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Startup Exits Podcast with Sonny Vu, founder of Misfit

The $260 million sale to Fossil: how Sonny started, ran and sold Misfit
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Sonny Vu

Founder of Misfit

Sonny Vu is a serial entrepreneur turned investor and advisor. Along with cofounders John Sculley (former Apple CEO), Sridhar Iyengar and Christy Trang Le, Sonny started, ran and sold Misfit – one of the most iconic wearable brands on the planet.

We chat with Sonny about

  • How to come up with the right ideas and analyze the market and competition.
  • Sonny’s experience with Noam Chomsky, John Sculley, Vinod Khosla and Bill Gates.
  • How Apple influenced Misfit.
  • What makes the right founding team?
  • Learning how to sell is the key to success.
  • How to partner with large brands as a small startup.
  • Remote teams for startups.
  • How Fossil acquired Misfit.
  • Reasons why companies may want to buy your startup.
  • Transitioning from a startup to a large corporation.
  • Future of wearables, AR/VR and battery tech.

Sonny now invests in startups with planet-level impact via Alabaster.

Episode transcript

ANDREW VASYLYK: Hey everybody. This is your host Andrew Vasylyk and you’re listening to Startup Exits, where we chat with founders that started, run and sold a tech company to learn about how it actually went down. Today I’m joined by Sonny Wu. Welcome to the show Sonny.

SONNY VU: Hi Andrew. How are you doing?

VASYLYK: Good, good. So, you started a bunch of companies. Your first company FireSpout was acquired by AskJeeves, your second company AgaMatrix went on to raise tens of millions of dollars, and your third company Misfit Wearables has just been an insane success – it’s one of the most well-known wearable brands out there and it got acquired in 2015 by Fossil for a very humble sum of $250 million.

So, lots of very successful companies and I think at this point it’s safe to say that it wasn’t luck. How do you come up with ideas?

VU: It is true that ideas are a dime a dozen, the most important thing really is getting great teams involved – surrounding yourself with people who are more competent, smarter and just as driven. So, that’s really the core of it. As far as ideas go, it’s all different from company to company. At Misfit we just saw that there was a trend happening in this space of having connected devices that people wear. 15-10 years ago the notion was absurd, but it’s now a normal thing.

The exact idea for the first product Shine and really came from a lot just reading and checking out our competitors. We actually read through thousands of product reviews from the other products that were in the market – FitBit, Jawbone and whatnot. And that was where we learned about what we needed to build.

Knowing what a customer wants is not their job

VASYLYK: So you’ve read thousands of reviews of the competition and as you were reading them what exactly were you looking for?

VU: We just wanted to learn what people complained about and what people wanted. Asking people for what they want is generally not a good idea, in terms of product design and whatnot. Knowing what the customer wants is not their job. So what you can do? The fastest way we thought was just reading through these reviews so that we find out what is it that people wanted and it became very clear after just a few of those. We really wanted to make sure we had our bases covered, something that was comfortable that looked good, produced data that they could understand, easy to charge, really durable. Actually, in hindsight, they seemed pretty obvious points but when the user speaks it gives you some profound insights.

VASYLYK: So when you were starting Misfit, at that time the wearable market was pretty much nonexistent. It was very tiny. And, as you put in one interview, that it was essentially “a bunch of Silicon Valley geeks making wearable products for Silicon Valley geeks”. So definitely wasn’t for the masses.

How did you know, or did you know at all, that the wearable market would explode to the point where it is now?

VU: We didn’t really know-know, we just had a hunch. I guess we’ve missed enough trends – the internet, mobile apps, a number of things of the past – and we weren’t going to miss this one.

Focus on ideas that are hard to reproduce

VASYLYK: So, all of your companies have been in pretty different industries – FireSpout was about natural language processing, AgaMatrix was very hardcore health care and Misfit is in the wearables industry.

How do you look at industries and what made you want to go into these markets?

VU: We generally have a heavy science bent, something that has a technology based on some sort of scientific breakthrough. Back in the day, in 1997 when we were doing FireSpout, we were using machine learning to help boost the performance of natural language processing systems. This was before machine learning was a thing. It was perhaps before machine learning really worked, to be honest. It was very hard back then. You needed PhDs and really top notch folks to do it. Now in 2019, there are packages that high school kids can use to build their own applications, it’s amazing how things are really developed.

