March 11, 2021- In today’s podcast, we welcome special guest Kurt Workman, Co-Founder & CEO at Owlet Baby Care, the connected nursery ecosystem that delivers data-driven technology to modern parenting. Owlet recently announced a going-public transaction through SPAC Sandbridge Acquisition in a $1.1 billion deal.
On the podcast, Kurt discusses:
- Co-founding a startup right out of university and participating in a tech accelerator
- The advantages of running a startup from Utah
- The dynamic of leading a mission-driven company
- Key insights into Owlet’s business combination with SPAC Sandbridge Acquisition
- Owlet’s key growth initiatives
- And More
Welcome investors to the Absolute Return Podcast. Your source for stock market analysis, global macro musings and hedge fund investment strategies. Your hosts Julian Klymochko and Michael Kesslering aim to bring you the knowledge and analysis you need to become a more intelligent and wealthier investor. This episode is brought to you by Accelerate Financial Technologies. Accelerate, because performance matters. Find out more at www.Accelerateshares.com.
Julian Klymochko: Kurt welcome to The Absolute Return Podcast. Awesome, that you’re here to talk about. A number of things, Owlet Baby Care, there is a lot going on there, you guys are going public through a SPAC, super exciting times at the business. And I’m sure you’re just running around like a chicken with its head cut off trying to handle all of this. So, I appreciate the time that you’re given to us and our listeners today. I wanted to start off by getting a bit into your background and the background of the company. It’s super interesting, I find that you co-founded Owlet, basically right out of university, right? Could you tell us a little bit about that experience? You participated in a tech incubator, Techstars. Launching your first product, taking on venture capital. Can you really walk us through the early stages of this entrepreneurial journey that you went on with? Basically, not a lot of experience prior to that.
Kurt Workman: Yeah, that’s right. It was like drinking from a fire hose and still kind of is a little bit, I think the best advice I ever got was just go out and hire the very best people from the top companies. And don’t let your lack of experience keep you from being really confident about the opportunity. Luckily Owlet’s such a mission-driven company that, you know, we’ve always been able to recruit above our weight and we’ve seen some of the best leaders across technology, healthcare and consumer brands like Amazon and Google and Phillips, United Healthcare, Nike, and some of the top leaders from those companies coming into help, you know, change parenting and influence pediatric health. So, the mission was so helpful in those early days to recruit above our weight. That was the best piece of advice I got from a CEO who said, you know, don’t lose confidence, go out and share the mission and recruit really great talent, which is what we did.
And I think that the other thing we did that was maybe better than anyone was just blending, everything we had learned about customer-centric, lean startup with a very high-quality bar. You know, when we were at Techstars, probably still to this day, it was one of the hardest things we’ve gone through. We started manufacturing units, you know, we didn’t have a lot of cash. And we realized that there were some quality issues with the experience. And so rather than ship the units and kind of get the revenue, we decided to throw away 2000 units, redesign part of the system.
Julian Klymochko: How much did that cost? Throwing those ones out.
Kurt Workman: 2000 units, probably at that early volume was maybe $200 a unit.
Julian Klymochko: Still quite a bit for a young company, that’s a lot.
Kurt Workman: Yeah, it was like all the money we had, but it turned out to be the, like the very best decision we ever made because we refocused, it created a culture of quality in the business. And when we did launch, at the end of 2015, we just had a great net promoter score. We’d done a year of user testing. We’ve just raised a new round of capital. And when we figured out the right way to educate people about the product, the business took off and we didn’t have to worry about, you know, we had a lot of confidence in that first product.
Julian Klymochko: You really focused on being a mission-driven company. And you don’t see that often in corporations, capitalism these days, where did the initial idea come from for Owlet? You know, being young guys or young individuals right out of college, how did the idea and the business really get started?
