Jawbone: The trials of a 16-year-old can’t-miss startup
The first thing you notice about Hosain Rahman, CEO of the much-buzzed-about gadget maker Jawbone, are his wrists. A big, hirsute, 38-year-old bear of a man, the Jawbone CEO has forearms that are a colorful study in self-expression. Both wrists sport multihued, braided bracelets, gifts from his small children. Below his left hand Rahman wears a massive gunmetal International Watch Co. timepiece, which he sheepishly acknowledges gives off a flashy, rich-guy vibe. On his right wrist is a gray UP3 fitness-tracker bracelet, his company’s latest offering.
The UP3 boasts a heart-rate monitor, the newest innovation in the “wearables” market that Jawbone helped pioneer. It isn’t available yet. A production glitch caused Jawbone to sit out the critical Christmas selling season. But to hear Rahman tell it, the delay is merely another hiccup. The wellness-tracking device is the embodiment of everything his company stands for: elegant design, hardware-meets-software functionality, and breakthrough data analysis that will change how users live their lives. “The things that we wear are expressions of who we are, whether they’re highly functional or they’re ornate or they’re made of valuable textiles,” says Rahman. The message is clear: Those who wear an UP are cool, confident, and healthy.
Magical pronouncements roll off Rahman’s tongue, calling to mind the silvery phrasemaking Steve Jobs once deployed to sell his wares. Rahman, who speaks in the raspy, low-octave tone of a jazz-station DJ, is holding forth on a crisp January day in the Rugby conference room of Jawbone’s open-plan headquarters in the edgy Potrero Hill neighborhood of San Francisco. (L.A.-bred Rahman and his co-founder, Alexander Asseily, who grew up in Beirut and London, met playing rugby at Stanford.) Whiteboards with strategic doodles surround the room, which Rahman uses as his de facto office. Black drapes cover a hush-hush prototype against one wall, a favorite Jobs flourish. It’s all very Apple AAPL circa 2001, complete with the bold predictions. Says Rahman: “Everything we’ve done over the last 15 years has been in preparation for what we’re about to do.”
Jawbone turns 16 this year. That’s an eternity for a Silicon Valley company to remain a startup: Most either go public or go away. In Jawbone’s case, it’s also a bona fide “unicorn,” the name given to privately held tech companies with billion-dollar valuations that in an earlier era would have an IPO under their belt. (Jawbone raised money last year at a valuation of more than $3 billion.)
The company maintains a high profile. It has pioneered three consumer electronics categories: Bluetooth cellphone headsets, wireless speakers (the popular Jambox), and fitness trackers. Rahman is a well-loved figure in Silicon Valley’s “bro-grammer” culture, a friend to nearly every A-list entrepreneur and investor, and a fixture on the tech-conference circuit. (The similarly burly Salesforce.com CEO, Marc Benioff, calls him his “brother from a Pakistani mother.”) Equally prominent is his friend and sidekick Yves Behar, Jawbone’s part-time chief designer. Behar, who sold a controlling interest in his firm Fuseproject last year to a Chinese marketing outfit, is involved in ventures that include working on television design for Samsung and co-founding the company that makes the trendy August home “smart” lock.
Jawbone’s travails are the stuff of startup legend. Born from hard-science coursework at Stanford—Asseily’s, not Rahman’s—Jawbone has endured multiple ups and downs, survived near-death experiences, raised more than $400 million from Sand Hill Road’s boldest-face names, and placed itself repeatedly at the center of the cultural zeitgeist where consumer behavior meets advancing technology. “It’s a unique company that has a unique set of capabilities,” says Andreessen Horowitz’s Ben Horowitz, a Jawbone director and one of its earlier backers, a blue-chip list that now includes Khosla Ventures, Sequoia Capital, Kleiner Perkins, Silver Lake Partners, and BlackRock.For all its accomplishments, though, Jawbone remains on the verge. It is no closer to making money today—with 450 employees and hundreds of millions in revenue—than it was more than a decade ago, when it was scraping by on government grants. Execution misses and slow-footed strategic moves have left Jawbone vulnerable to disciplined competitors, including the surging Fitbit. Indeed, despite all the money it has raised and its patina of success, Jawbone continues to scramble for cash and struggles to ship a quality product on time. And that’s all before Apple itself pounces on the wearables market with its eagerly awaited Apple Watch. Jawbone’s vision and style are groundbreaking. Whether it can avoid being left behind in the very categories it created is another matter altogether.
