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Early Investor

The Risks of Being an Early Investor Pebble: One Company, Many Lessons

Investors: do you remember the Pebble Watch?

Pebble raised more than $10 million on Kickstarter in 2012—a record at the time—far exceeding its $100,000 goal.

Early on, Pebble seemed like a classic success story. The watch did what the company said it would: it worked well with both the iPhone and Android smartphones, it had a long battery life, and it had customizable watch faces. It was inexpensive, to boot.

Intel, at one point, reportedly offered to buy Pebble for $70 million; Citizen offered $740 million.

Early Investor Success ? Ultimate Investor Success

Pebble’s success brought competitors to the market.

Garmin, Huawie, Samsung, Sony LG, Motorola all entered the smartwatch market.

And, of course, Apple did too, in April 2015. Still, Pebble soldiered on, using Kickstarter again and again to fund new products.

Pebble kept burning cash, however. It retreated to the capital markets, trying to finance its way to profitability. Pebble laid off about 25% of its workforce in March 2016, with its CEO stating:

“[w]e want to be careful. Pebble is in this for the long haul. We have a vision where wearables will take us in five to 10 years, and this is setting us up for success.

Pebble’s Death

Less than a year later, on December 7th, Fitbit issued a press release announcing its purchase of select Pebble assets. The purchase price was reported to be just under $40 million.

Pebble no longer makes (or sells) any device and, according to reports, about 60% of its employees were not hired by Fitbit.

Existing Pebble watches will continue to function…for the time being. But they are not covered by a warranty. Pebble’s other assets, including product inventory and server equipment, will be sold separately.

ABCs

An assignment for the benefit of creditors (“ABC”) commenced on December 6th—the same date during which the asset sale to Fitbit closed.

In an ABC, an assignor (i.e. Pebble) transfers legal ownership of all of its assets to an assignee. The assignee is then charged with liquidating the assets, winding down the assignor’s business, and distributing the net liquidation proceeds to creditors of the assignor who timely submit claims as instructed below.

You can learn more about ABC by reading this, this, and this.

For a great webinar that explains an ABC in the broader context of options available to a financially troubled business, see this.

The Moral of the Story

Pebble’s story underscores the risk that early innovators face.

Think about the eight-track player, Betamax, Blackberry and TIVO. Great new technologies often go the way of the dodo bird.

It also underscores the inherent risk of investing in start-ups. (For more of my ranting on why it is risky, you can read this and this.)

To learn whether and how to invest responsibly in start-ups, read this and this.

To see great, easy-to-understand webinars on the subject, any of these can make you a better investor: here, here, here, here and here.

But Wait, What About “First Mover” Advantage?

It is true that there are advantages to being the first entrant to a new market or the first to bring a new product or service to market.

It can help to create strong brand recognition, for example. The head start may also allow the first mover to build economies of scale and to lock up key suppliers, customers, locations and employees. Consider two recent first movers: Airbnb and Uber.

And, from a customer’s perspective, there can be significant switching costs that act as a deterrent to moving to a competitor.

For example, I do not like Bank of America (more about that in a future installment), but I don’t move banks because I do not want to endure the exercise of having to switch my online auto-pays.

But the reality is that while the first mover wins the first battle, a later entrant often wins the war.

More Often, the Second (or Later) Entrant Wins

Apple did not create the MP3 player. Or the first cell phone. It dominates both product categories today.

Blackberry was the phone of choice for business people in the mid-2000s. But whose stock would you have rather bought and held since then?

Another example? A little company called Google.

Google, of course, wasn’t the first search engine. In fact, it wasn’t even close.

There are countless examples of second movers doing as well or better than first entrants abound. Think Pepsi and Coke or Lowes and Home Depot.

Not being the very first mover has some definite advantages. A later entrant, for example, can learn from the mistakes of the earlier entrant without incurring the same losses.

The value of being the first or second entrant, of course, will depend on the particular product or service. The value is greater when the required level of investment to bring the product or service to market is very large or very small.

That brings us to the “Network Effect.

The Network Effect Is Powerful

The “network effect” occurs when a good or service becomes more valuable to the consumer as other users adopt it.

Think about Facebook, or any other social media platform.The entire value comes from the fact that so many people use it.

That’s why it was a winner-take-all proposition when Facebook came onto the scene to challenge MySpace. (Another example where an early investor could have bet horribly wrong on the first entrant.)

Thankfully, for commerce and the untold numbers of start-up founders in the world, most industries can support many players.

5 Easy Lessons You Can Learn from Pebble

  1. Understanding how Pebble went from where it was to where it ended up can be a useful exercise for any business facing trouble. For more about this generally, click here.
  2. Understanding how Fitbit went about purchasing assets from Pebble can be a useful exercise for any business thinking about buying the assets of a troubled company. For more about this generally, click here.
  3. Understanding what recourse creditors of Pebble may have can be a useful exercise for any business that finds itself a creditor of an insolvent customer or counterparty. For more about this generally, click here
  4. If you are a creditor of Pebble, you can get the proof of claim form here.
  5. If you are an owner of a Pebble watch, well, you may want to buy a new watch.

About Jonathan Friedland

Jonathan Friedland is a partner with Sugar Felsenthal Grais & Hammer, a law firm with offices in Chicago and New York City. Born and raised in a New York suburb, Friedland graduated SUNY-Albany magna cum laude in three years and then earned his law degree from the University of Pennsylvania Law School. Friedland clerked for…

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