What's Next for Wearable Devices
An observation of the current state of this fast growing vertical and my predictions for what's coming next
Introduction
What was once used exclusively by only the most elite and professional athletes, wearable devices that track activity and health metrics have now become commonplace with all fitness enthusiasts. In part accelerated by the pandemic, nearly one out of every four Americans now owns a wearable device and the market has been gaining attention from investment capital providers. Big tech giants have all seemingly launched their own version of a wearable device and multiple startups have grown into billion-dollar enterprises. Despite this proliferation of devices to track health, there doesn’t seem to be a corresponding improvement in health outcomes, which has led me to reflect a lot on the next evolutionary stage in the wearable vertical. In this blog post, I explore where the wearable market currently stands and make some predictions about where investment dollars will be flowing in the coming years.
Market Overview
Market research varies on the current size of the wearable market, but the consensus is that it is massive and has been growing substantially over the last 10 years. Typical estimates are that it’s a ~$116 billion market and growing at a compound annual growth rate of ~18%. If growth rates continue this would imply a $225 billion market by 2026 and surpassing $300 billion by 2028. As mentioned previously, a large portion of this growth can be attributed to the COVID-19 pandemic during which many consumers became acutely aware of any deviation in their health and wanted data to quantify how they were feeling. Nearly 14% of consumers in the US who currently have a wearable, bought the device since the start of the pandemic. Below is a graph provided by InsiderIntelligence.com that shows estimates of the US Smart Wearable adoption rates in percent of the population and millions of users:
The definition of wearable has evolved with improved technology over time. The category was once confined to only heart rate monitors and step trackers but has since expanded into devices that can be worn all over the body and that collect a seemingly endless variety of data. We can now quantify metrics such as strain, recovery, activity, resting heart rate, heart rate variability (HRV), oxygen saturation, sleep metrics, blood glucose levels, hydration levels, and even emotions and nervous system health. These data points can be collected through wrist-worn straps, smart rings, smart clothing, implantable continuous glucose monitors (CGM), chest straps, skin patches, contact lenses, and shoe insoles. Below is a market map that shows my view of the landscape and some of the largest players in the above-mentioned categories.
This growth of the market has been fueled in large part due to the interest of capital providers to fund these companies. Some of the more notable funding rounds in recent years include:
Whoop: One of the leaders in the wrist-worn wearables space and an early developer of HRV tracking as a means to gauge strain and recovery, Whoop most recently raised $200M in August of 2021, valuing the company at $3.6B.
Oura: The leader in the Smart Ring category raised a $100M Series C Round in May of 2021, bringing the company’s valuation to $2.55B.
Fitbit: In January of 2021, Google acquired one of the pioneers in wearable technology, Fitbit, for $2.1 Billion.
And many additional early round raises over the last couple of years including $15M for Apollo Neuro, $10M for Prevayl, $5M for Cipher Skin, $45M for Mojo Vision, $4.6M for Xsensio, $60M for Withings, $60M for Happy Health, $12M for Levels, $13.5M for Super Sapiens, $8.8M For January, $5M for Nextiles, among others.
The Problem
Despite this recent growth and success of the vertical, there are a few reasons that I believe we are at an inflection point for wearable-focused companies. First, a pullback in public market valuations for the broader technology sector during the back half of 2022, partly fueled by an increasing interest rate environment, has meant a slowdown in funding for early-stage and growth-stage startups. Many of the wearable companies I’ve discussed up to this point have not focused enough on creating a sustainable business model, and instead have relied on the open taps of Venture Capital and Private Equity funds to fuel operational growth. Unfortunately, like many of the major technology companies, this has meant operational changes and layoffs. Whoop, for one, recently announced a 15% reduction in its workforce. This slowdown in funding is forcing many wearable technology companies to dial in their business models and evaluate new paths to growth.
According to a study published by Rock Health, in Q3 of 2022, there were 125 deals in Digital Health (which is a broader category but still indicative of trends in wearable devices) and $2.2B in equity raised. This is the lowest in terms of the dollar amount invested in the space since Q4 2019. 2022 is expected to reach only half the levels of 2021 funding.
A second reason the industry is at an inflection point is the demand for wearable products seems to be normalizing post-pandemic. Like many other products that grew substantially during the early months of the pandemic and stay-at-home orders (Peloton), the increased purchases of wearables may not have been a reflection of an expanding market, but perhaps just a pull-forward of future orders. According to a report by CNET, global shipments of wearable smart devices declined for the first time ever in Q1 of 2022. The growth and adoption rates many of these companies saw over the last 2 years, and which are key determinants of valuation, may have been an overestimation of future, sustainable growth rates.
And a third reason I believe the industry is entering a new evolutionary phase, and quite frankly this is a frustrating reason, is that despite the proliferation of health data collected through wearable devices, it doesn’t yet appear that there is a direct correlation with positive health outcomes at the broader societal level. The global community (particularly the United States) continues to experience unprecedented levels of obesity, chronic disease, and mental health issues.
39% (93M people) of our population is obese and this will eclipse 50% by 2025.
Type 2 Diabetes cases are projected to double by 2045.
And the truth behind the mental health crisis, particularly in young adults and children, has only been further exposed post-pandemic.
I think part of this is due to the stickiness of the products themselves (I myself have experimented with the Whoop 3.0 Strap, Whoop 4.0 Strap, Oura Gen3 Ring, Suunto Spartan, and Garmin VivoActive S). The data collected by these devices is only meaningful if one can observe it over time and use it to drive lasting behavioral change. This requires more prolonged use and active monitoring of the data these devices collect.
Anecdotally, I think there is also data fatigue with trying to interpret the increasing number of health metrics at our fingertips. We can collect all of the data about our health in the world but it’s not worth anything if we don’t understand the data and how to use it to drive change. What we need is actionable insight and quite frankly to be told what to do with the data. This backdrop of the problem leads to my thoughts on where the market is headed.