When Alexander Asseily arrived at Stanford in 1993, he was interested in art, not engineering. Practicality won out, however, and before long he was studying product design and mechanical engineering. For his senior thesis he designed a futuristic contraption straight out of “Dick Tracy.” “I had a diagram of a wrist-worn communicator connecting to a headset,” he says, a diagram he would later incorporate into a business plan for the company that became Jawbone. The work was interesting but too forward-looking for his professor. “The irony of all this is that I got a B– in the class,” he says.
Like many scientifically-oriented Stanford students, Asseily caught the startup bug and, together with his friend Rahman, decided to see if there was a product to be had from his research. A professor introduced the pair to scientists at the nearby Lawrence Livermore National Laboratory who were working on voice-recognition technology. Unsure what they wanted to build, the group recognized they had intellectual property that could be used for noise suppression, which happened to be of great interest to the U.S. Defense Department. “They wanted high-reliability, low-detectability speech transmission in high-noise environments,” says Asseily.
The Stanford duo and a Livermore scientist they recruited ended up with grants from the U.S. Navy and DARPA, the Pentagon’s research arm whose precursor had funded the creation of the Internet. Recognizing that what might work on the battlefield would be equally useful in an automobile, the small team decided to build a headset that would employ technology to block background noise. (Its eventual trademarked name had a martial flair: Noise-Assassin.) They formed a company, AliphCom, evoking the first letter in the Hebrew and Arabic alphabets with a wink toward speech communication. Early on they turned down an offer to sell out to headset leader Plantronics. Like all good entrepreneurs, they believed they were onto something.
What they were onto was good enough to get a meeting with Steve Jobs in 2004. Unfortunately, he savaged their product, a headset that connected via a wire and a clip to a cellphone. Recalls Rahman: “Steve said, ‘The only place anyone would ever use a clip like that is in your mind.’ ” Jobs was right. Rahman and Asseily introduced their headset that year to favorable reviews, but the product flopped. By then they had recruited Pat McVeigh, a seasoned hardware executive who had worked at Palm as CEO. They had also attracted a modest investment from Mayfield Fund, an old-line Silicon Valley venture firm. When the headset failed, though, Mayfield threatened to close the doors, and another DARPA grant helped keep the company afloat. Most of the employees left, including McVeigh. Rahman calls that period Jawbone’s “nuclear winter.”
In retrospect, they were Jawbone’s salad days. Its tiny, scrappy team toiled away on what would become a breakthrough product, a wireless headset with notably quiet sound. Funding remained a problem, however, and Rahman became adept at keeping creditors at bay. At one point during 2006, Asseily persuaded a group of watch dealers in Birmingham, England, to invest $500,000, but only after taking them to the factory in China where the headsets were being made.
The team’s big break came just before Christmas in 2006. Cingular Wireless (now AT&T) had agreed to stock the headsets in its retail stores. But AliphCom had again run out of cash, and the company that made the devices wouldn’t release them unless it was paid. The founders persuaded early AliphCom investors, including Chris Burch (the former husband of fashion designer Tory Burch) and publishing heir Austin Hearst, to extend a line of credit, triggering the shipment to Cingular.
The Bluetooth headset was a hit, millions of dollars flowed into the young company, and suddenly venture capitalists were begging to invest. “In January 2007 everyone came out of the woodwork and said, ‘We love you,’” recalls Asseily. After eight years of trying to build a business, the founders heard the message loud and clear.
AliphCom was the proverbial overnight success. Hands-free driving laws in multiple states sparked a run on wireless headsets. The company racked up millions in sales and recorded sizable profits in 2007 and 2008. By this time Asseily had begun to step away from the active management of Jawbone, and he eventually returned to London. Rahman, now CEO, began an epic run as a fundraiser, attracting Horowitz (in his pre–Andreessen Horowitz angel-investing days); Vinod Khosla (Rahman: “With Vinod, for the first time in my life I was with someone who made my ideas seem small”); and Sequoia Capital’s Roelof Botha, a former PayPal finance chief.
Flush with success, Rahman quickly became one of the leading lights of the burgeoning tech scene in Silicon Valley. He grew up in Southern California, the second son of an engineer father from India who designed chemical refineries and a physicist mother from Pakistan. Between accompanying his father on far-flung work projects and visiting various family members who’d left the Indian subcontinent, Rahman saw the world at a young age. “I remember flying into Hong Kong when the airport was in the middle of the city,” he says. He attended the Webb boarding school in Claremont, Calif., and landed at Stanford when Larry Page and Sergey Brin were computer-science teaching assistants and Marissa Mayer had just arrived from Wisconsin. (She lived in the same freshman dorm and today is a Jawbone director.)
