National Post (National Edition)
Deal stalls as Phazon struggles to meet production deadlines
Each week, Financial Post contributor Mary Teresa Bitti revisits the previous week’s episode of CBC’s Dragons’ Den. She captures what the cameras didn’t and in the process provides a case study for readers, zeroing in on what pitchers and dragons were thinking and what the challenges for the deal are going forward.
The pitch What’s a retired Saskatchewan Roughrider turned tax specialist to do when his earbuds keep falling out while he’s working out? Chris Houle decided to invent one-size-fits-all wireless earbuds.
“I found the wireless earbuds I was using were inconvenient and not truly wireless; they still had one wire. I thought there must be something out there that’s better than what I’m using but I couldn’t find a good solution,” Houle said. That was in 2014. He did his research, hired two industrial designers, chose the design he liked best, brought on two engineering graduates as partners and started Montreal-based Phazon.
A master’s degree in taxation may seem at odds with launching a tech startup, but Houle had already taught himself to code and had created a gaming app. The app didn’t go anywhere, but the pull to become an entrepreneur was established.
Phazon received investment and support from LaunchHouse incubator in Cleveland, Ohio. During the development phase Houle had to buy out his technical co-founders and bring in new engineers/partners. On Nov. 18, 2015, after taking about 18 months to develop the prototype, Phazon launched a 60-day Indiegogo crowdfunding campaign and raised US$1.5 million.
“It was one of the top campaigns on the Canadian platform,” Houle said. “We proved the market with the campaign.”
Phazon’s market is active users, so universal fit and ensuring the product is waterproof are chief differentiators. The company has both design and utility patents in place, though its competitors are not focused on this market.
Houle pitched the dragons with a very specific goal. “Our plan was to start shipping around the time the episode would air, this fall. If we landed a deal, the investment would be a source of working capital.” The deal Houle asked for $500,000 in exchange for a 10 per cent equity stake — a $5 million valuation. And although he presented a prototype that was still a work in progress, all the dragons wanted in.
Putting aside Manjit Minhas’s offer to buy the company for $4 million, Houle arrived at a deal on air deal with the four remaining dragons in which he gave up a 20 per cent stake in the business.
While the deal has stalled in due diligence, Houle continued to perfect the prototype. It is now much smaller and features a microphone inside the earbud that lets users take calls.
Finalizing the prototype, which is still in progress, and securing the manufacturing (the electronics are made in China and assembled in Canada) took longer than anticipated and extended the ship date for the earbuds to January 2017. “Our first order of business is to fill the preorders. We recently hit US$2 million,” Houle noted.
“The beauty of crowdfunding is the exposure it gives new products. Because we had a huge hit, a lot of distributors reached out, including Walmart, Amazon, Best Buy but we weren’t ready. We’ll be at CES in early January and so will they and we’re hoping to close more orders then. They’ve already contacted us, we’ll be really busy.” The earbuds are expected to retail for US$199.
Meanwhile, Houle is negotiating the details of a partnership with a major carrier in China, that represents 600 million cellphone customers. He has plans to create more products, including a version with biosensors and internal memory to track temperature and heart rate, as well as a more affordable version with fewer features. A dragon’s point of view “We knew this was a good idea and good product, but we worry about the time it’s taking to finalize the prototype," said Jim Treliving, whose team took the lead on due diligence.
“It’s crucial to get it to market as soon as possible. Big players such as Apple and Samsung have already announced wireless earbuds. Some of the people who’ve pre-ordered the Phazon products have started to complain on social media about the repeated delays. We all talked about buying the company, but he didn’t want to sell. It’s a great idea and we’re still interested, if he can get it to market.” An expert’s opinion John Cho, partner at KPMG Enterprise, echoes those concerns. “It’s a compelling product and potentially a winning one. There’s definitely a trend toward portability and it seems like a reasonable price point. It’s all a function now of how well the product works and how quickly he can get it to market.”