Wearable technology: Heart on your sleeve

Zepp is a wearable technology for golf enthusiasts, burgeoning baseball stars and would-be Roger Federers of the world. It is a small square device - worn on the wrist, or attached to the racquet or bat - that tracks the user's swing, recording 1,000 data points per second. The accompanying app then uses this data to analyze the speed of the swing, the angle and tempo of the backswing, and the movement of the hips.

The product is the latest addition to a growing market in innovative wearable tech. It is also the end-result of a remarkable strategic pivot by Zepp Labs, the start-up behind it. Launched in Beijing in 2012, the company initially hoped to develop a computer game controller but soon found a better use for the technology in its possession.

"When we looked at the software we were building, we realized where we are very accurate was in high speed motion capture," says Jason Fass, CEO of Zepp Labs. "So we started looking at sport and that led us to build the platform we have."

The decision was a fortuitous one. If the company had not positioned itself within the burgeoning wearable tech space, it might not have secured its most recent Series B round of funding led by US and Asia-focused VC investor GGV Capital, which followed a Series A investment of $5m a year earlier, led by China's Legend Capital.

Like bees to honey

GGV and Legend are by no means alone in seeing the opportunity in wearables. VCs across the globe are looking to invest in a whole new generation of hardware start-ups. There may be a lot of excitement around wearables today, does this new technology really live up to the hype? It is also worth noting that the start-ups we see today are not necessarily indicative of how the space will evolve tomorrow.

"Wearables are here and they are here to stay," says Chris Evdemon, a partner with Beijing-based incubator Innovation Works. "However, it is a new segment and with every new segment you have a tremendous amount of interest, though not always from people who understand it best."

So far, the statistics surrounding the industry are compelling. A recent report by Deloitte predicts that smart glasses, fitness bands and smart watches will sell around 10 million units in 2014, generating $3 billion in sales. Of these, wearable computers - such as Google Glass - are expected to generate the most revenue, selling 4 million units at an average $500 apiece. Fitness bands and smart watches meanwhile are anticipated to sell 4 million and 2 million units, respectively, with average selling prices of $140 and $200.

Another report by Cisco predicts that the number of connected wearable devices in circulation globally will increase from 36 million this year to around 177 million in four years' time.

From venture capital perspective, the industry is still very nascent. The first generation of wearables has only recently started gaining traction. Research firm CB Insights puts total VC investment in wearables in 2013 at $483 million across 49 deals globally. Unsurprisingly, most of this activity and early innovation has centered on Silicon Valley.

"Wearable companies tend to come from the US because the Silicon Valley still has the leading technologies," explains Eddy Lee, a principal at Fenox Venture Capital, which makes around two thirds of its investments in the US, while the rest goes to Asia, "Also, when it comes to developing a global product, Silicon Valley will still lead the way because the of the branding associated with it."

Barriers to entry

To date, most wearables have been consumer-facing plays which roughly fall into three main categories. First, there are those that fall into the category of the "quantified self" - activity trackers and fitness devices like FitBit and Jawbone, which provide information on exercise, calorie consumption and sleep. Second, there are smart phone companions like smart watches, and third, wearable internet devices such as Google Glass. With the latter two categories dominated by large tech companies, most start-ups have fallen into the first category.

Many accelerators and venture capitalists that have traditionally backed software companies - such as internet start-up mobile app developers - are now looking to tap into the wearables sector. However, the risks involved can be quite different.

While the barriers to entry for would-be entrepreneurs are lower than ever before, many underestimate the capital required to set up manufacturing enterprise. Zepp Labs' Fass observes how many founders are now looking to raise capital from crowd-funding sites like Kickstarter with expectation of bringing a hardware product to market for as little as $100,000.

"It's impossible. When you are dealing with hardware, cash is going to be a huge concern," he says. "You have your working capital, your payment terms form your channel, and then you need to have the money to build units. On top of that you have to understand the consumer electronics landscape. It can be more costly young entrepreneurs think."

