Hosain Rahman’s beautiful failure

FORTUNE — The bracelet — a half-inch wide and rubberized — represented a decade’s work, a thing so small and versatile it could both track its wearer’s health, then actively work to improve it. In a sense, the UP was meant to become a part of its user’s life, a part of his or her story. An example: The UP measures sleep cycles by keeping track of movements throughout the night, then vibrates its wearer awake after he or she has reached just the right amount of deep sleep. It was the culmination of a nearly decade-long collaboration between Hosain Rahman, co-founder and CEO of Jawbone, and Yves Behar, a gadget designer as famous as Apple’s Jonathan Ive. Rahman and Behar had married software and product design to build wearable computing devices before—most successfully with their Bluetooth headsets, the name of which had become synonymous with the company—but never in something quite as ambitious. It took less than a month after UP was released for the wristband to turn into the biggest disaster in Jawbone’s history.

It was the first week in December 2011. The UP band had arrived in stores for Black Friday and sold out almost instantly. A few days later users began posting to online forums and on Jawbone’s website, as well as calling the company’s customer service line. All complaints described a troublingly similar symptom: UPs were permanently shutting down, what’s known in the industry as “bricking.” The first reviews were similarly grim. In the headline of its article on the UP, the tech blog Gizmodo called it “A Potentially Wonderful Thing That You Should Not Buy.” Still, no one at Jawbone knew what was causing the UP to brick. After all, the device was meant to be worn all the time. Figuring out what had gone wrong in those failed products, and checking that against the vastness of an UP user’s experience, was going to be especially difficult, seeing as the point of the product was to measure so many of life’s aspects.

Rahman, who until now has not spoken publicly about the UP’s failure and his reaction to it, says that he initially wanted to get ahold of as many broken units as possible, open them up, and try and find out what had gone wrong. He had been wearing an UP band for weeks before its launch, but getting bricked units proved difficult. Jawbone pushed nearly all its UPs into stores before the holidays. The few he and other Jawbone employees had on all seemed to work. Rahman went so far as to send staffers to Apple stores throughout the Bay Area to collect broken units. But this took time. Dissecting, investigating, and testing the bricked UPs would take even longer. Days passed, and Rahman stewed.

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He arranged his hours at Jawbone’s headquarters around what he took to calling the War Room. Drab as any conference room, the War Room soon became cluttered with the workspaces of a dozen employees—from engineering, manufacturing, marketing, design, customer service, and public relations—their white Mac cords adding to the crush and tangle. Rahman and his cohort traced the situation as it unfolded, blanketing the walls with flow charts, mapping out potential problems. Travis Bogard, Jawbone’s vice president of product management and strategy, recalls Rahman coming in each morning after staying up all night talking to teams in China. “He was sharp and clear-minded about what he wanted: to get to the bottom of the problem and make it right,” Bogard says.

But Rahman needed time, which he did not have. And as days passed he realized that knowing exactly what was going wrong would take more time still. His company had devoted tens of millions of dollars to developing the UP, just the third entirely new product line in Jawbone’s history, and several potential investors were waiting, and watching, to see what he’d do next. Sifting through the transcripts of customer service calls, it became clear to Rahman that inaction would appear worse than action. The question became, Just what, exactly, should he do?

Rahman, 36, is a giant teddy bear of a man whose body and voice—a permanently hoarse, always enthused SoCal surfer’s drawl—fill a room. He has not-so-quietly become one of Silicon Valley’s most connected stars, with enviable orbiting planets, including friends like Twitter co-founder Jack Dorsey, venture capitalist Yuri Milner and former Stanford classmate Marissa Mayer. Ben Horowitz, eponymous co-founder and general partner of venture capital firm Andreessen Horowitz, himself a Jawbone investor, describes Rahman as “a relationship person,” the sort of socially savvy, influential connector described in Malcolm Gladwell’s The Tipping Point.

Rahman founded Jawbone in 1999, after graduating from Stanford with a degree in mechanical engineering. He and his co-founder, Alexander Asseily, were working on conversational artificial intelligence software that was similar to Apple’s AI assistant, Siri. The company, then called Aliph, also developed noise-cancelling software, and Rahman and Asseily decided to build a headset to go along with it. Designing both a program (the software) and the shell it’s wrapped in (the hardware) is uncommon among tech companies, particularly tech startups, because building all aspects of a product is incredibly expensive, and development often takes years—a stark contrast to the hacker mentality driving the likes of Google and Facebook, where moving fast and breaking things is all right if it’s in the name of innovation. The first Jawbone headset, a wired device, launched half a decade after Rahman and Asseily founded the company, and even then it didn’t immediately appeal to many consumers.

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In 2005, Rahman took over as CEO. In 2007 he made Behar, who had partnered with the company for five years, Jawbone’s chief creative officer. (Behar runs his own design firm called fuseproject, which collaborates with companies such as Jawbone and Herman Miller.) Behar had initially focused on integrating Bluetooth technology in the devices, but he now plunged into every aspect of the product’s design. Jawbone’s headsets came to look like no other: sleek and futuristic, with a waffled texture and minimalist size. The next year, in the wake of the financial crises, a million customers canceled their orders and the company was forced to lay off roughly a third of its staff. Rahman held firm, and by 2009 the wireless headsets led the market and had put Jawbone in the black. The headsets appeared in exhibitions at the San Francisco Museum of Modern Art, the Art Institute of Chicago, and Centre Pompidou in Paris. Then, inevitably, the blowback: Wireless headsets soon came to be seen as the sure sign of the über-nerd, or tool. Brad Pitt was photographed in one on the cover of Wired, and next to it the phrase: “Ditch the headset. He can barely pull it off—and you are not him.”

