Aneesh Bansal, Ryan Chilcoat, Prachi Gupta, Chinedum Ofodile, Nick Pyne, Akash Srivastava

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Should Hobeika continue?

Yes, we believe Hobeika should not only continue but expand Instabeat as it is a great

opportunity. With no immediate competitor in the non-wrist wearables market for swimming,

she has a golden window of opportunity to be first to market. Moreover, she has already gained

interest from a sizable number of early adopters across countries, and brand partnerships such

as the Michael Phelps foundation, who can be strong influencers as the primary buyer for

Hobeika’s product. Finally, Hobeika is a passionate entrepreneur who has identified a very

specific pain point for which the customer is willing to pay and has worked on multiple iterative

solutions, allowing her to fail, learn and progressively reinvent her prototype.

However, we recommend Hobeika move from Lebanon to Silicon Valley. First, by building her

network in California, she will be closer to the prototyping team, VC’s, and the majority of her

addressable market. This will allow her to incorporate feedback quickly into the process,

reducing turnaround time in prototyping and testing, as opposed to wasting 40+ valuable hours

each month travelling back and forth between the US and Lebanon. Second, Silicon Valley is

a booming environment for entrepreneurs with many potential avenues for funding, whereas

Lebanon has limited expansion and funding opportunities and failure is perceived more

negatively. Finally, due to strict employee protection laws in Lebanon, she has a high risk of

being sued by her employees, whereas California will allow more employee flexibility and a

bigger pool of resources with relevant skill sets.

While the move to Silicon Valley will bring many advantages, Hobeika needs to consider three

important risks. First, navigating visa requirements as Hobeika is a foreign citizen who needs

to decide which visa fits her requirements best to start her business in the US. Second, she

should hire legal counsel to advise her on how to file her company in the US and determine
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which business status suits her needs best, an LLC or Corporation. Finally, she needs to

account for the high cost of living in Silicon Valley in terms of stay, renting office space, and

hiring employees, and be prepared for cultural differences that may arise in doing business in

a different continent. She should leverage her connection with Asseily to help her navigate

through many of these risks.

Beachhead market and TAM

Currently, Hobeika plans to target a broad market of 3-5 million triathletes and professional

swimmers around the world. We recommend narrowing the customer segment further and

focusing on US Collegiate swimming programs as the beachhead market. With approximately

25,000 scholarship swimmers competing year-round across 672 campuses, collegiate

swimming programs form an attractive beachhead market for the following reasons 1:

1) Top-ranked collegiate swimming programs are fully funded by their athletic departments,

receive financial support from booster clubs, and are accustomed to outfitting athletes with a

similar basket of new gear before each season. Furthermore, the San Francisco location is in

close proximity to prominent California schools such as UC Berkeley, Stanford, UCLA, and

USC.

2) Schools and athletes are always looking for a competitive edge in college athletics. By

increasing the training potential of the team, coaches and players alike are highly incentivized

to use a product that will yield performance results.

3) Success in the collegiate swimming segment can be leveraged to break into other markets

such as the US national teams and other professional clubs. Swimmers from these top-ranked

1
http://www.scholarshipstats.com/swimming.htm
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universities who use the product will eventually bring the technology with them, spreading

Instabeat’s reach to a broader audience of 4,000,000 triathletes and professional year-round

swimmers2. Word-of-mouth within the advanced swimming community will also expedite

entrance into new markets.

Business Model: Revenue Streams

We recommend Instabeat to sell the gadget directly to the US collegiate swimming programs.

As part of the business model, Instabeat would initially sell the hardware product for a one-time

upfront charge plus recurring subscription fee. Since the product is capable of wirelessly

syncing the device’s data to an online dashboard, we recommend Instabeat invest in R&D to

produce a machine learning algorithm that generates detailed performance insights and

benchmark data. This monetized feature not only justifies the subscription fee but also

increases the stickiness of the product, improving customer retention and protecting against a

future switch to competitive offerings in the market. The recurring subscription revenue

ultimately increases LTV of our customers and makes the company more attractive for VC

funding.

Business Model: Go-to-Market Strategy

Primary customer research and user testing during prototyping phase has demonstrated strong

interest in Instabeat’s product. Our beachhead market (college swimmers and their coaches)

is highly incentivized to use the product as they want to keep their competitive edge. To

understand the full life cycle use case for Instabeat’s product, we created the following user

profile:

2
https://www.usaswimming.org/docs/default-source/default-document-library/statistics-2018.pdf
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1. User: competitive collegiate swimmers looking for an edge in their training program.

Swimmers primarily use the hardware and coaches derive value from software insights.