We like to work with things that are hard to reproduce. Something that gives us an unfair advantage on a technological basis. So, whether it’s electric chemistry or natural language processing or algorithms for wearable technology – these were all defensive moats for us.

VASYLYK: As you were getting into these very tech- and science-heavy fields, did you have any prior experience in these areas?

VU: Yeah, the first one was actually stuff that I’d worked on during my PhD studies. And the second one was my co-founder Sridhar’s PhD work and his scientific background. And in the third one, even though we had technological advantages in terms of better algorithms and better power management, the core was focused around just building beautiful products and a brand that people could relate to, resonate with and just really fall in love with. So, honestly it was primarily a design and branding focus.

Learnings from Noam Chomsky, John Sculley, Vinod Khosla and Bill Gates

VASYLYK: So, you did your PhD at MIT and one of your advisors was Noam Chomsky. Beside Noam, you also had a chance to meet and work alongside some very incredible people like Bill Gates, Steve Jobs, John Sculley and Vinod Khosla – who would say impacted you the most as an entrepreneur?

VU: Different people taught me different things and I feel like you’ve just had the honor and the great fortune to have some great mentors.

With John, I feel like I really learned a lot about consumer marketing and communicating, and an aspirational branding and just things that you don’t learn in a PhD school.

Noam was an amazing advisor and a teacher, we used to talk about politics just as much as about linguistics. So that was a lot of fun.

Vinod has always been a great mentor through building FireSpout. He was always very honest about what he thought. I knew I could always rely on him for honest feedback and [he was] just a great lateral thinker.

And then with Bill Gates, it was like a nine-minute conversation but it was one of those times that I’ll never forget. I asked him, “As an inventor, as an entrepreneur what you like working on?” and he said “Work on great products that could benefit the masses. Make technology really inexpensive.” Most people make stuff that’s really breakthrough and [has] amazing user experience, but he was focused on serving the least of these – the bottom billion, the poor – and making technology accessible and just really useful. It seems so obvious but has influenced a lot of my thinking over the years.

How Apple influenced Misfit

VASYLYK: And I think in a way Misfit did that because it was a very affordable option compared to what was out on the market at that time.

In the early days of the company, Misfit was pretty heavily influenced by Apple. The name itself comes from a very famous Apple ad  “Think different”. It starts off by saying “Here’s to the crazy ones. The misfits.” The company was also founded on the day that Steve Jobs died and, of course, John Sculley is one of your co-founders who is a previous CEO of Apple. What was it about Apple that attracted you?

VU: Back in the day we were big Apple fans, still are, and I feel like it’s a brand that people really fell in love with. So we were really inspired by that – how to communicate an experience that was more than just megabytes and gigabits and build the product and brand that people would fall in love with. And I feel like they mastered that playbook on how to do that. So, we’ve always been fans of the commercial and whatnot. I think it was meant to be, the fact that we founded it on the day Steve Jobs died and the fact that John happened to be around and available and was open to working with us, it seemed to all come together.

VASYLYK: You speak a lot about people – people that surround you, the team and values. And in one of your earlier interviews, you mentioned that in the early days with your first companies you used to mostly think about “what and how” but as you grew as an entrepreneur in your later companies you switched your thinking towards “who and why”. And this is, again, within the context of people and values.

What was that about you Sridhar and John that made you guys such a great team?

VU: I think we’re all really different. We brought different things to the table. I was the only operating founder but having them on the board and also just a text message away and a shoulder to cry on, advice when I needed it, from folks who I knew had my back, they played such a key role in that regard. Ultimately, my operating cofounder was really my wife, she was the founding COO and CFO with me, so the two of us really are the ones who drove the business.

Having John and Sridhar really brought some expertise and firepower that you just couldn’t buy anywhere. Sridhar, with his expertise in IP and technology, is really valuable, always a person I could kind of back off to and get some great insights. And John, of course, was a mentor to all of us. And if we needed to have people show up at an event, we could just say “Hey, John Sculley’s coming.” We try not to do that too much but we had a couple of recruiting trips where we did that and it totally worked.

VASYLYK: Yeah, I could definitely see that working.

You mentioned that you guys are all pretty different. What is that about you, in your opinion, that makes you so successful as a founder?

VU: Honestly, I think I’ve just gotten incredibly lucky. There’s this whole imposter syndrome out there and I feel like I have a chronic case of that.

But having awesome team members around that I could count on I think has been a large part of where we’ve ended up and where we are now. So, to this day I still work with many of these people. It’s really a journey of working with people that you trust and that you like and that are just supremely competent.

