Pebble turned down $740 million, then sold for under $40 million a year and a half later. Its founder called it "100% my fault"

A company that turned down a $740 million acquisition offer sold for under $40 million a year and a half later.

VentureBeat reported that in summer 2015 the watchmaker Citizen offered to buy smartwatch company Pebble for $740 million, and founder Eric Migicovsky said no. In early 2016 Intel offered $70 million, and he turned that down too. At the end of the same year, Pebble sold its software and people to Fitbit and let its hardware go. The price was undisclosed. According to Bloomberg it was under $40 million, and the debts were larger than that.

Migicovsky wrote up the story in 2017 and published it on the tenth anniversary of the Kickstarter. The same kind of sentence comes up again and again. “In hindsight, this was stupid and obvious and 100% my fault.” “I should not have aggressively grown the company without a stronger plan.” “Still I screwed this up.”

Pebble was a hardware company that took venture capital, which puts it outside this site’s criteria for cases, which record businesses that started small. Still, records in which a founder lays out sales and inventory year by year and writes about failure are rare. Here, as a column, those numbers are read in order.

From a $10 million Kickstarter to the sale to Fitbit

Migicovsky’s retrospective says Pebble sold over 2 million watches in five years and over $230 million in four.

The first year was profitable

The first numbers are small. After Y Combinator in 2011, Pebble raised only about $150,000 from angels, far below the batch average, Migicovsky writes. In April 2012, its Kickstarter drew 68,000 people and passed $10 million.

The next two years were unusually healthy for a hardware startup. In 2013 sales were about $30 million with a $9 million net profit. In 2014 sales doubled to about $60 million and the company broke even.

At that point Pebble was making a watch that technically minded people like its founders wanted, and selling it to them. That sales could double without going into the red reads as a sign that the company knew exactly who its buyers were.

The year it expected $100 million and got $82 million

It came apart in 2015. Migicovsky says the sales target that year was about $100 million. Actual sales were $82 million, still up 35% from the year before. They missed the target anyway, and gross margin fell from about 35% to 27%.

Heavier than the gap between target and result was that the gap stayed in the warehouse. At the end of 2015 there was over $15 million of inventory there. Operating expenses had been doubled in the same year in anticipation of growth. Production lead times ran over four months, so holiday orders had to be placed before retail sales data existed. In early 2016, Pebble’s cash ran short.

In a hardware company, inventory is cash in another form. The unsold $15 million was $15 million of cash it could not use. This is the number the desk weighs most. More than the $740 million offer or $82 million in sales, the $15 million stacked in the warehouse at year end decided where this company went.

The decision he called “100% my fault”

Migicovsky is explicit about where he went wrong. In 2015 Pebble tried to market its watch as a productivity tool, then tried to lean into fitness. It moved from a product people wanted to an ill-defined one it hoped people would want. He calls this the root cause and writes, “In hindsight, this was stupid and obvious and 100% my fault.” Of the delay in focusing on fitness, he writes, “This delay was solely my fault.”

He uses the same voice about hiring. “I should not have aggressively grown the company without a stronger plan.” Of doubling operating expenses, he wrote, “Still I screwed this up.”

What follows is inference: the decision to turn down $740 million seems to have rested on the same outlook. Summer 2015 was when the expectation that sales would rise from about $60 million to about $100 million had not yet broken. If that expectation held, the offer was still cheap. It broke at year end, and the break became visible when the warehouse inventory was counted. More than the refusal itself, the sales outlook that justified it had run ahead of both inventory and costs.

What sold was not the watch

In the December 2016 sale, Fitbit took the software, intellectual property and people. According to Bloomberg, about 40% of employees got job offers, mostly software engineers, and the hardware teams got none. Hardware was excluded from the deal, the announced Time 2 and Core were canceled, and Kickstarter backers were refunded. The debts exceeded the price, and Fitbit did not take them on.

The watch company’s last sale was not a watch.

For a startup failure that did not mean the end of the business, there is Gumroad’s record. Its founder published his post-funding stall as the failure of a would-be billion-dollar company, and it carried on as a small, highly profitable business. Pebble, as hardware carrying inventory, could not take that road. Records where inventory became the turning point exist at small companies too. For dog-lovers’ e-commerce shop Happy Puppin, shipping 5,000 robot piggy banks was the turning point. Inventory either way, but 5,000 units sold out and $15 million left over leave opposite things behind.

The extent of what could be confirmed

The limits need stating. Sales, profit, inventory and gross margin come from Migicovsky’s retrospective and were not checked against company financial statements. The Citizen and Intel offer amounts come from VentureBeat’s reporting, and neither figure appears in his retrospective. The sale price was undisclosed: VentureBeat reported $34–40 million, Bloomberg under $40 million. The first Kickstarter is “over $10 million” in his retrospective and $10.2 million in VentureBeat, and for Pebble Time he writes “over $20m.” Neither source states how much venture capital was raised.

What stayed was not the size of the offer, but the size of the warehouse

The $740 million always comes up when Pebble’s failure is told. It tends to become a story about how he should not have said no.

The numbers Migicovsky laid out point somewhere else: $82 million in sales against a $100 million target, operating expenses doubled, $15 million left in the warehouse at year end. He wrote “100% my fault,” but that line points not to the summer he turned down the offer, but to the decision to grow the company and its inventory ahead of the sales outlook.