Jawbone Is Dying. Like the Wearables Industry, It Raised a Lot of Money but Never Found a Reason to Exist

After its successes in Bluetooth headsets and Bluetooth speakers, the wearables market may make Jawbone the first Silicon Valley unicorn to die.

Jawbone, the company that made its name with a Bluetooth headset, a rectangular speaker, and the UP wristband, may be about to reach the end of the road.

This week the Silicon Valley scoop site The Information reported that Jawbone has hired an investment bank to sell itself. Its suppliers, meanwhile, did not get their August payments on time.

This is the latest turn in a long run of financial trouble at Jawbone.

A venture round early this year cut Jawbone's valuation in half, to about $1.5 billion.

A few days ago BlackRock, the asset manager that holds $300 million of Jawbone's debt, wrote down its Jawbone shares from $5.97 each to less than a penny. In BlackRock's eyes, the company has lost 99.8% of its value and is worth essentially nothing.

Jawbone once read the rise of the smartphone shrewdly, shipped a string of successful audio accessories, and by 2011 was valued at $1.5 billion — a member of the "unicorn club" of startups worth more than a billion dollars.

Now the Silicon Valley company that once set the standard for smart hardware, and was once valued at as much as $3 billion, may become the first unicorn to die.

How did Jawbone get here in four years?

Once Silicon Valley's Most-Watched Smart Hardware Company

In 1999 Hosain Rahman and Alexander Asseily, whom he had met at Stanford, founded Jawbone's predecessor, Aliph, to develop noise-cancellation technology for the U.S. military.

Three years later Aliph won an order for noise-canceling headsets from DARPA, the Pentagon's advanced research agency. It never became a defense contractor.

At the CES electronics show in 2007, Aliph unveiled a Bluetooth headset called Jawbone.

In a Bluetooth headset market then built around business users, the Jawbone's look was a breakthrough. It came from Aliph's creative director, Yves Béhar.

Béhar was already a well-known designer with his own studio, Fuseproject, whose clients included BMW, Nike, and Swarovski. At the time few technology startups hired designers of that standing.

The packaging was nothing like that of rival products either. Gone was the hard plastic shell you needed scissors to open. The box itself served as the manual: how to wear the headset was clear at a glance.

Switch it on for the first time and the Jawbone went straight into pairing mode; open your phone's Bluetooth settings and there it was. In an age when pairing a Bluetooth headset meant "power off, hold the power button for five seconds, wait for a red light — or a blue one, or a green one — to blink," that was a breakthrough. Plenty of Bluetooth devices copied it later.

For the next four years Jawbone updated its headset line once a year, and the market liked what it saw. Aliph renamed itself Jawbone.

In 2010 Jawbone shipped its other important product: Jambox, a portable Bluetooth speaker priced at $200.

Portable Bluetooth speakers were still uncommon. Most speakers were built for computers and DVD players; the few built for Apple used a dock, so you had to plug in an iPhone or an iPod.

Jawbone saw clearly that after the iPhone took off, the music player in people's hands had become the phone, and that phone needed something better to play through.

Jambox created a category. Its sound had plenty of room for improvement, but a handsome design, a built-in battery, and a microphone let it turn up in the bedroom, the study, the living room, the conference room — anywhere it might be used — with no cable to tie it down.

Jambox became a bestseller in Apple's own stores: for every ten Jamboxes sold, other brands sold one comparable product.

Those were Jawbone's best years. It had two product lines, headsets and speakers, a good reputation, and — unusually — money coming in.

The Turn Came With the New Trend Jawbone Spotted: Wristbands

2011 was the dividing line in Jawbone's history.

On the strength of its earlier run, Jawbone closed four rounds in quick succession that year, raising more than $200 million in all and pushing its valuation to $1.5 billion.

Silicon Valley now had a hardware startup worth more than a billion dollars. Not since the internet boom of the 1990s had a hardware startup reached that kind of valuation.

