority led the 2016 round.^[2]

The Symptoms: Jawbone Warning Signs From the 2011 UP Wristband Failures

The first Jawbone warning signs appeared in December 2011. The company acknowledged charging and synchronization problems with its UP wristband, offered refunds and paused production.^[3]

Refunds and replacements cost cash after the original sale, so launch revenue was not the same as money the company could keep. A health tracker has to stay usable long enough for a customer to form a habit. Repeated service problems can break that habit, add support work and make the next model harder to sell.^[3]

The UP3 program later faced manufacturing difficulty and delays. The product's design ambitions then had to survive production at volume.^[4]

In January 2016, Reuters reported, Jawbone raised US$165 million at a US$1.5 billion valuation. More money could fund repairs, but a lower valuation and existing debt could narrow the options for a sale or fresh equity. Funding could not prove that the product was ready.^[2]

Reuters reported that Jawbone laid off 15% of its staff in November 2015. In December 2015, BlackRock marked down its shares by 69%, per PitchBook. A 2016 sale attempt found no buyer.^[2]

Reuters also quoted an IDC analyst who put Jawbone's wearables market share well below 5%. A small share left little room to absorb repair costs.^[2]

• December 2011: charging and synchronization problems with the UP wristband, followed by refunds and paused production.^[3]
• Refunds and replacements cost cash after the original sale.^[3]
• January 2016: US$165 million raised at a US$1.5 billion valuation.^[2]
• UP3 program: manufacturing difficulty and delays in production at volume.^[4]

Cause of Death: Why Jawbone Failed as a Hardware Business

Our read: the fatal flaw was a hardware company that relied on repeated funding, while its wristbands had a documented reliability problem.^{[2] [3]}

The Jawbone shutdown was reported in July 2017 and independently confirmed. Fortune named Sherwood Capital as the liquidator. Hosain Rahman, the CEO, launched a related health startup. That did not mean the original consumer company survived.^{[1] [2] [6]}

The Reuters headline called it “death by overfunding.” That is a memorable phrase, but it is not a full diagnosis. Reuters, citing CB Insights, ranked Jawbone second among venture-backed failures by funding raised, behind Solyndra.^[2]

Our read: the Jawbone business model was a hardware business that struggled to turn successive launches into contribution (the money left after a product's direct costs), while carrying financing and obligations to installed customers.

Reliability, manufacturability and category competition offer a fuller explanation than “too much money.” Capital could extend development, but it could not remove the need to ship dependable units. Public accounts do not isolate one cost or defect as the sole cause.

The Toxicology Screen: The Numbers Behind Jawbone's Collapse

The US$3.2 billion valuation in 2014 and the US$1.5 billion valuation in 2016 were financing numbers, not cash the company could spend. A valuation is the price investors agree to pay for a share of the company.^[2]

Of the money raised, Reuters, citing PitchBook, reported more than US$400 million was debt, most of it from BlackRock. Debt has to be repaid, and lenders can be paid before shareholders if a company fails.^[2]

The price ladder is public. TechCrunch reported April 2015 prices of US$50 for Move, US$99 for UP2, US$179 for UP3 and US$200 for UP4. These are list prices, not margins.^[5]

Jawbone published no churn figure. For the category, The Conversation cited a TechRepublic claim that roughly half of wearable buyers stop using their devices within six months. That is an industry claim, not Jawbone data.^[7]

The cited reporting gives no verified Jawbone burn rate, no customer acquisition cost (CAC, what it costs to win one customer), no manufacturing cost per tracker, no warranty-adjusted contribution and no closing runway. Burn is the cash a company spends each month. Runway is how many months that cash lasts. The cost of a failed unit includes diagnosis, replacement logistics and support, as well as its components.

• Customer acquisition cost (CAC): Not publicly disclosed.
• User churn: No Jawbone figure published. Category claim: roughly half of wearable buyers stop using devices within six months, a TechRepublic figure cited by The Conversation.^[7]
• Pricing model: Devices sold at list prices. TechCrunch reported April 2015 prices of US$50 for Move, US$99 for UP2, US$179 for UP3 and US$200 for UP4.^[5]
• Monthly cash burn: Not publicly disclosed.
• Runway at collapse: Not publicly disclosed.
• Total funding: More than US$500 million of equity and more than US$400 million of debt, mostly BlackRock, reported by Reuters citing PitchBook.^[2]
• Peak valuation: US$3.2 billion in September 2014 after a US$147 million round, reported by Reuters citing PitchBook. Not verified as the peak.^[2]

Open full-size image

Exhibit A. Figures, periods and uncertainty follow the cited records.

The Post-Mortem: Lessons for Founders

Test before you scale. Before a production order grows, test failure rates over a defined wear period. Track first-pass yield (the share of units that work the first time), return rate and warranty cost per shipped unit, and set a threshold that stops shipments. Watch for returns rising between batches. The cost is a launch that slips, and a defective installed base creates obligations that outlast the delay.

Reserve cash for the product you already sold. Before approving the next generation, stress-test repairs and debt payments under slower sales, then fund new hardware in stages. If a buyer is part of your exit plan, ask who will support old customers and settle that before a sale. The cost is a slower launch schedule, which is easier to recover from than a base of customers who stop trusting the device.

Further reading

• Reuters, “Jawbone’s demise a case of ‘death by overfunding’ in Silicon Valley,” 10 July 2017
• Wired, “Jawbone Explains UP Wristband Failures and Offers Full Refunds,” 8 December 2011
• TechCrunch, “Jawbone is being liquidated as its CEO launches a related health startup,” 6 July 2017

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