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While software continues to eat the world and VC checkbooks, venture investment in consumer electronics startups is poised to decline year-over-year in 2019. That marks the third year in a row of contracting investment for the North American startups in the space, per Crunchbase data. And even hardware investors are sounding bearish.

“It’s a down window right now,” said , partner at , a hardware-focused seed and early stage investor that has been largely staying out of new deal flow in consumer electronics for the past couple years.

Lemnos isn’t alone this year. A Crunchbase analysis of investment in North American consumer electronics startups shows total known funding of $1.74 billion in 2019, down from $2.45 billion in 2018. Round counts have slipped as well. We break down totals for the past five years below:

The Drivers

Klein pointed to three main drivers for the decline in consumer device investment.

The first is the growing dominance of the “Big Four” — Apple, Samsung, Google and Amazon. These corporate giants are cornering a growing number of consumer electronics categories, leaving startups hard-pressed to compete.

The second is the disappointing aftermath of the Kickstarter revolution. When crowdfunding platforms began gaining traction early in the decade, there was optimism in venture circles that developers of popular products would go on to serve massive markets. That hasn’t panned out as expected, with early follower enthusiasm rarely germinating future mass-market hits and instead bringing a .

The third factor is the so-far unimpressive strategy of writing large early checks to more experienced entrepreneurs.

“Those deals haven’t done as well as everyone thought they might,” Klein said. It’s particularly challenging because founders have to build both a product and a marketable brand. Both of those are expensive and risky propositions.

Klein didn’t name names, but startups that come to mind include , the mobile phone and device maker that raised $330 million across two early stage rounds, and , the VR wearables unicorn that has raised over $2.6 billion to date.

Series B Was Particularly Weak

It’s noteworthy that of all stages of consumer device investment, Series B was particularly weak this year. Per Crunchbase data, just nine North American consumer electronics companies announced Series B rounds in 2019, bringing in $209 million (more details in chart below). That’s less than a single company – Essential – raised in its 2017 Series B.

This slowdown is significant because if we visualize where Series B lands in a company’s development, it’s a bit like the final on-ramp to a highway. As we noted in a prior analysis, companies are expected at that point to have proven technology, early indications of market demand, and, at least some revenue. The next stop is Series C, where the scaling accelerates.

Because the bulk of really big startup financings happen at the later stage, after Series B, a slowdown here indicates the likelihood of fewer supergiant fundings for consumer electronics down the road.

Hits And Flops

Since consumer electronics success requires a recognizable brand, we’re more likely to hear about the companies that prevail, as well as those that didn’t live up to early hype. So, let’s look at some of the biggest names in both categories.

On the success side, probably the standout for 2019 is , the maker of connected fitness equipment that went public in September and has cinched a market capitalization around $8 billion. Founded in 2012, the New York-based company raised just shy of a billion dollars prior to its IPO.

Other deals involved smaller numbers, including Amazon’s purchase of venture-backed home router startup, , for an undisclosed sum, and Google’s purchase of publicly traded fitness wearables maker for $2.1 billion.

As for flops, among the most prominent closures of 2019 was , the maker of robotic toys that raised more than $200 million in venture funding. The list of smaller startup shutdowns for the year includes , a connected home device developer,  and , which wanted to modernize the breast pump.

Scant Funding Portends Fewer Future Flops

Of course, you can only have big flops if startups get enough money with which to flop bigly. The scarcity of supergiant consumer electronics fundings in recent quarters means there is a smaller pool of companies poised to become either the next big success or notorious failure.

Part of the challenge, Klein said, is finding niches where the Big Four don’t already exert market dominance. Connected fitness represented one such area, and that helped push Peloton’s valuation up and fuel investment for others in the space. Another example is , a startup that makes air purifiers.

In coming years — new sensors, maturation of the VR space, and other developing technologies will also likely open up new use cases for consumer electronics. But it may take a while said Klein, noting:

“History always teaches us that what goes down will go back up. It’s just really hard to tell when.”

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In a statement via email, Anki’s head of communications told us:

It is with a heavy heart to announce that Anki will be letting go of our employees, effective Wednesday. We’ve shipped millions of units of product and left customers happy all over the world while building some of the most incredible technologies pointed toward a future with diverse AI and robotics driven applications. But without significant funding to support a hardware and software business and bridge to our long-term product roadmap, it is simply not feasible at this time. Despite our past successes, we pursued every financial avenue to fund our future product development and expand on our platforms. A significant financial deal at a late stage fell through with a strategic investor and we were not able to reach an agreement. We’re doing our best to take care of every single employee and their families, and our management team continues to explore all options available.

Anki was perhaps the most well-funded startups in the connected toys space. Over time, according to Crunchbase data, Anki had raised a total of at least  from investors such as , and , among others. Founded in 2010 by three Carnegie Mellon Robotics Institute graduates, Anki was considered to be a “darling” in the field. Venture capitalist  in a 2013 blog post called Anki the “” he’d ever seen.  Andreessen once sat on the company’s board, from the time. A company spokesperson told Crunchbase News last September that its 2017 revenue “approached $100 [million]” and revenue was expected to exceed that in 2018.

In 2016, I (Mary Ann) had the company for another publication and Sofman had told me:  “We started Anki with the goal of harnessing robotics and AI to bring to life consumer products with unprecedented level of intellect and interactive capabilities.”

But its closure is not entirely a surprise.

In September 2018, we covered a likely financial shakeup at the company, surfaced in a pair of SEC filings. The first document detailed an equity transaction targeting $27.24 million in “Series 1 Preferred” stock. Crunchbase News had seen the Series 1 label before when we broke the story that Andreessen-backed tee shirt design marketplace Teespring re-capitalized, wiping out tens of millions of dollars worth of common stockholder equity in the process. The last round raised by Anki prior to the Series 1 deal was a Series D. Based on prior experience covering distressed Andreessen Horowitz portfolio companies, there’s strong reason to believe that Anki’s investors re-capitalized the company in 2018.

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