Jawbone's funding timeline

December 2006

Seed round, $800,000

July 2007

Series A, $5 million

January 2008

Series B, $30 million

March 2011

$49 million

July 2011

$70 million

December 2011

$40 million

May 2012

$64 million

September 2013

Debt financing, $93 million

September 2013

$20 million

May 2014

Secondary-market sale, amount undisclosed

September 2014

$147 million

April 2015

Debt financing, $300 million

May 2015

Amount undisclosed

January 2016

Down round, $165 million

The rush of money came because Jawbone, after smartphone audio accessories, had spotted another business: wearable devices, and specifically fitness wristbands.

At the end of 2011, with that fresh capital behind it, Jawbone released its first fitness band, the UP.

The UP did roughly what every band does — count steps, track sleep. But it was almost the only choice on the market, and with Jawbone's usual fine industrial design and packaging, it drew a flood of orders at launch and could not be made fast enough.

Jawbone had no sales channel in China then, and Taobao shops importing UP bands were everywhere. Because the band sold so well, the smaller shops almost never had every color and style in stock, and many sold by pre-order: whatever arrived was gone in minutes.

The bands that shipped, however, soon showed quality problems.

Most obviously, many buyers found their UP bricked. The tech blog Gizmodo wrote up its poor build quality under the headline "A Potentially Wonderful Thing That You Should Not Buy".

To save what reputation it could, Jawbone offered every buyer an unconditional refund, with no need to send the band back.

Quality aside, the UP had a fatal design flaw. It is hard to understand how a company that won its market with Bluetooth headsets and Bluetooth speakers shipped a wristband with no Bluetooth, one that had to sync its data through a headphone jack.

Walked briskly to the office today instead of taking the bus, and want to see how much you moved? An UP owner had to take the band off, flip open the little cover on its edge, plug it into the iPhone's headphone jack, open the UP app to read the data, then close the cover and put the band back on. After the UP, almost no other wristband shipped without Bluetooth syncing.

Bad quality and an absurd syncing design wasted Jawbone's head start.

In 2012 Nike and Fitbit each launched a band of their own: the Nike+ FuelBand and the Fitbit Flex.

The FuelBand built an LED display and a row of rainbow lights into the strap, so you could see how much you had moved without touching a phone.

Pre-orders for Nike's new toy sold out in the United States four minutes after they opened, and the website buckled. Some of the people who got one flipped it on eBay at twice the price.

Carried by Nike's brand and its sales channels, the FuelBand became the most popular wearable device of 2012.

But Nike did not stay in the band market for long, and several of the people at the heart of the FuelBand left in 2013 to work on the Apple Watch.

The company that actually beat Jawbone in wristbands was another startup: Fitbit.

Fitbit had started at roughly the same time as Jawbone. Before the Flex it had spent years on clip-on pedometers, which taught it how to make a device small enough while keeping the numbers accurate.

The Flex, in fact, was not fundamentally different from the clip-on trackers Fitbit had sold before. It was still a small, box-shaped activity recorder, only now you could slot it into a rubber band.

Do what you are good at first, then plan new products around the market. Fitbit, the less reckless of the two, began to lead the smart-wristband market.

NPD's figures put Fitbit, Jawbone, and Nike as the top three makers of health-tracking devices in the United States in 2013, with 68%, 19%, and 10% of the market.

After the Product Failed, Jawbone Bet Again

Left behind, Jawbone had also burned most of its cash on wristbands. But the smart wearables market still looked promising.

In 2012 the Pebble smartwatch raised more than $10 million to become that year's biggest Kickstarter campaign, and the whole wearables market took the hint.

Venture funds put more money into the market between 2011 and 2014.

Between 2012 and 2013 Jawbone raised $170 million, including $93 million of debt that landed in September 2013, lent by Silver Lake, Wells Fargo, and other financial institutions.

It needed that much money because it meant to beat its rivals with new technology.

That year Jawbone bought BodyMedia, a maker of health-monitoring devices. AllThingsD, citing people familiar with the deal, reported that it was worth more than $100 million.

BodyMedia had a new way of measuring activity: it read the skin's electrical response and temperature, and worked out calories burned from the rate at which heat left the skin.