My Predictions for What’s Next
1.) Acquisitions Will Fuel Growth
I believe many of the largest wearable companies will shift focus from exclusively new customer acquisition, and fuel growth through consolidation of other wearable-related companies. The market is currently fragmented, both in terms of ways to wear a device and the number of companies in each of those categories. I predict the more dominant firms in the space, namely Whoop, Oura, and especially all of the deep-pocketed big tech firms, will expand both vertically and buy the various fitness and health applications that use wearable data, along with horizontally into new modalities. If there is a strong consumer preference between using a ring, watch, insole, or any other modality, it doesn’t make sense to switch between companies if the data being collected is all very similar. A company will emerge and try to fulfill all wearable needs as a one-stop shop. There is enough size and traction at this point, and assuming we have a more stabilized interest rate environment, that there should be an uptick in M&A activity and consolidation in the market.
We are starting to see the beginning of some M&A activity. Whoop finalized what I believe was its first major acquisition in September of 2021 when it bought PUSH, a sensor that can live on multiple parts of the body and helps quantify weightlifting performance metrics such as speed, power, force, and acceleration.
The largest outright acquisition of a wearable company, which I mentioned above, was when tech giant Google, bought Fitbit for $2.1B in early 2021. With the Amazon Halo, Apple Watch, Microsoft’s Partnership with Samsung, and Google Fitbit, it’s evident that all the major tech players see the potential in wearable devices. It won’t surprise me if some of these larger players go after companies like Whoop, Oura, and Garmin, to stake a more definitive top position in the wearables category.
2.) Data Synthesizers will Outpace Data Collectors
A second prediction is that it will not be the data collectors who will gain the most momentum but rather the data synthesizers. As discussed in “The Problem” section, wearables are not leading to healthy outcomes in part because consumers do not know how to, or are simply not, correctly using the data being collected. The companies that are actually able to synthesize this data and create actionable insight, or monetize the data to provide to third parties to drive that insight, will be the industry growth drivers. Below are a few of the companies that are already focusing on this insight-driven model:
TERRA: TERRA is not so much a data synthesizer but rather an aggregation tool. It’s an API that enables various health applications to connect to users’ wearable devices. In other words, TERRA creates the pipeline that allows wearables data to flow to more name-brand fitness companies for them to use as they see fit.
Thryve: Thryve is really the European equivalent of TERRA. They are an API that targets Digital Health Services, Insurers, and Care Providers to allow access and connection to health data collected through wearables.
Vital: Vital is a health dashboard that allows users to connect all of their wearable devices to view a snapshot of health in one place. They are currently in a closed private beta phase and are not widely available to the public.
Human API: Human API is in a lot of ways a combination of the aforementioned API companies and a health dashboard. They aim to collect highly fragmented health data and provide a dashboard that can be used both by end-consumers to evaluate their own health, as well as by healthcare-focused entrepreneurs looking to build products off of this data. They recently raised a $20M Series C round with participation from Samsung Ventures, CNO Financial Group, Allianz Life Ventures and Moneta VC.
PwrLab (Now DashLX): PwrLab, which recently changed its name to DashLX, sells directly to outdoor recreation and fitness brands to enable a DashLX widget to be installed on the brand’s site. Each brand is then empowered to incentivize the consumer in different ways to upload their wearable data to the site, through DashLX’s interface, and can then use this data for product development and to provide actionable insights i.e. “Joel you are running more often on trails these days, these shoes are a better fit for your needs.” Or, “Joel your wearable data shows you are doing more physical activity at higher elevations, you should be using this SPF sunscreen for proper protection.”
I predict that many of the existing wearable companies will continue to build out their capabilities to tell consumers what to do with their data rather than focusing so much on how much data they can actually collect, or they will find ways new ways to monetize this data. New startups focusing on this segment will attract a larger share of the financial capital in the coming years.
3.) Clinical Use and B2B Channels
My final prediction is that many wearable companies will focus their efforts on the B2B channel. Consumers’ tastes and purchasing behavior is fickle. Companies that are able to sell through the B2B channel to larger customers such as corporate wellness teams, healthcare providers, and insurance companies will unlock more stability in their revenue streams along with getting a seal of approval from trusted service providers. Many of these relationships will be strengthened as more studies emerge on the effectiveness of wearable technology in tracking certain health metrics, along with the actual FDA approval of certain devices. Part of the issue now is that most mobile health apps are not actually regulated by the FDA and so entrepreneurs developing health applications aren’t required to source medical input. This leads to variations in the advice given through these apps and a general sense of scrutiny with looking at any of the data being collected.
In October of 2021, Withings was one of the first wearable companies to receive FDA clearance with its ScanWatch product, which can help detect atrial fibrillation through ECG and blood oxygen levels.
With multi-year studies being published that show the definitive accuracy of many wearable companies’ data, along with the stamp of approval by governing bodies like the FDA, I believe more institutional customers will use wearables and health data to enhance their own product or service offering.
Conclusion
Although the second half of this post may have had a negative tone, I really am excited about all the growth that has happened to this industry over the last ten years and thrilled to see where it will be going from here. I expect there to be consolidation through M&A activity, for companies to better hone in on how they present the data to consumers, and for companies to focus on the B2B channel. But most importantly, my hope is that these developments start to lead to strong positive improvements in the healthcare state of our country and world. I’d be curious to hear from anyone reading any different thoughts on the industry or any other major trends that I may have missed. Thanks for reading.
I like your thoughts on data synthesizers, and thanks for sharing company names that are already operating in this space. I was talking to my wife recently about wanting someone to bring my Garmin data together with food data to help me draw connections.