Hosain Rahman at Startup School SV 2014

Founding Context and Early Pivot (1997–1999)

• The company began in 1997–1998 with the goal of building mobile voice interaction ("Siri for mobile"), inspired by Palm and Nokia.
• The founders failed to raise venture capital for this original idea because the Valley was not yet focused on mobile voice; raising the initial $500,000 proved harder than raising $200 million later.
• Strategic Pivot: The team accidentally discovered a breakthrough noise cancellation technology while trying to solve speech recognition issues.
• This technology was described as "the biggest breakthrough in mobile audio in 30 years" and shifted the focus from speech recognition to enabling clear voice communication in noisy environments.
• Major handset manufacturers (Nokia, Motorola, Sony Ericsson) rejected the technology due to the perceived cost of adding extra microphones, though modern iPhones now contain six microphones.

Survival Through the Dot-Com Bust and Government Funding

• To survive the post-dot-com crash and lack of private capital, the company secured DARPA (Defense Advanced Research Projects Agency) funding.
• DARPA grants required productizing the noise cancellation algorithms for battlefield use, allowing the eight-engineer team to survive without salaries for a period.
• The team moved to San Francisco in 1999, operating in an office that previously housed Macromedia and later shared space with Airbnb and Zynga.
• The founders emphasize that their ideas were often "ahead of their time," learning the lesson that one must stay the course despite market timing.

First Hardware Attempt and Failure (2002–2004)

• In late 2002, the company decided to abandon a pure licensing model and attempt to build their own consumer hardware, despite having no prior venture-funded hardware success stories in the Valley (aside from Apple and the short-lived Palm).
• The first product was a bulky headset with a belt clip, launched in 2004.
• Critical Feedback: Founder met Steve Jobs in mid-2004 for 45 minutes prior to a product debut; Jobs provided "brutal" criticism, noting every design flaw, including the impracticality of the belt clip.
• Despite positive media buzz (Product of the Year by Time magazine), the first product failed commercially due to design compromises made to meet shipping deadlines, selling only about five units.
• Catastrophic Setback: Investors lost faith, forced the founders off the board, fired all employees, and physically chained the office doors shut to lock them out.
• The founders had $60,000 in the bank and $600,000 in debt; they wrestled control back from investors and restarted with no salaries.

Turnaround and Rapid Growth (2006–2007)

• After two years of working for free and utilizing a second DARPA contract, the team relaunched a next-generation Bluetooth headset.
• The December Crisis: In late December 2006, the manufacturer held $2,700 worth of inventory hostage due to lack of funds, risking missing the Christmas season.
• Resolution: An angel investor (Chris Birch and Austin Hurst) provided a letter of credit; the founder personally went to JFK airport to negotiate customs release using the correct harmonized code.
• Outcome: The product sold out within hours, generating a transition from zero to $70 million in revenue within the first year.
• The company scaled from six employees to $220 million in revenue, securing investment from Sequoia, Marc Andreessen, Ben Horowitz, and Vinod Khosla.

Market Volatility and The "UP" Health Product Crisis (2008–2012)

• 2008 Financial Crisis: Following the collapse of Lehman Brothers, the company faced massive order cancellations, leaving them with $70 million worth of inventory in China; they worked through 2009 to liquidate this stock via a deal with Costco.
• UP Launch: In Fall 2011, the company launched the "UP" wearable health tracker, which became the fastest-selling third-party product in Apple retail history at the time.
• Product Failure: The device suffered from high failure rates at scale, including issues with hardware breaking and physical harm to users (e.g., wrist burns).
• Strategic Response: The founder issued a public letter apologizing, offering refunds, and allowing customers to keep the defective product, framing the response around "first principles" of customer safety.
• Outcome: The transparent approach reversed public sentiment from "death threats" to praise for customer service, leading to a successful relaunch and consumer re-embrace.

Evolution into Software, Data, and Integrated Systems

• Cross-Functional Integration: The 2011 UP launch revealed a disconnect between the hardware team and their in-house app team, which was initially of poor quality.
• Organizational Shift: The company spent 2012 dismantling silos to merge hardware, software, and cloud data disciplines, instilling hardware discipline (profitability per unit) into software development.
• Data Science Capability: The firm built a world-class data science team, noted by competitors like Google and Facebook attempting to recruit talent.
• Design Philosophy: The company redefined design as a "three-dimensional to two-dimensional" intersection, requiring seamless integration of physical products, applications, and cloud data to solve specific user problems.
• Current Focus: The organization now operates as a unified entity solving customer problems through the combination of hardware form factors, application experiences, and data analytics.