It was time for something new, and Rahman was prepared. In 2011, he introduced two products: a portable wireless speaker and the UP. Rahman unveiled his svelte wristband computer at the TED Global conference in July. The buzz was instant and grew throughout the fall. Tech bloggers salivated and readers agreed. “Looks like a perfect move for the company. Looking forward to trying it out!” a commenter on the website GigaOM wrote after Rahman’s July announcement. Everything looked up. That same month Jawbone announced $70 million in new funding from J.P. Morgan Asset Management. Five months later things had taken a decidedly downward turn.

Rahman left the War Room only occasionally, to clear his head. It was during one of these respites that the simplest, most direct, and in some ways the most difficult path opened up before him. His compatriots remember him walking back into the War Room and telling them: “Okay, here’s what we’re going to do,” and he laid out to them what he would write to Jawbone’s customers, the guarantee he would make. Rahman doesn’t know exactly how his first draft of the letter that would come to save his company began. It was revised so many times, by so many of his co-workers, that the nuances of that first draft have been lost. Still, the essential nature of the thing didn’t change. It was an apology and a promise. Rahman admitted that there was a problem (“we know that some of you have experienced issues with your UP band … this is unacceptable and you have our deepest apologies”) then offered a full refund to all UP users, even if nothing was wrong with their units. “We are so committed to this product that we’re offering you the option of using it for free,” he wrote.

It was the evening of Dec. 7, Pearl Harbor Day, and Rahman called all of Jawbone’s biggest investors (the company is private) to let them know what was happening with the UP, and about the letter that would go online the following morning. Rahman then called several potential investors, alerting them too. It was late in the evening, and he and his team had been working nonstop for more than a week. Rahman had a holiday party in the Valley that night, hosted by Kleiner Perkins Caufield & Byers, one of the biggest soirees in the Valley that holiday season. Many of the people he had just called would be there, and though he didn’t feel like going, not showing up would appear cowardly. He told those still in the War Room that he would return later to tell them how it went.

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The party was at the Menlo Circus Club, a grand Spanish-colonial-style horse ranch built in the 1920s, in Menlo Park. The first person Rahman spotted upon arriving was Vinod Khosla. In 1982, Khosla co-founded Sun Microsystems and has since become a giant in Silicon Valley venture capital—first as a partner at Kleiner, then at his own firm, Khosla Ventures. He is also Jawbone’s biggest investor. The wispy, patricianly Khosla patted the big teddy bear on the back. “I’m proud of you,” Khosla said.

Rahman made his way around the party in a daze. Word about his decision had spread throughout the crowd, and the guests’ response was overwhelmingly positive. The next morning, soon after the letter posted to Jawbone’s website, the CEO of Deutsche Telekom, the company’s European partner, sent Rahman an e-mail stating his unflagging support. Mickey Drexler, CEO of J. Crew, and Dave Morin, co-founder and CEO of Path, called Rahman too—both were impressed with his letter and guarantee. Customer messages went from vitriolic to gushing—many mentioned the fact that every time they called Jawbone, they could get a real human on the line in a minute or less. Tony Fadell, whose division at Apple built the iPod, empathized with his friend: He knew how gut wrenching a product launch could be. “It’s incredibly hard to write a letter like that,” he says. “But it’s the only way. If you try to bury it, it’s always going to be lingering. You own it, and you move on.” Yves Behar views his longtime partner’s letter—and its successful quelling of potential disaster—as an extension of their shared design philosophy. The letter didn’t just represent good design; it was good design, because, as he puts it, “design is how you treat your customers—every aspect of that: ergonomics, sustainability, and service.” Just days after the letter and the Christmas party, Jawbone closed another $40 million in funding from Deutsche Telekom, Kleiner, and Rahman’s friend Milner.

Since then, much has changed in the field of personal health trackers. Nike has released a band similar to the UP, and FitBit, a device worn on a waistband or in a pocket, has gained tens of thousands of users. Jawbone engineers eventually located the causes of the bricked devices—a glitch in a capacitor on the charging circuit that rendered the UPs battery useless, and the fact that soap was slipping through the wristband’s watertight seals—and a reengineered version is on its way. Rahman won’t say whether it will make it in time to redeem last year’s Black Friday mess, only that it’s coming “soon.”

Behar, who worked on the UP’s redesign, is fond of describing how meaningful objects are created: by crafting an object that will tell a story. For Rahman it’s much the same. The best way to understand Rahman’s willingness to admit failure is to hear him tell stories. Specifically, it’s the stories his products tell, the way they become part of his customers’ lives, part of their story. Before launching into his description of the week leading up to the letter that saved his company, Rahman mentioned the Jambox, the portable speaker released just before the UP. In the year since, the Jambox has become the bestselling portable wireless speaker in North America and the U.K.  It wasn’t this fact that Rahman was excited about but how integral, and intimate, the speaker had become to its users. And it was their stories.

He recalls one example in particular that stayed with him this year. “A guy came up to me at the White House Correspondents’ Dinner,” Rahman says, “and I’d never met him before, and he just goes, ‘I feel like you were there for the birth of my child. The Jambox was there for her—for 13 hours of her labor.’ Then he introduced me to his wife. It was magical.” He pauses. “This is why we do what we do, why we create things that are there for people for the most important moments of their lives—that will be there with them all the time, everywhere.”