2. Decision making unit: the purchasing decision will be influenced by coaches, athletes, and

the athletic department procurement team. Athletes and coaches both serve as product

champions as they will be the direct users and beneficiaries of the product. The primary

economic buyers are the athletic departments; however, in some cases, coaches have a

discretionary budget for these types of purchases. Ultimately, athletic departments are the

purchasers as they must approve team budgets before each season.

We plan to focus our marketing efforts on coaches. Coaches have the highest incentive to buy

this product for their team as improved performance directly correlates with coaches’ pay and

reputation. Furthermore, the sales process, purchasing timeline, and value proposition are

nearly identical for each collegiate swimming coach nationwide, thus ensuring that our sales

team can effectively and efficiently access our entire beachhead market. In order to increase

reach, generate awareness, and acquire new customers, we recommend aggressively

promoting our product in the following ways:

Provide free samples to coaches: Coaches may require additional, hands-on product

validation beyond the promising results and notoriety already received. Furthermore, providing

coaches with access to the latest product versions and updates increases the likelihood of

repeat purchases throughout the customer life cycle.

Promotion in trade shows and conferences: Instabeat should participate in trade shows and

conferences such as USA swimming’s ‘Coaches Clinics’ to effectively market its product to the

target audience. Trade shows not only accelerate word-of-mouth within the segment but also

provide insight into competitive entrants.

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Partner with Michael Phelps foundation to promote the product: During the crowdfunding

stage, Instabeat generated tremendous support amongst swimming brands and organizations,

most notably receiving partnership interest from the Michael Phelps foundation. Such a high-

profile partnership would provide Instabeat with instant credibility among competitive athletes.

Expanded visibility also expedites product adoption rates, increasing the likelihood of capturing

our beachhead market.

Leverage Hobeika’s image and experience to market the product: Hobeika is a passionate

swimmer and has received many awards for her product. She is a likable figure as VCs

continue to back her venture. Instabeat should leverage her image and develop a marketing

campaign around her story. Hobeika’s ability to relate to the user persona also adds significant

value to Instabeat’s business development efforts.

Business Model: Manufacturing Strategy

We recommend moving away from the current manufacturer and identifying a new

manufacturer who has expertise in manufacturing wearable tech hardware or PCBs. We

recommend that Instabeat work with Flextronics’ San Jose facility which hosts expertise in

rapid prototyping of non-regulated tech/semiconductor PCB products in the US to develop an

easy to manufacture prototype. Since Asian electronic printed circuit board manufacturers have

economies of scale, manufacturing Instabeat in China/Asia makes economic sense. To provide

context using comparable products, Fitbit was able to achieve a high operating margin by

outsourcing manufacturing to China (Revenue to COGS ratio which was 2:1 in 2014 3).

Moreover, the suppliers for all components required to manufacture the PCBs (the most

expensive part of Instabeat product) are present in China. The potting process which is the

3
https://www.sec.gov/Archives/edgar/data/1447599/000119312515196965/d875679ds1a.htm
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most unreliable part of Instabeat’s current manufacturing process is much cheaper and reliable

in China. Taking all these factors into consideration, we recommend that Instabeat partner with

Flextronics to manufacture the product in one of their Chinese facilities to reduce cost.

More importantly, Instabeat should seek legal counsel and develop a manufacturing agreement

that defines the rules of engagement. For example, manufacturing agreement should include

a payment structure that incentivizes Flextronics to manufacture and deliver the product to

Instabeat on time. Also, to protect its competitive position, Instabeat’s manufacturing

agreement must have clauses to protect its IP. This could be done by isolating suppliers of

different components so that no one vendor can gain expertise of the product being developed.

Pricing Framework:

Current pricing is based on the crowdfunding campaign which was launched to raise capital

and test if the end users would pay for Instabeat’s product. Although Hobeika was not able to

supply the product for 2 years few customers asked for refunds which shows that the utility of

Instabeat product is higher than the price charged ($150) and customers are inelastic to

increase in price. Moreover, Instabeat’s product has no direct competition and

swimmers/coaches are looking to adopt anything that can improve performance of the

swimmers. Hence, we recommend that Instabeat increase their price to $299/product. This is

a two-way door decision as price can be reduced at a later stage (when COGS go down or if

demand starts to reduce). We base this pricing change on the higher willingness to pay and

low-price sensitivity. The typical swimmers spend upwards of $10k4 annually on swimming gear

and Instabeat’s product represents <2% of that spend at $150 and 3.15% at $299. Such

4
https://www.swimmingworldmagazine.com/news/a-cost-benefit-analysis-of-a-lifelong-swimming-career/
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insignificant increase would not deter customers from buying this product given the unique

value proposition.

