Failed start-ups like Juicero and Jawbone haven't scared off investors from hardware

Key Points
  • A new CB Insights study finds that 70 percent of hardware start-ups die off or turn into "zombie" companies after they raise venture funding.
  • Jawbone, Njoy and Juicero were the three most expensive flameouts in venture-backed hardware since 2009.
  • Hardware start-ups are still scoring seed funding, but later-stage financing remains elusive.
Source: Juicero | Business Wire

Seventy percent of hardware start-ups die off or become "zombies" after raising outside funding, according to a new study from CB Insights. That's partially because it's relatively easy to score a first seed round but not later-stage financing.

In venture capital, a "zombie" is a start-up that raises money but fails to attract a buyer or grow big enough to go public, leaving backers without hope for a return on their investment.

According to the CB Insights study, the most costly flameouts in hardware since 2009 included Bluetooth wearables maker Jawbone, e-cigarette company NJOY, and Juicero, which made juice presses and pouches full of fruit pulp to go in them.

Source: NJOY

Jawbone scored a valuation of $3 billion and had raised $930 million in venture funding before liquidating its assets. Njoy raised $181 million in venture funding and achieved a $1 billion valuation before Homewood Capital acquired its assets. And Juicero raised over $100 million in venture funding before closing down this year.

That said, investors play a portfolio game. They expect most start-ups in their portfolios to fail, but huge exits for a few to generate returns for their funds. The big, tantalizing exits in hardware from companies such as Beats, Nest and Oculus have kept venture investors, especially with seed-stage funds, interested in hardware.

Image source: Jawbone

And clearly, investors are still interested.

Last year saw 456 hardware start-ups score a first round of funding from outside investors. And so far the pace looks similar for 2017, with 217 hardware start-ups raising a first round of funding already.

Later-stage financing, however, has remained elusive for hardware start-ups. Many, like Naya Health, turn to crowdfunding platforms to drum up money to manufacture their products. But crowdfunding success doesn't guarantee market success, as Pebble's example has shown.

The early smartwatch pioneers raised more money on Kickstarter than any prior campaign, then raised $59 million in venture funding, only to sell off assets to competitor Fitbit in 2016 in a deal reportedly valued between $34 million and $40 million.

As we've previously reported, investors' interest this year has shifted away from consumer devices to niche and enterprise hardware, such as aerospace technologies, tech to power self-driving vehicles, and industrial robotics.