Learning how to sell is the key to success as a founder

VASYLYK: And as far as putting this team together and convincing everybody to work with you, there’s a lot of selling that comes in place. And selling, in general, is one of the most important skill sets of an entrepreneur.

How did you learn how to sell?

VU: Well they certainly didn’t teach it in the immigrant school. But I think mostly practice. It just took me a while to realize that that’s kind of what founders do day in, day out, all the time. You’re not programming, you’re not designing, you’re not building models – you’re selling.

You’re constantly trying to convince people to do stuff that they wouldn’t normally do. You try to convince potential employees to join for no job security and half the pay, you trying to get the media to write about you when there’s nothing to write about, you’re trying to get investors to invest in you when it’s way too early. This is what you do, day in, day out.

Whether you like doing it or whether you’re good at it or not, you better get used to doing it because that’s mostly what you’re going to be doing as a founder.

VASYLYK: Yeah, I definitely agree that sales is just ingrained into so many aspects of what founders do on a day to day basis. On the topic of sales, misfit had some crazy impressive partnerships with very large brands like Victoria’s Secret, Coca-Cola, Swarovski.

What advice would you give to founders that are running early stage, unknown startups as far as how do they get these kinds of deals? How do they even get a meeting with some of these large brands?

VU: It’s a good question. First of all, take advantage of your network, your advisors, your board, your investors and just ask for introductions. An introduction goes a really long way.

In a number of these cases we just cold called. We just called until they just got so annoyed that they just had to answer the phone. There are a lot of times you just never get a response and that’s fine. But in many cases, you really just need one – you just need to get that first break. For us, it happened to be Victoria’s Secret. That’s when Svarowski and Speedo and Coca-Cola came in. Actually, no, Coca-Cola was our first and the more we did the easier it got because then you have a track record.

Ultimately, I think [it’s about] making it really easy for companies to say “yes” and having no risk on their side at no cost to start with. I think that’s one way to get these things done because folks are pretty risk-averse could be [in these] companies. So you gotta make it really easy for them to say “yes” without having to take too much risk. And then, over time, as you get to know them and you develop a relationship, it can become more and more lucrative. That’s what happened with Coca-Cola. We just started out, honestly, as friends. And then we got to know them, then we did something small with them,  we did MyCoke Rewards, it was a tiny little program with them and then one thing led to another and then before we knew it we were at the World Cup and the Olympics with Coca-Cola. It was amazing.

Having a remote team could be a competitive advantage

VASYLYK: At the time of the acquisition you guys were a team of over 250 people spread across Silicon Valley and Vietnam. What made you want to set up a remote team?

VU: So we had about 45 in the US and the rest were in Asia, so about 5/6th of the team was based in Asia between Beijing, Shenzhen, and Vietnam. So, in a sense, the San Francisco team was kind of the remote team; but it was really a bi-coastal team – Asia and the US.

And we basically wanted us to have an unfair advantage in each of the places that we recruited for. So what we did was we tried to focus on a few roles at a time, per location. So if you’re building a wearables company, there’s a lot of kind of job titles to recruit for – hardware and software engineers, cloud engineers, designers, product managers, salespeople, supply chain logistics – there’s just a lot of job descriptions. It’s not like you can just hire 50 software engineers and you’re done. It’s the whole gamut. So what we did was – we divided. At first, by function. In San Francisco, we’re mostly hiring hardware and some firmware folks. Then we did software in Vietnam. Then, over time, each of the officers became more standalone.

But [setting up a remote team] was really so that we can get a competitive advantage in recruiting and to be able to move faster.

Acquisitions usually start off as relationships

VASYLYK: I like one of the things that you mentioned about going remote. A lot of companies, when they go remote, expect to get cheap talent and that’s pretty much exactly what they get. So your approach was to essentially treat the remote team as if you were building your in-house team. And I think when it comes to remote work structure, attitude is very important.

Let’s talk a bit about your exits, you’ve had two. First acquisition was FireSpout by AskJeeves and then Misfit by Fossil. Could you tell us a little bit more about how these acquisitions went down?

VU: Sure. The first one, [AskJeeves] wanted a linguistic tech company and there weren’t that many options in town at the time. Remember this is like 2000/2001, it was still quite early in the NLP days. It didn’t feel early, it felt like everybody’s working on NLP at the time, but not really. So it was a natural fit because search was one of the areas that we were looking to serve. We weren’t really planning on an acquisition but it just happened because the enterprise customer ended up becoming an acquirer.