Such connections and a natural gregariousness—Rahman is a hugger in the land of the fist bump—boost his celebrity status in the tech community. “One thing we all really admire about Hosain is is how he has reinvented his business multiple times with category-defining products,” says Drew Houston, CEO of storage startup Dropbox.
Events, both technological and otherwise, certainly have had a way of conspiring against Jawbone. Hands-free driving was a boon to the company—which began using the name Jawbone in 2008, after a version of its Bluetooth headset—but it also spurred automakers to improve their in-car Bluetooth functionality.
The financial crisis hit Jawbone as hard as everyone else, and sales dried up in 2009, taking the company off what would have been an expected IPO trajectory.
In its labs and design shops, however, the company had other products in the works. First, in 2010, it came out with the Jambox wireless speaker, creating an entirely new consumer category. It introduced multiple versions of its headsets and speakers, in different sizes and colors. In 2011 it released the UP fitness tracker, again to critical acclaim. As the ability to monitor fitness and sleep caught the public’s imagination, “wellness” gradually became the company’s primary thrust.
Then the pattern repeated itself. A production snafu caused the UP to malfunction, and the company offered to refund the full price for any customer who wanted one, even if there was nothing wrong with the product. Jawbone was essentially out of the fitness-tracker market in 2012 as it retooled its product line and raised more money to push forward.
Even as Jawbone recovered, however, its product remained plagued by unreliability. One reason is its ambitious design, stringing wiring throughout its rubbery band. Bending puts wear and tear on electronics, and users often send their UP bands back for replacement under warranty. The demo model the company supplied Fortune, for example, stopped taking a charge after a few weeks, so it ended up where broken watches typically do—in a dresser drawer rather than on a wrist.
When James Parkand co-founder Eric Friedman started Fitbit, it was hardly a lock for future success. “We actually knew nothing about hardware,” says Park, a soft-spoken, hoodie-wearing 38-year-old who dropped out of Harvard before completing his computer-science degree. Park worked at Morgan Stanley for a time, founded a startup that went bankrupt, and then started another that he sold to CNET for an amount not worth bragging about.
Park was a gamer, however, and in 2006 he waited outside Best Buy to be among the first to buy a Nintendo Wii gaming console. He and Friedman fell in love with the product in a way only computer scientists could. They realized the Wii had sensors—accelerometers, to be precise—that were so good and so inexpensive that for the first time they could be put into consumer products. “We got to thinking about a ‘magical device’ that could track all your fitness,” says Park.
Much like Jawbone in its earliest days, the Fitbit founders toiled away for two years with a tiny group of employees. They decamped to Asia for months at a time to build trust with the company that would manufacture their product. By 2009, when Fitbit launched its first fitness tracker, the founders had raised a paltry $2.6 million. Five years later Fitbit is the market leader, with 68% of the North American market for fitness trackers last year, and it is widely expected to sell shares in an IPO this year. To date it has raised $66 million, none from the sort of VCs whose names in a news release make people take notice. Says Park: “Some of our peers have raised 10 times that.”
The contrast with Jawbone goes well beyond its capital efficiency. Park redefines “unassuming,” as does Fitbit’s office space in a less-than-hip downtown San Francisco office tower. Fitbit started not with a bracelet but rather with a clip-on device, which it discovered was popular with women, who liked to clip the gadget to their bras. Most of Fitbit’s early sales were from its own online store, and it expanded its product line quickly. “Our strategy from early on has been that there is no one size fits all, so we have tried to be first with lots of them,” says Park. He says his experience of having lost a startup to bankruptcy made him careful with expenses. Still, Fitbit is an aggressive marketer, with a slick television campaign throughout Christmas and multiple corporate partnering programs.
Fitbit has also had problems. A popular model caused an allergic reaction for some users, triggering a costly recall in 2014. Yet Fitbit had enough other products—including a connected scale, the Aria—so that it quickly recovered from the recall and shot ahead of Jawbone in market share. Like Jawbone, Fitbit announced new products this past fall: a heart-rate-monitoring version of its main tracker and a smart watch to compete against Apple’s. Fitbit’s new products weren’t available for Christmas, but unlike Jawbone it hadn’t suggested they would be.