But the technology $100 million bought never reached a new Jawbone band. In fact no company's band or smartwatch uses anything like it even now. It was too far ahead of its time.

This was the big bet Jawbone made after losing the lead the UP had handed it, and it bet wrong, with rather a lot on the table. For comparison, Apple — then earning billions of dollars in net profit a quarter — paid only $345 million for the fingerprint company AuthenTec, which bought it a two-year technology lead.

For the sake of wristbands, Jawbone even gave up the headset and speaker markets it led.

According to the research firm NPD, the United States sold 740,000 Bluetooth speakers in the first quarter of 2013, up 432% from a year earlier.

But after 2013 Jawbone never updated its speaker line again. Established makers poured in — JBL, B&O, B&W, Sony, Bose, UE (bought by Logitech) — with products that looked as good and sounded better.

On "technology," Sonos offered a whole-home system better suited to streaming services, and the Amazon Echo that followed could already understand what people said to it. From looks to technology, the Jambox had no advantage left.

Speaking to Fortune early in 2015, Jawbone co-founder Alexander Asseily said the company had come to see over the past year that its future value lay in health. "I think our Jambox is sexy," he said. "But it's just not that big a market anymore."

It was a big market. Jawbone simply could no longer reach it.

And Then the Wristband Market Itself Never Found a Reason to Exist

Jawbone rode the smart-hardware investment boom to a $3 billion valuation after that, but its chances were gone.

Shipments of the Jawbone UP had fallen out of the top five in the United States, with Fitbit holding first place firmly.

The more profitable smartwatch market belonged to Apple's Apple Watch. In the young Chinese market there were any number of rivals selling for under 200 yuan.

In the second half of 2014, Jawbone's cash position looked bad. Its contract manufacturer, Flextronics, sued it for breach of contract, saying Jawbone still owed more than $20 million for goods delivered.

Jawbone proposed paying in installments over five months, dragged the matter out for a while, and settled the bill in the end with money from a new investment.

Raise a few hundred million dollars, reach a valuation in the billions, make no money: this has become a common condition among Silicon Valley startups.

Bill Gurley, the well-known Silicon Valley investor and an early backer of Uber, wrote this year that unprofitable, highly valued startups should cut their valuations in the next round and stop burning cash first. Companies, he stressed, should not take money on harsh terms merely to hold their valuation up.

For Jawbone, Gurley's advice came a little late.

After Fitbit went public in 2015, its share price at one point ran 60% above the offering price. The market still looked optimistic.

That was the moment when Jawbone, instead of raising money at a lower valuation to fix its cash problem, sold BlackRock $300 million of convertible notes.

That $300 million came with harsh terms. If Jawbone ever sold off its assets, BlackRock would be paid from the proceeds before other suppliers, lenders, and the investors who had led Jawbone's earlier rounds. If the eventual sale fetched less than $300 million, no one else would see anything. In short, Jawbone pledged the whole company for the money.

Not long after the $300 million arrived, the future of the entire wearables market came into question.

Fitbit's share price began to fall hard, down nearly 70% from its high. In its first-quarter results this year, Fitbit's profit was 77% lower than a year earlier.

The Apple Watch also sold worse than analysts had expected, and fell year on year in the second quarter of this year — the first Apple product since the iPhone to start declining as early as its fifth quarter on sale.

If the Apple Watch and Fitbit both looked shaky, Jawbone, far behind them in the market, had even less to hope for.

Early this year Jawbone finally faced facts and took $165 million at half its old valuation from the Kuwait Investment Authority, a state-backed Middle Eastern investment institution, bringing its valuation down to $1.5 billion.

That money may no longer be enough to save the company.

What came afterwards was one piece of bad news after another: dumping inventory, looking for a buyer for the speaker business, putting the company up for sale, missing payments to suppliers.

Had it not followed the venture money into wearables, we might still be waiting to see what the next Jambox would look like.

And Jawbone will probably not be the last highly valued startup brought down by overreaching.