Why you should start a wearables company

Venture funding is heating up in the wearables space as bands get more accurate and innovative

The future of wearables seems pretty certain at this point: they’re officially a thing now. Like, five years ago, if I had seen someone wearing a wristwatch (a la Basis), I would’ve been like, “Dude, this is 2009. We don’t do wristwatches because it’s 2009 and we just inaugurated our first black president.” (Like how I set the scene with timely historical references?)

The wearables space is heating up and evolving. A report from Canalys in February predicted that health trackers will gradually fade away and be absorbed by smartwatches—essentially the same argument that was made regarding the iPad and dedicated e-readers. Can a dedicated device stand its ground against a smartwatch that has health tracking capabilities in addition to the ability to run non-native apps?

There are those who disagree with that idea, though, such as Basis CEO Jef Holove.

“We imagine there will remain an opportunity for purpose-built devices and applications to capture data and offer specialized insights that the iWatch may not,” he said via email in February.

Whichever way the wind blows, the wearables sector is hotter than ever right now. In 2013, VCs invested $176 million in 17 wearables companies, all but two of which specialize in health and medical wearables. That’s compared to $99 million across 15 companies in 2012.

The largest round--$45 million—went to Proteus Digital Health, a company that—and I can’t believe I’m writing this because it seems to SciFi—embeds sensors in pills to help patients keep track of their meds. The sensors activate when the pill is digested and the information is relayed back to the patient or caregiver’s smartphone. (Mind= blown.) The round saw participation from Novartis Venture Funds, Otsuka Pharmaceutical Company, and several undisclosed investors.

Fitbit raised the second highest amount with $43 million across two rounds, and Mc10 Inc. raised the third highest amount with $26.96 million across two rounds. Basis and Misfit Wearables rounded out the top four with $26.64 million and $15.20 million raised, respectively. That’s according to data from the National Venture Capital Association.

So who is investing? In terms of the number of companies invested in, Norwest Venture Partners led the fray with investments in Basis and Mc10, a company that is developing wearable health monitors and medical devices that are flexible and conform to the body more naturally than, say, a giant clunky wristwatch.

Other firms that invested in the wearables sector in 2013: Mayfield Fund, North Bridge Venture Partners, Intel Capital (which acquired Basis last month and invested in Mc10), Khosla Ventures, O’Reilly AlphaTech, Horizons Ventures, the Social+Capital Partnership, SoftBank Capital, True Ventures, First Round Capital, FirstMark Capital, Lemnos Labs, Rock Health, and more.

And the wearables market is only going to get bigger. Currently, U.S. penetration for wearable bands hovers around some 1-2%, according to Canalys analyst Daniel Matte, who expects that number to rise to 20% by 2016. The research firm expects that altogether, 17 million wearables will be shipped in 2017, nine million of which will be basic bands (health trackers). 

Join us in May for our Vator Splash Oakland event, which will include a panel on the future of healthtech and the Quantified Self. Panelists will include Mayfield Fund's Tim Chang, Morgenthaler's Rebecca Lynn, Rock Health's Malay Ghandi, and Interwest's Nina Kjellson.