And then at AgaMatrix where we did the blood glucose monitoring stuff. [Sanofi] never acquired the company, but it was a very deep and long-term relationship where they got a lot of our technology for the blood glucose monitoring, electric chemistry stuff, and again, that started out with a conversation, friendship and then developing into a partnership that became very deep. And is still running to this day, it’s almost a 10-year partnership [now]. It’s very successful in that regard.

And then at Misfit it started out with us approaching a number of the brands which were part of the Fossil Group, which I didn’t really know at that time that they were apart of the Fossil Group. We were also approaching Michael Kors and Kate Spade at the time. And before we knew it, we got a call from Fossil  from the great folks there, looking to do a commercial partnership. And then one thing led to another and it ended up as an acquisition.

So again I don’t know how intentional these things are, but I feel like it often starts with a conversation or relationship and then it builds to a partnership and then before you know it, people want to buy you. And for various reasons – control or exclusivity – there are lots of reasons why a company would want to acquire yours.

Acquisition intentions are not always clear

VASYLYK: And was there anything that you learned with the first two cases that helped you with Fossil acquisition?

VU: I think the most important thing that I’ve learned over time was that there’s just has to be very clear value why another company would want to acquire you for that to really happen. There’s got to be clear value added to the company, I guess that’s an obvious point.

But the other thing is you never really know “why” – it’s often quite opaque, the reasons for why one company would buy another. On the surface of it, there may be some obviousness but you never really know – maybe the board is pushing the CEO to do it, maybe Wall Street, maybe they just want to have something to say so that their stock would go up, maybe they’re feeling threatened by a competitor and they need a response now, or maybe their managers need to be replaced (and there are acquihires that will go in and basically is a way of switching out management).

So there’s a bunch of reasons , but to the startup it’s not always obvious. So I wouldn’t make assumptions, I guess that’s my point.

VASYLYK: And the Fossil acquisition went through towards the end of 2015, about six months prior to that Apple released their first version of the Apple Watch. Did that influence the acquisition in any way?

VU: The world was moving towards wearables, it was very obvious. And, I think, Fossil just had a lot of foresight in this space. They’ve been doing watches and stuff for a while actually experimented with wearables. They were among the first innovators in wearables. They built some of the first smart watches, few people know that. [That was] like a decade ago but it wasn’t until 2011/12/13 when wearables really became a thing and so I don’t know Apple Watch had anything to do with it but I do know that it’s been a long-standing interest for the company.

VASYLYK: And what was the transition like to Fossil?

VU: Certainly very different – corporate life versus startup life. One year [you are] in the wild and with no resources and completely responsible for everything from rent to keeping the lights on and feeding 240 mouths. But once you’re in a larger organization there are more demands from you, the expectations are different in terms of what you need to deliver revenue-wise and all that stuff. But you also have more resources at your disposal. The biggest difference really is that now you’ve got to work with other teams that you don’t have the same level of influence, at least from a role perspective. For me, one of the things I learned was getting things done through influence, which was pretty valuable.

Are acquisitions bittersweet?

VASYLYK: I guess in some ways it goes back to the sales and persuasion topic that we discussed earlier in the podcast. So an acquisition is a very sought-after event and that’s pretty much the idea behind our show, that founders were looking for an acquisition or an IPO, [as well as] investors and employees. So it’s a very positive event in general.

But on the other hand, you’re in some ways letting go of a baby that you created – your company. Are exits in any way bittersweet for you?

VU: I guess they would be if you didn’t get paid very much. But if someone pays you a proper amount for your baby, it’s their baby. I hear about founders getting bitter or whatever because they’re letting go of their baby, and I’m like “Dude you just got paid, like whatever amount of money, they have the right to that. Why are you bitter, man? Go and start another company and be grateful for this opportunity.

So, I think I cannot relate to the bittersweet thing. It’s sweet.

Wearables need to be more useful

VASYLYK: So the last question I want to focus on the future, where do you see the wearables market heading?

VU: One of the things I’ve always said about the wearables market is that wearables just need to be more and more useful. They have to be useful. For quite some time they just weren’t that useful, they didn’t really do much. Activity tracking and notifications were quite cool, but they wouldn’t pass my “turnaround test” – if you forgot them and you’re halfway to work at home, you wouldn’t turn around to get it. Whereas if you forgot your iPhone at home you would definitely turn around to get that. So for a long time wearables didn’t pass that.