Kurt Workman: Yeah, I think becoming a parent is the biggest change we go through in life, right? You know, overnight you take on all of these new roles, you’re the doctor, you’re the nurse, you’re the dietician. And I remember leaving the hospital with my son, Ashton for the first time. And you walked outside of those hospital doors and you realize like, wow, it’s all up to me. I am the caregiver, and you know, the sock is the anchor product of our ecosystem. And it started because my wife and I were concerned that our children might have a cardiac issue that she has, she’s had three heart surgeries and they didn’t know that she had that issue when she was born. And so, there’s this miraculous story. Her mom ended up rushing her back to the hospital to do emergency heart surgery that saved her life. And I just remember wondering, like, how would I know if baby was okay? So, we were visiting, we’d been married for several years. We were visiting her cardiologist to see if it was safe to get pregnant. And they just talked about all the extra checkups that we’re going to have to do. And I think every parent just wants to be there when our kids need us the most. And that was kind of the driving force for us to start the business.
Julian Klymochko: So, you get it started, you have this product idea and really a dream of where you want to get to and in a business plan, at what point did you realize that Owlet was a real company, a real business, and that you had pursue it on a full-time basis?
Kurt Workman: Figuring out that it’s a real company. I think it’s such a gradual approach, but as an entrepreneur that the pursuit and like the dedication came really early on, I remember quitting my job and like, just feeling really passionate about building this company, you know, the the feeling that this is like a real company, didn’t come until a few years into it, I think, you know, with our prototypes, we were using at home with my son, Ashton. I remember my wife saying like, maybe you should just give the money back. Because there were so many issues, and when our second was born, my daughter Summer, I remember it was like a couple of weeks after she was born. My wife just turned to me randomly. She’s like, I love this thing. It’s like, I can’t imagine not having an Owlet.
And that was the moment for me where I’m like, okay, it’s real. Even though we, you know, we’ve been working on it for years at that point, you know, separately, I think that the most amazing moment in our journey was when we heard back, it was actually a beta tester who reached out to us and said that because they had the smart sock, they were able to find out, you know, that there was an issue. And so, they took their baby in and they did a sleep study and found out that their child had severe apnea, life-threatening apnea. And their daughter was on oxygen for a few years after that. Oxygen therapy because of the condition that she had, and that was real because what we really wanted was that, right? We just want parents to have more information and peace of mind and feel empowered to give the best possible care for their child at home. And that was one of the coolest moments. And now we’ve had, you know, so many of those scents, but it’s just so memorable that first story.
Michael Kesslering: When you talk about the stories that motivate you, I can absolutely see how there’d be no shortage of that within your focus Owlet. One thing that I was very curious about was your decision to be based in Utah, obviously, there are positives and negatives about being in a non, I guess, tech hub, right? You’re not in San Francisco, you’re not in New York. We can relate to that as well, being based in Canada, in Calgary to be exact, but what have you found in terms of recruiting and the overall positives and negatives of being located in Utah?
Kurt Workman: You know what? It’s actually been amazing. We have really great talent. Utah has a great lifestyle for employees and it’s one of the fastest-growing economies in the country and fastest-growing populations on a percentage basis in the country. Utah had 25 billion in exits last year. It’s growing, it’s exponentially growing from a tax perspective. On top of that, you have the skiing, the hiking, the mountain biking, plus this new strong, they call it Silicon Slopes. Call it Silicon Slopes, this new strong startup community. And, you know, COVID has really accelerated our remote workforce. And so, we now have executives in the Northeast, in the New York area, the Northwest, the Bay Area. And you know, we’re getting broader leadership talent now that we’re moving more remote and that I think will give us the best of both worlds.
Julian Klymochko: So, I want to get into the big news, obviously, congratulations on the recently announced business combination with special purpose acquisition company, Sandbridge Acquisition, valuing Owlet at $1.1 billion dollar enterprise value. Must feel nice to get to that really big milestone in the company’s development. We’re wondering, and we’re always interested in how these things to fruition. What’s going on behind the scenes. How did this deal come about? Did you specifically set out to go public or was it more so due to inbound interest where you could raise a bunch of capital and really step up the company’s growth initiatives?
Kurt Workman: Owlet has a really strong core growth business that’s growing 50% year over year. We’ve been extremely capital efficient. We hit profitability in the back half of 2020 and you know, had just strong profitable growth ahead of us. And so, we were actually in process of getting the company ready to go public when the SPAC approached us. There were three things we really liked about it. We felt like it combined the best of both worlds. One, you know, we had getting value-add funds into the company with Ken and Domenico being brand experts and brand really matters in the parenting category. And so, they’ve just deep experience in brand.