Financial Analysis and Underlying Assumptions

Raising a new round of venture capital will be a critical step for Hobeika to successfully relaunch

Instabeat in San Francisco. We believe that Hobeika will attract investors in Silicon Valley after

sourcing a reliable manufacturing partner for the next-generation Instabeat, acquiring pre-

orders from swimming coaches at notable universities in the Bay Area, and presenting a go-

to-market strategy to dominate the nascent wearables market in competitive swimming.

Instabeat will present an attractive investment opportunity for venture capitalists for

three primary reasons. First, the total addressable market for swimwear wearables is large

($1.5 billion) and underpenetrated. Instabeat has the opportunity to be the market leader in

this category with proprietary technology and prominent partnerships with organizations like

the Michael Phelps Foundation. Second, our market research indicates that competitive

swimmers and triathletes represent an affluent demographic that is price inelastic. As such,

Instabeat could command a higher price point ($299 per unit) in the US market to maintain

favorable unit economics with greater than 50% gross margins. Third, industry tailwinds in

consumer wearables and the “quantified self-movement” will create near-term cash out

opportunities to sell Instabeat to strategic fitness wear brands. Companies like Nike, Adidas

and Speedo may be interested in acquiring Instabeat to kickstart their entry into swimwear

wearables and expand existing capabilities in sports analytics.

By targeting three million in additional equity funding from both Berrytech and Silicon

Valley investors, Hobeika will have the necessary runway to lead Instabeat to cash flow positive

operations by 2020. We modeled Instabeat’s financial performance over seven years,

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representing the typical holding period for venture investments. Selling the company in 2022,

after surpassing 50 employees and $22.4 million in annual revenue, would generate a seven-

year return on invested capital of approximately 1,000% with an IRR of 38.95%. The revenue

exit multiple of 4.5 is based on a comparable deal analysis of high-growth consumer hardware

startups. The attached DCF model, sales forecast, and cash flow statements detail our core

operating assumptions for this investment opportunity. Some important financial model

assumptions include; 36 Days receivable, 50 Days inventory, 67 Days payable - based off Nike

and Fitbit comparable companies, 5% penetration of our beachhead market in 2017 with an

increase to 50% penetration by 2022, cost per unit to manufacture of $125 throughout the

forecast period, a disproportionate amount of Capital expenditure for potential needs internally.

Snapshots of the discounted cash flow analysis, product order and employee projections are

shown below:
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How cases, notes, simulation & book helped us develop our Action Plan

1) Book’s step 0 has informed our recommendation for Hobeika to proceed further. Hobeika

correctly identified the clear benefits and value proposition of her product for the target market

i.e. triathlete and professional swimmers. Given her passion and commitment towards

swimming, Hobeika is expected to lead the venture happily and successfully. This contrasts

the commitment of the entrepreneurs in cases like "By the Sea Biscuit". Moreover, our

recommendation to Hobeika to protect IP of wearables is inspired by the learnings from the

"Sheila Mason & Craig Shepherd" case.

2) Our recommendation for Hobeika to focus on the beachhead market of US collegiate

professional swimmers, with the first 10 customers focused in California is inspired by the

lessons from the book. For instance, the Day2 founders strategically focused on the Israeli

market as their beachhead market before considering the US market.

3) We used the step on Full Life Cycle use case to develop the comprehensive Go-to-Market

strategy section of our action plan. Similar to Waterdrop case, where the founders considered

eCommerce supply chain to account for the product reaching the customers, our analyses

around the product roadmap and strategy is comprehensive.

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4) Our action plan to change suppliers and use Flextronics to manufacture the product is in line

from our learnings from prior cases. Decision made by Bob Reiss of R&R case and Andy Hoang

of Aviron Inc. to outsource manufacturing and adopting agile product development helped us

understand the importance of developing strategic partnerships and outsourcing to achieve

operational efficiency. Baabuk case revolved around moving away from manufacturing in Nepal

to Portugal for proximity advantages. These learnings significantly influenced our action plan,

most specifically our marketing and manufacturing strategy.

5) Our suggestion to price the product at $299 is strategic, similar to Baabuk's case where the

founders were very intentional about pricing the products through various channels, to attain

the optimal balance in making profit and fuel organic growth. As learned from the book, the

crowdsourcing audience primarily comprises of enthusiasts and early adopters who are

relatively price insensitive. Attractive pricing will address the early cash flow problems of the

venture, consistent with the learning from the simulation - the goal of the venture is not just

about growth, it is also about sustaining the growth by disciplined cash flow management.