Fully Connected
Wearables and connected health devices are here to stay and have investors running to invest
In December, after lengthy quarantine with a more diligent focus on health, I took the plunge and purchased the Fitbit Charge 4 (which I recommend) and a premium account. I wasn’t entirely sure what I wanted to get out of the subscription, but I’m a data nerd and figured I could explore. So far, it’s helped me learn more about how I sleep and why I sleep the way I do, what my heart rate variability (HRV) and resting heart rate (RHR) mean, and to generally be more aware of what I’m doing to be healthy.
While I consider myself a generally healthy-ish person, probably somewhere in the top 25%, I am by no means a health nut. I enjoy the casual beer (or several) and sometimes will take a few rest days in a row. But despite the fact that I have this Fitbit Premium subscription, I am only scratching the surface of the burgeoning wearables and connected health market.
Hundreds of companies have popped up in the last few years that are starting to shape and connect the industry. Incumbents like Fitbit, Apple, Garmin, and a few others have dominated the wrist-wear portion of the market and according to [Grand View Research had almost a 50% market share as of 2019. But wrists are just the start, and only a portion of the connected health market. Companies like Levels (a real time glucose monitoring decide), WHOOP (a more holistic device focused on recovery), Oura (a smart sleep measuring device) have raised $12M, $205M, and $48M respectively as of this post and that’s just the type of the iceberg.
There is a dizzying amount of other companies that measure sugar levels, fertility, and much more. While obviously pure speculation at this point, some projections show this being a $100B+ market with ~16% CAGR over the next 6 years.
Not everything will be a wearable object on our body, though. There is ample growth on other connected devices like Mirror (who was acquired by Lululemon for a dizzying $500M), the Eight Sleep mattress - whose company has raised $76M (Matteo if you read this please let me advertise your product), and we don’t even need to talk about Peloton’s market cap - which as of mid January almost hit $50B. Billion… with a B.
So there’s a lot of money flowing into these markets, as shown with the lofty and growing valuations spread far and wide. But how are these companies making money? Fitbit had margins of ~37% for its physical products, and an annual run rate of $100M just for consumer services (e.g. Fitbit Premium) and 500,000 paid subscribers. I’m focusing on the software side of revenue because for a lot of these new startups, their hardware margins are paper thin to start but the services will bring in quality revenue.
Whoop, the latest upstart in wrist-wearables raised $100M at the end of 2020 and has a litany of high-profile endorsements with celebrities like Patrick Mahomes and Rory McIlroy (Who have also invested in the company). Whoop has a different approach than most health wearable companies, where the actual band is free but comes with a $18/month starting subscription service if you pay for 18 months upfront. The recurring revenue from a product like Whoops is tantalizing for investors, while simultaneously the features and in depth metrics are tantalizing for hardcore athletes and data-nerds like myself.
Levels, a glucose monitoring product helps users “maximize diet and exercise”. A fascinating concept, no doubt, it reports on your glucose levels to see how your body reacts to different intakes and physical exertion. The company pitches Metabolism as a core part of our sleep, appetite, weight, and energy as well as a perfectly measurable feature of life that can be assessed through detailed reporting. Levels is reportedly in it’s “Tesla Roadster phase" which you may or may not remember from my post the John Mayer Framework (secretly thrilled to be bringing this back up). What this means is that Levels' currently sizable $399 cost is meant for a specific audience who is willing to shell out, provide diligent feedback, and give money/Tweets (aka “free” press). Eventually as Levels iterates and improves the business to me more capital efficient, we will see the business roll out cheaper and more accessible products. While it's not the same quality business of Tesla (yet), it could very easily approach mass adoption for a more regular fee and capture monthly revenue from a massive TAM.
From an incumbent standpoint, Apple is dominating and is pretty well placed to continue dominating the health wearables market. After listening to a podcast with Matteo Francheschetti (the founder and CEO of Eight Sleep), the vision of what Apple is setting out to be has clarified itself in my mind. Matteo mentions an intriguing point in that Apple is both collecting all of the data that we pipe into our phones from various sources but also that it is still perfecting the Apple Watch. Apple will accumulate years and years of health data about us from various sources that they can turn into legit “medical grade devices”. Apple very likely has their sights on being a leader in preventative health.
The wearables and connected health market is only getting started, and while it’s not hard to envision a future where we’re all wearing four or five devices at any time and using smart mattresses/chairs/etc, I think we will see some consolidation. The market is enormous, and has potential to save millions of people money in hospital bills and more. Right now, most revenue is product driven, but the switch to services and cloud-based data opens up doors for product stickiness with low initial barrier to entry. Years of data accumulation will add to the longevity of these products and drive massive ARRs thanks to high customer retention.