But I think they’re getting closer and closer to the point where you think “Maybe I will turn around and get my wearable.” I happen to be a watch guy, I love watches. I don’t have that many but I have a few that I really like. I might turn around for my Swiss mechanical watch. Just because it’s part of who I am and it’s important.

I haven’t gotten that used to a smartwatch yet but maybe if I pull a lot of my data it and relied on some of the functions then maybe I would turn around. I think that the future is one where wearables will become more and more useful – maybe it’s healthcare, maybe it’s payments and identity, maybe it’s habit formation. I’m not really sure, but we’ll see.

VASYLYK:  And as was the case with Misfit regarding habit formation. So a lot of people are expecting AR and “smart glasses” to be pretty huge. What are your thoughts around that?

VU: I think. Well, first of all, I think VR is going to be a lot bigger, at least in the short and medium term, just because I don’t think AR is good enough. I’m not really sure why people would use AR other than to provide a cool experience. But is it really all that useful? I’m not really sure yet, but it’s only 2019 so let’s give it 3 to 5 years and I think we’re gonna be living in a completely different world. Certainly, VR is not just [useful] for entertainment but [also] for education, training and maybe for all sorts of things that we haven’t even thought of. I think that’s definitely going to be happy in the years to come.

As for AR, I’m sure we can look back 5 to 10 years from now and just think “I cannot believe we were in a world where there was no AR”, almost like there was a world with no internet or mobile technology, maybe not quite to such an extent but we’ll see. I can’t wait to try out some of the stuff that’s out there.

VASYLYK: And batteries are of course a big constraint when it comes to wearables and IoT and it feels like there hasn’t been any sort of breakthrough in batteries in what feels like forever. Do you foresee any sort of significant advances in batteries in the future?

VU: Well, I think that physics is fair. There’s really a lot of limitations that we’ve got to overcome or we have to think about things like energy storage and usage in a different way. We’re in this electric chemistry paradigm, we’ve been in it for decades. There really has been very little improvement. It’s like the opposite of Moore’s Law for batteries over the last 100 years. The improvements have been on average about 3 percent a year over the last 100 years, as opposed to Moore’s Law which is 100 percent every 18 months. And so, as far as electric chemistry goes I do not see massive breakthroughs. I do not see energy density increasing 10x anytime soon, at least with electric chemistry.

Are going to be walking around with micro nuclear reactors or little fuel cells or whatnot? I don’t know, but there are some cool developments out there. There a number of energy harvesting technologies out there that I think will make a difference.One way is to have better batteries the other way is just to generate your own power. So we are familiar with solar technology, kinetic, motion-based, but we’re seeing thermal-electric too, another modality that I think is quite promising.

One company in particular that we’ve followed and been involved with, called Matrix Industries, they’ve got some amazing thermoelectric material science and energy harvesting technology that can, basically, harvest energy from ambient heat and they’re prototyping it out on watches right now but their main application is actually in IoT and in air conditioning actually, in cooling. So, we’ll see where that goes.

VASYLYK: Yeah, and that’s one of the companies that you’ve backed with a firm that you founded – Alabaster – that invests and advises deep tech startups?

VU: That’s right. Over the last year, now that I’m on my own, [I have] just been focusing on continuing to advise and invest in startups through our group, Alabaster. And the focus really is on deep tech companies with technology that’s based on some sort of scientific breakthrough and helping founders of those companies build fast-growing businesses. About 70 percent of our focus right now is on climate change reversal. We’ve largely exited consumer electronics and certainly we’ve gone out of wearables. The focus is to work on stuff that hopefully we’ll have a planet-level impact. One of those companies, Matrix Industries, has this new material that, as I said, harvests energy from ambient heat.

VASYLYK: So you’ve now switched from entrepreneurship to more of an advisory and investor role. Do you see yourself starting another company in the future?

VU: Yeah, probably, but not right now. Right now the focus is on supporting these founders of these companies, helping them grow, advising them and showing our support where appropriate, we’ll also invest from the family office. So that’s what we’ve been doing over the last several years and now I just do it full time.

VASYLYK: I think there’s a lot that you learn from being on the sidelines as an investor and advisor, watching other entrepreneurs build their companies, that you could take with you to your next venture.

Sonny, it was a pleasure to have you on the show. Thanks a lot for coming and sharing.

VU: Absolutely, Andrew, thank you. It’s been a pleasure.

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