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Nokia’s Acquisition of Withings: A Save or a Win?

May 01, 2016

Nokia made a really interesting move today with their $191 million acquisition of personal health device manufacturer Withings. I think this is a brilliant move for Nokia. They know how to do distribution at a massive global scale, they have the infrastructure and experience to do that, and they know how to make “dumb” devices that are broadly appealing. The thing they failed at was making those beautiful interfaces and high-end devices that dominate the smartphone space. Withings makes dumb, but useful, devices. Scales, thermometers, blood pressure cuffs, even an interface-less smart watch. They do have an app, but just one, and it’s in pretty good shape.

That’s the good news. But there’s some bad news in this story and it’s buried in that first line.

$191 million.

 

Don’t get me wrong, that’s a lot of money. Withings has only raised (according to Crunchbase) about $35 million in private financing so it looks like everyone involved should be getting a healthy return on their capital. That said, hardware companies notoriously need debt to finance inventory and, while I haven’t seen any figures, it’s not out of the question that there is an enormous amount of debt that’s getting backed out of that topline number before the money is shared around. Even with that caveat, $191 million is a lot less than what you would hope a very successful hardware company to sell for.

2014 was a big year for hardware: GoPro went public and closed on the day of their IPO at a $2.5 billion valuation; Google acquired Nest for $3.2 billion and they then turned around and acquired DropCam for $555 million a few months later, Facebook acquired Oculus Rift for $2 billion, Apple acquired Beats for $3 billion, and Samsung picked up SmartThings for $200 million. The party continued into mid-2015 with FitBit hitting a $4.1 billion valuation after its IPO in June.

 

Sounds pretty good right?

 

But then the bloom started coming off the rose. FitBit now is now at a $3.7 billion market cap, down 10% in a year, GoPro is at $1.65 billion, down roughly 40% (despite a failed $300 million stock buyback plan), and JawBone, who supposedly had a $600 million/year run rate, has pushed off their IPO indefinitely amid some very rocky financial ground. Add to that the struggles going on inside (and outside) Nest and things look a lot more sober as we head through Q2 of 2016.

The easiest parallel to draw with Withings would probably be SmartThings as they were each similar vintage startups (2010 and 2012 respectively) and they each exited for around the same price ($191 million and $200 million), but Withings raised a little more than twice as much capital ($35 million vs. $15.5 million) and it’s taken three times as long (six years from seed to exit vs two) to get to the same valuation.

So, while I'm happy for the Withings team and I hope everyone did very well, my sense is that the company was probably struggling with growth and slogging through the slim margins and high capital demands of a hardware manufacturing and distribution business. Making devices is really, really hard: you have to be experts at industrial design, electrical and electronic engineering, manufacturing, logistics, marketing, and support. Startups have a hard time juggling all of those demands with limited resources. Companies like Nokia have decades of experience doing that and they, despite their shrunken size from their former glory, still have the resources and infrastructure to support a growing segment like the personal connected health space. That said, from a hardware investor perspective is that this exit looks more like a save than a win.

noah@two-bulls.com
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