Fitbit isn’t Jawbone’s only problem. Wireless headsets have become a commoditized business, and Jawbone has lost ground to the competition. In speakers, Jawbone took an industry by surprise but in the process awakened a sleeping giant in Bose, which is spending heavily to protect its turf and has regained a leading share. (Jawbone’s has dwindled to 5% in the U.S.) Some speculate that Jawbone will dump its non-health-related products. Asseily, still Jawbone’s chairman, suggests that such moves would be “painful,” but perhaps prudent. “Over the last year we’ve come to terms with the fact that our future value is focused on wellness,” he says. “Audio is great, and I think our audio products, particularly Jambox, are sexier. But it’s not as big a market.”
For a company that has had so many ups and downs, it should come as no surprise that Jawbone is in the midst of what technology companies like to call a pivot. It has begun hiring prodigious numbers of software engineers and data scientists, all to make the applications that connect users with its UP devices more magical—and functional. Rahman refers to the UP as a “24-hour context engine.” Users “engage” with their UP for 23 hours a day, he says, compared with 15 minutes for Facebook. (Facebook’s engagement time landed it more than $12 billion in revenue last year.)
The results so far are impressive. Jawbone has devised ingenious content to go with its app that truly prods users to eat better, exercise more, and pay more attention to the quality of their sleep. This content, in turn, offers opportunities for big brands to pay Jawbone to reach its active users, which number, Rahman says, in the “many millions.” Quaker Oats and skin-care-products maker Lab Series, for example, have paid to include messages in Jawbone’s app, which Rahman calls “brand activation” content rather than advertising. “I think of hardware as a customer-acquisition device,” he says. “We’ll know similar things to Facebook.”
The vision is compelling, although still in its early days, says Rahman. It’s true that by collecting information from a willing customer’s body, Jawbone would have tremendously valuable data. Rahman says his dream is that Jawbone’s device-to-services revenue mix would be fifty-fifty. Says Rahman: “I tell Tony”—referring to Tony Fadell, creator of the Nest “learning” thermostat, which he sold to Google for $3 billion—“the Nest doesn’t know if you’re hot or cold. I will.”
The problem is that making money on content tied to Jawbone’s hardware is a classic chicken-and-egg problem. Hardware doesn’t make money for Jawbone today—as a private company, it won’t disclose any financial information—and its “brand activation” programs are nascent. “Hosain is trying to build a razor-and-blade business, but razors lose money, and his blades don’t exist,”says one close observer of the company.
In the meantime, the challenges of running such a business amount to a high-wire act. In early 2014, Jawbone agreed to an investment of $250 million by investors associated with Rizvi Traverse, a low-profile firm that made a bundle investing in Twitter TWTR. For reasons neither side will comment on, the full amount of the investment never materialized, forcing Rahman to scramble yet again to raise new funds. In August the prominent contract manufacturer Flextronics sued Jawbone for breach of contract and claimed in a lawsuit, since settled, that Jawbone’s “perilous” financial position prevented it from paying Flextronics $20 million it was owed. Flextronics declined to comment. Without addressing specifics, a Jawbone spokesman said the suit’s quick resolution shows that it was merely a “miscommunication between two partners.”
The low point of a difficult year for Jawbone came in December, when it said that the UP3, announced the previous month, would not ship to customers by year-end, as promised. Jawbone offered a $40 discount to customers who had ordered it, slashing profitability for its $180 marquee product before it even hits store shelves. Rahman says a “sealing” problem caused the delay, a reasonable enough excuse, but one that raises the question of why Jawbone promised availability in the first place. Says Rahman: “We felt like it was ready.”
Jawbone knows well that both its fans and investors are ready for results. “My hope is that we can go from an organization that produces sizzling products to an organization that also is a predictable and healthy business in the traditional sense of the word,” says Asseily.
Rahman, though, speaks of Jawbone’s newest strategy in loftier terms. “I think of it now as at the intersection of beauty,” he says. “We are making beautiful objects that people are emotionally engaged with, the way they are with a vintage watch that their grandfather gave them, or a piece of jewelry that makes them feel beautiful about themselves or is a self-expression. The whole mission is to give people a better life, whether that’s the ability to consume media in a higher-quality way off a mobile device or to know things about yourself and figure out how to use all that data to improve your life.” It’s an inspiring vision. Now, at last, Rahman has to deliver on it.
This story is from the February 2015 issue of Fortune.