Another issue is talent. Many successful examples of start-ups in the wearables space have been able to leverage experience of their founder members.

Zepp's Fass, for example, was formerly director of product management with Jawbone and, prior to that, a senior product manager with Apple. Misfit Wearables, the company behind activity tracker Shine, which recently raised a $15.2 million Series B round led by Horizon Ventures, was set up by ex-Apple CEO John Sculley. Yet many others entering the space appear to have little or no experience in hardware or supply chain management.

"It is difficult to find a team with the right DNA for both the hardware side and the software side so invariably them majority have gone through all kinds of nascent problems," says Innovation Works' Evdemon. "That is why so many have failed."

On the flip side, due to the greater risk associated with setting up a manufacturing enterprise, entry valuations for VC backers might be lower.

It is precisely because of these challenges that Asia could emerge as a destination for future wearables start-ups and their investors. One of the obvious appeal - and this equally applies to the broader hardware start-up community - is the region's affordable manufacturing. Locations such as Shenzhen in southern China, where Zepp has based its manufacturing, have long been a hub for the production of low-cost goods. But it is not the only solution.

"Manufacturing in Shenzhen may be fast but cultural and language barriers can mean it still takes a long time," says Fenox's Lee. "What's more, China's intellectual property protection laws are not mature, so some entrepreneurs are finding Singapore, where protection is strong and there is rich history of manufacturing, a good alternative."

It is also worth noting that Singapore is well-suited to hardware innovation because of its competency in areas such as microelectronics.

However, the benefits of being in Asia for start-ups are not only on the buy-side. Of course, the region offers an interesting combination of nascent and established consumer markets, ranging from the emerging large-scale middle classes of China and India to the longstanding high-end shoppers of Hong Kong and Japan. But perhaps more importantly, the nature of demand in emerging Asia differs from the West.

Meng Weng Wong, co-founder of tech accelerator JFDI.Asia, which is considering setting up a hardware-focused sideline over the next six months to target opportunities in the wearables space, notes that the US market is characterized by start-ups looking to solve so-called "first-world problems," and a lot of the low hanging has been picked.

"In Asia, where the next billion people are coming online, people have real, fundamental problems around access to healthcare, e-commerce, payments and logistics," says Wong. "And many are turning to their smart phones for education, social advance and to help them as small entrepreneurs. I think this will prove to be fertile ground for wearable innovation."

Enterprise angle

Whether a company is in Asia or the US, the space is shared with a number of large corporations that have already developed their own wearable products. The most recent examples have been Samsung's smart watch, the Galaxy Gear, and Google Glass, which is due for commercial release later this year. The release of Apple's first wearable product is anticipated soon.

These companies are well resourced in terms of technology and intellectual property, and they possess the supply chain and marketing capabilities to bring any product to market at short order.

"For this reason do not invest in things like smart watches," explains Bernard Moon, co-founder and managing partner at SparkLabs Global Ventures. "Because we know big companies like Samsung, Apple and Google will have more leverage to focus on that area."

Accordingly, start-ups are looking to offer devices which not only have more specialist applications but are less consumer-facing.

An interesting statistic put out by US strategic consulting firm Endeavor Partners revealed that most devices released to date have failed to drive long-term, sustained engagement for most users. In fact, Endeavor reveals that more than half of US consumers who have owned an activity tracker - like a Nike Fuel Band or FitBit - no longer use it. Furthermore, a third of consumers who have owned one stopped using the device within six months of receiving it.

"A lot of these wearables look fancy and interesting in the first couple of weeks you have them on your arm but after a while you are saying, ‘What now?‘" reflects Innovation Works' Evdemon. "The way a lot of these wearables have been designed is not really meaningful overtime and that is where they are failing."