The second piece that they brought was just international expansion, you know, deep expertise there. The founder of JD.com is a senior advisor in their fund, an investor in their other deals.
And so, we really liked that we were getting that expertise as well, because there’s four times as many babies born in Asia as the United States and more babies born in Europe than the United States. So, we know that’s a big opportunity, but we’ve just been focused on the States up until this point. So, we liked that value add, you know, there’s long-term shareholder alignment with an 18-month lockup and a 50% earn out on the shares. And so that kind of spoke to us. So, we felt like we were getting sort of the benefits of a growth equity round with the opportunity to increase our visibility and ability to attract great talent partnerships by being a public company. And so, we really liked that combination. We were marching down that the IPO route anyways and decided that this was a good fit for us.
Michael Kesslering: And in terms of the transaction itself, I mean, you talk about the good fit in some of the growth areas that you’re looking at, and you do have the pipe financing, the cash and trust from this SPAC, assuming that, you know, trading at a premium that it will maintain that level of trust value. When you look at the cash that you could have on your balance sheet, post-transaction looking at potentially over $300 million dollars. What else are you looking at for the uses of capital outside of some of that international expansion?
Kurt Workman: You know, we’ve been so efficient with our marketing spend, our cost per acquisition is less than $30 dollars today. And if you look at some of these clusters in the United States, like Nebraska, Louisiana and Utah, they’re, you know, 20% of babies born using Owlet are part of the ecosystem. And if you were to extrapolate just that penetration across United States, that alone is over a billion dollars in revenue. And so, you know, first priority is we want to get more aggressive. We see a huge opportunity to just deepen penetration with our existing product suite. And then we talked a little bit about integrating the nursery into one connected ecosystem. This is a very big, there’s 48 million parents with children between the ages of zero and four, and they spend $12,000 dollars per year on those children. So, it’s a very big $300 billion dollar market, but it’s very disjointed. It’s a very fragmented market. And specifically, when it comes to technology, you know, we benefit from these technology ecosystems in every other market. And its parents that kind of suffer from that lack of consolidation. So, we want to integrate the nursery into one connected ecosystem, and then, you know, we’re leveraging the data to drive data-driven telehealth. Parents engage with our ecosystem with the app eight times per day, with the data that we collect. We know that there are certain things we can screen for and spot. And so, we feel like we’re in the perfect position to tee up a telehealth consult and help avoid some of those just in case visits or help screen for some of the biggest issues in the future that children are at risk for. So that’s where we want to continue to invest. And then you mentioned, yeah, international, there’s four times as many babies born in Asia than the United States. And so really any one of those areas can drastically increase growth. There’s just so many ways to win in this category. That’s been unserved for far too long.
Julian Klymochko: So currently you mentioned another, a number of interesting growth initiatives, whether it be international, this telehealth opportunity, on the data side, obviously the Tam total addressable market, on this side of the business is pretty massive. What are you looking to build Owlet into saying the next 5, 10 years, where do you guys want to be?
Kurt Workman: We want to be the digital health platform for parenting, you know, similar to Livongo for patient monitoring or Peloton for at home fitness, but for parenting. And it’s just this really large market that’s suffered from that lack of technology cohesion that, you know, Owlet can bring.
Julian Klymochko: So, I want to get into some of the fundamentals, some of the unit economics. You mentioned very efficient with your marketing, customer acquisition costs, relatively low, currently around $30 dollars, I believe, but on the other side, on the flip side. The customer lifetime value around $550 dollars. So certainly spending $300 or $30 dollars to get a customer worth $550 is pretty exceptional. However, you view those unit economics expanding even more as shown in your investor presentation, how are you going to accomplish this? I.E., make those customers worth even more and perhaps spend even less become more efficient.
