Startups Venture

Toys Aren’t Play For Venture Capitalists As Connected Fun Goes Big

Keeping a child entertained in the digital age seems to be more challenging than ever. That’s why it should be no surprise that an increasing number of startups are focused on bridging the gap between play and digital with “smart” toys.

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While connected toys are not yet mainstream, their popularity seems to be growing. Unsurprisingly, investors are looking to cash in on the trend.

San Francisco-based Anki and Boulder-based Sphero are the highest profile startups in the burgeoning space. Anki’s mobile app uses artificial intelligence to bring its toy cars to virtual life. The company has raised $157.5 million since its inception in 2010 from investors such as Andreessen Horowitz and JP Morgan Chase & Co., according to Crunchbase data.

Sphero makes app-controlled robots and balls, among other products. And, according to the company, has attracted $124.2 million in investment to-date since it was founded by Ian Bernstein and Adam Wilson after the pair completed Boulder Techstars in 2010.

New York-based littleBits Electronics has raised a total of $62.3 million from investors such as Khosla Ventures, Foundry Group, and DFJ Growth, among others. The company is an open source library of electronic modules that snap together with magnets, and it allows users to learn electronics via prototypes. LittleBits’ toys have been described as “Legos for the iPad generation.”

Even giant toy manufacturers are getting into the smart toy game. Mattel Inc. CEO Margo Georgiadi told analysts in June he wants to turn the company into one “centered on mobile technology and activities,” according to Bloomberg.

Overall, connected toy sales were up 96 percent in the twelve months ending Sept. 30, 2016, while toys in general saw a six percent increase in sales over the same period, according to research firm NPD Group. Sales are particularly strong over the holidays. Last November, NPD analyst Juli Lennett said the toy categories that she expected to provide the most growth in November and December 2016 would be connected toys.

Strong Sales Follow

Most recently, in April, Sphero raised $36 million from Foundry Group, Amazon, and Morgan Stanley, according to CEO Paul Berberian. (Crunchbase puts the round at $23 million, but the firm told Crunchbase News the round was open for longer than what was reported, leading to its increased size.)

So far, Sphero has developed 13 products with 10 out on the market now and three to come later this year. They are sold in more than 20,000 stores (such as Apple, Best Buy, and Target) in more than 80 countries. The company has sold millions of products and its revenue is “well in excess” of $100 million a year, according to Berberian. Sphero has had some profitable years, but for now, it is more focused on growth and innovation than profitability, he said.

“These are high-tech, app-controlled toys that are driven by software,” Berberian said. “They are content rich in terms of play experiences. And they can get updated over the air so the products people buy will only get better over time.”

Currently, Sphero’s products range in price from $99 to $300. But the company’s goal is to make its offerings more affordable (think $29) so they will appeal to the masses and not just a select (privileged) few.

“If we leverage the power of the cloud, machine learning and AI (artificial intelligence) platforms, there’s so much more we can do to bring play experiences to life in a much richer way,” Berberian said. “Our goal is to get them to a lower price point while still pushing the limits of how machines and humans interact.”

A Playful Perspective From Venture Capital

Colin Beirne, managing director of Two Sigma Ventures – the venture capital arm of Two Sigma Investments – has invested in Anki, littleBits, and a young startup called Play Impossible. From Play Impossible, a multi-sport, mobile device-connected ball designed for indoor and outdoor recreational use is expected to launch in the fall.

Beirne’s experiences as a father have helped him in making investments.

“I have a nine-year old son, and he loves numbers and data,” wrote Beirne via email. “… [W]hen he throws a ball, he’d like to know how high or fast it went, or how many revolutions it took.”

Today’s kids are the iPad generation, Beirne points out, with most learning how to use digital tools as toddlers. This creates great opportunity for connected toy makers.

“Machines are going to be a big part of today’s kids’ world, from childhood through to adulthood and old age,” he wrote. “And we believe connected toys are a great way to get that started on the right foot. Parents know this, which is why this category is growing fast.”

As children continue to demand more out of their toys, a number of startups are ready and eager to meet those demands. Who will succeed remains to be seen, but the early players mentioned above no doubt have a leg up on future competition.

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