Perhaps this would not be the case if a piece of wearable tech could be used as a work tool, applied to an industry or made into a life-saving device. Then, it may benefit from greater adoption and better user engagement over a long period. Wearables tech start-ups that fall into this non-consumer category are still in the minority but more are looking for opportunities to serve a particular niche.

"We see high potential in the enterprise field for wearables as companies are able acquire specific users," says George Jijiashvili, a research analyst for market intelligence firm CCS Insight. "At consumer level users tend to vary, but enterprise products will have a uses within very specific fields."

Vuzix, for example, a US-based company that is also targeting the European and Japanese markets, uses a technology similar to that found in Google Glass. However, its flagship product is an Android-based wearable computer that is being marketed to companies in the logistics, healthcare and services sectors.

Two recent investments in Asia illustrate the scope of enterprise application for wearable technology. 

Intel Capital backed Taiwan-based SanJet Technology, which develops digital video recorders that can be mounted on car dashboards and form part of driver assistance systems. Rather than analyze a golf or tennis swing, the cameras and associated software contribute to vehicle safety applications.

Meanwhile, Persistent Venture Fund, an investment vehicle controlled by Indian tech firm Persistent Systems, has invested in Hyginex is a US-based wearable technology manufacturer looking to fulfill a simple yet vital function. It is developing a wristband for hospital staff that can measure the amount of soap used and time spent scrubbing every a person washes their hands. The wristband connects to sensors mounted above a patient's to alert staff if they approach without washing their hands.

Indeed, healthcare is proving to be the area on which many wearable tech firms are pinning their hopes. Big corporations are already leading the way: Apple is has filed a patent for headphones that can measure your heartbeat; and Google researchers are said to have developed a contact lens that can deliver minute-by-minute measurements of a diabetes patient's glucose levels.

Jixun Foo, a partner at GGV, ponders that the wearable start-ups of tomorrow will not just improve your golf swing but could also save lives. "If you are a diabetic and this technology allows your doctor to offer care at an affordable price, you will pay for it," he says. "There is a lot of innovation in this space which will create real value for the end-user in future."

SIDEBAR: Inside the Internet of Things

San Francisco-based start-up The Orange Chef perhaps offers the best example of how ubiquitous internet connected devices have become.

The company - which recently raised $1.2 million from Google Ventures and SparkLabs Global Ventures - has developed the Prep Pad, a Bluetooth-enabled food scale that syncs with your iPad, offering real-time nutritional data as you cook. The product falls into the growing category of products related to the Internet-of-Things (IoT), a family of technology devices of which wearables are sub-category.

"Most people are connected to the internet via their phone or PC but soon everything will be connected," says Jixun Foo, a partner with GGV Capital. "It is not just appliances like your TV or your fridge, but whole homes, even pets, will be connected."

According to market intelligence firm IDC, IoT technology and services spending came to $4.8 trillion in 2012 is expected to reach $8.9 trillion by 2020. The number is so large because it represents more than just prepping boards and fitness bands. IoT is the product of technology and networking coming together in way that will not only connect homes but also buildings, cities and infrastructure. It is not just the value of the products themselves but the value of data they collect that many start-ups are tapping into.

"The Orange Chef, for example, is a health and fitness play but it is also a good data play because companies like Unilever know what food people buy, but they do not know what they do with it," says Bernard Moon, co-founder and managing partner at SparkLabs. His firm plans to launch an IoT accelerator later this year in order to connect hardware and software manufacturers to research and engineering resources in Asia.

"I think wearables and IoT complement each other well," Moon adds. "It is all about taking the hardware product - whether it is on or off your body - and connecting online, they all have data play."

As such, early stage investors have found opportunities not just in IoT products, but in services supporting the IoT space. Earlier this month, for example SAIF Partners took part in a Series B round of funding for Ayla Networks, an IoT platform that wants to expand its cloud-based services into China. Meanwhile, Intel Capital has just launched a $100 million China-focused vehicle targeting businesses developing smart devices and other technology in the IoT space.

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