Fitbit is Jeff Clavier's healthiest bet in his decade-plus investing in tech start-ups. To say nothing of his mammoth financial return.
Clavier, the founder and managing partner of SoftTech VC, wrote Fitbit a $125,000 check in 2008, and has lost 30 pounds since he started using the fitness tracking device a year later. He has a treadmill workstation in his San Francisco and Palo Alto offices and tries to take 15,000 to 20,000 steps a day while on phone calls and writing emails.
Oh, and SoftTech's stake in Fitbit is now worth $124 million.
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That's after Fitbit sold 36.6 million shares at $20 apiece in its initial public offering, valuing the San Francisco-based company at $4.1 billion. The stock, trading under ticker symbol FIT, debuted Thursday on the New York Stock Exchange, opening 50 percent higher, trading in the low $30s.
Fitbit marks Clavier's first IPO. He owned 6.2 million shares prior to the offering, representing 3.4 percent of the company. True Ventures, which led the initial investment, owns 22 percent.
When Clavier and True Venture's Jon Callaghan first invested, not even they could have hoped for such outsized gains. For starters, it was October 2008, the depths of the financial crisis. Sequoia Capital had just put out its infamous "R.I.P. Good Times" slide show, warning start-ups of the pending doom.
Not only that, but Fitbit was trying to raise money as a hardware company, pitching a device that would track a person's calorie intake, steps taken and sleep quality.
Hardware, of all things, was an untouchable area for venture capitalists, because of the huge sums of money required just to get a working protoype.
Phrases like "connected devices" and the "quantified self" weren't yet part of our lexicon. And there was no Kickstarter for device makers to hold crowdfunding campaigns and lure early test customers.
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"There was literally nothing on the market at that time," said Clavier, who was at the NYSE on Thursday to join in the IPO festivities. "I call it the dark ages of hardware, where you basically had zero infrastructure for them to rely on."
Dark ages no more. Fitbit sold close to 11 million devices last year, more than double its 2013 number, and revenue almost tripled to $745.4 million. According to NPD Group, Fitbit controls 76 percent of the market for wearable fitness trackers.
With a gross margin of 48 percent, Fitbit generated net income of almost $132 million in 2014. GoPro's gross margin, or the revenue left after subtracting costs of goods sold, was 45 percent last year. Apple's was 39 percent.
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Of course, the Apple Watch is brand new to the market and is just now starting to sell in retail outlets. Of the 11 competitors or potential competitors that Fitbit named in its IPO prospectus, Apple likely poses the greatest threat given its history in consumer devices and massive base of app developers.
"Now that Apple is in the game, it will put margin pressure on everyone," said Weston Henderek, an analyst at NPD Group. "For Fitbit, the differentiator has to be a creative ecosystem where users can store, save and access their health and fitness data."
Fitbit can still win on price, for now. Its gadgets range in price from $60 for a basic tracking device to $250 for the Surge, which combines a GPS watch, heart rate monitor, activity tracker and smartwatch.
The first generation of the Apple Watch starts at $350.
Why didn't I go all in?Jeff Clavier, founder of SoftTech VC
The way Clavier sees it, if Fitbit continues to build innovative products and execute on its growth strategy, the presence of new market entrants, big and small, won't matter much.
His confidence stems from the many obstacles that co-founders James Park and Eric Friedman have successfully navigated to date.
After starting the company in 2007, they found that nobody was jumping to put in money. Clavier, who was new to the venture game, took a meeting with them because he was looking for hardware businesses that could test new models of capital efficiency.
He joined the round that was being led by True, but only with a small check.
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"I said, if I Iike something but I'm not completely sure, I'll make a small commitment," said Clavier, whose firm is a very early-stage investor. In retrospect, he rhetorically asks, "Why didn't I go all in?"
Around the time of the deal, Fitbit presented at the TechCrunch50 start-up conference and wowed the crowd and the judges. The founders said they were taking pre-orders and planned to have the first generation of the product on the market by Christmas 2008.
They were off by a year, finally shipping the following holiday season.
"That's where James and Eric's lack of experience with actual production showed, because they were nowhere near ready to ship Christmas 2008," Clavier said.
Even after sales took off in 2010, investors remained dubious. Continuing to scale hardware businesses requires expertise in supply chain and contract manufacturing. When orders surge, production has to follow, but if demand slackens, too much production can kill the business. Also, investors had to gauge if this was just a passing fad.
Fitbit needed money to grow. When Park and Friedman went out to raise Fitbit's next round of funding in 2010, again nobody was biting.
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"In the early days we had a lot of skepticism, especially amongst investors, as to whether this whole category was actually going to be something or not," Park, Fitbit's CEO, said in a videotaped interview in January with Engadget.
As desperation neared, Clavier sent an e-mail to Foundry Group's Brad Feld, saying "If I have any ounce of credibility with you guys, please take a look."
Clavier laid out his investment thesis and was convincing. In September 2010, Foundry announced that it led a $9 million financing round. Feld, who's run 24 marathons and one ultra-marathon, wrote in a blog post titled "My quest for measuring everything," that he'd looked at Fitbit a year earlier and passed.
"I was an early user and liked it a lot, but hadn't clearly formed my perspective on what the right combination of software and hardware was," wrote Feld. Taking a deeper dive this time, Feld saw that Park and Friedman "totally have this nailed," he wrote. "That made it easy when we explored investing again to pull the trigger quickly."
Thanks to that decision and future investment, Foundry is the largest shareholder, with a $1.05 billion stake at the time of the IPO.
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Clavier poured $1.5 million to $2 million into Fitbit, meaning a return to date of at least 62 times his money. But, with the exception of a sliver of shares he's selling in the IPO, the rest is locked up until six months after the offering.
He and the other insiders have to hope the stock holds up in a market that's been challenging for emerging tech companies.
One thing that is definitely holding up is Clavier's obsession with Fitbit devices. He uses the Charge HR to capture heart rate and the clippable Fitbit One to track treadmill steps. Clavier's assistant blocks out two hours a day for him to work while walking so he can reach his desired number of steps in the office.
"I'm definitely very conscious of the need to exercise," he said. "And my schedule is too crazy for me to actually go to the gym."