Kurt Workman: Yeah, so our marketing spend will go up. I’ll talk about that. But, you know, we are expanding our services offering with, you know, Dream Lab is a big exciting new area for Owlet that we just recently launched which is really about bringing experts to the home and making that it’s kind of these experts that you get for fertility coaching and labor coaching and lactation consulting and sleep training and, you know, telehealth. Making those readily available to parents at home at a fraction of the cost. And we’ve successfully done that with Dream Lab, 91% of parents sleep through the night in seven days. And so, we want to expand that, we want to integrate telehealth into the platform. That’s all coming very soon. We have two new products that are launching this year, and we have significant owned media because parents are engaging with the app eight times per day.
So, to be able to leverage owned media, to upsell, you know, these other services that makes a lot of sense and doesn’t cost the business any additional advertising dollars. In addition to that, we mentioned 20% of babies in Nebraska and Louisiana have an Owlet, and it’s not paid acquisition that’s driving that, it’s a brand strategy. One of the reasons we’re excited to partner with Sandbridge, and if you extrapolate that, that alone like we talked about will drive over a billion dollars in revenue. So, there’s multiple ways to continue to make the business more efficient. I do think we’ll actually get more aggressive in our [Inaudible 00:16:36] there, you know, there’s upside to growth opportunities that, you know, we’ve just been so efficient with our spend, I think specifically building awareness and partnerships on the coast because we’re, you know, we’re winning in middle America and expand of the coast, which is unique especially with a $300 dollar product. And so that’s kind of how we think about it, but there’s tremendous efficiency that we think we’re sort of this tipping point or inflection point as a business to be able to drive that.
Michael Kesslering: When we’re zooming out a bit as obviously the unit economics of your business are fantastic, what I found really interesting was one of the slides in your deck, which showed the life cycle of costs from infancy into the later years as well, but really showing as a system, how much, say children do cost the system. And so, any sort of efficiencies that we can have with parents is really just beneficial to the entire system. Can you speak to that a little bit on the overall cost savings to the system in the U.S. that can be gained from using technology such as this?
Kurt Workman: Yeah, I mean, there’s a couple of different angles there. I think what Owlet done with the sock and cam and Dream Lab are pretty incredible. We’ve consumerize healthcare, right? And care for children that costs a thousand dollars to hire a night nanny or a sleep consultant to come in and help sleep train your baby. Dream Lab is $99 dollars, it’s literally a fraction of the cost, we’re just getting started there. Telehealth is another big opportunity. It’s, you know, there’s 3.4 million ER, visits for infants alone. That’s like basically one for every child born. And the vast majority of those babies that go into the ER, you know, they’re not getting admitted to the hospital. They’re getting sent home with Tylenol and Motrin, and there’s so many just-in-case visits in this period of life.
There are 92 million healthcare visits in the first four years alone. The majority of those being just in case visits, just making sure baby’s okay. And, you know, we’re really excited about the ability to build an ecosystem at home that can help parents and doctors close the loop at home. Bridge the gap and save money, you know, the telehealth console is half the cost of an urgent care visit, and it’s about a 10th, the cost of an ER visit. And so those are just two of the ways we’re planning on driving that. We’ve partnered with 24 foundations across the United States to try and make our technology more accessible to families. And we partner with those groups were families who can’t afford, you know, the sock or the ecosystem. And we match them three for one to try and help families who can’t afford get access. There’s also registry is another, you know, angle to that as well, which I know is that what you were asking, but we think a lot about accessibility too, with our platform,
Julian Klymochko: Clearly a lot of future opportunities for Owlet. Massive total addressable market, with respect to baby care, parenting, et cetera. Now, with this large economic opportunity, I assume it’s a highly competitive space. How does Owlet differentiate itself and its products within this marketplace?
Kurt Workman: We think about that in a few different areas, the first is ecosystem. So, you know, it makes it harder for customers to switch platforms as we continue to build out our ecosystem. We’ve seen that with our existing integrations, and we know we’ll continue to see that as we expand. And in the data, we collect, Owlet has the largest data set of infant health and sleep that’s ever been collected. And it, you know, not only does that allow us to launch new features and, you know, just from the data itself, it also makes it harder for competitors to match value. You might be able to create some hardware, but because we use machine learning and AI to drive most of our algorithms and feature development, you actually need the data sets too in order to match value. And so, the data become big component to that. We have a nine-year head start in our technology stack. Everything from flexible circuitry, low powerful sock symmetry, you know, combining multiple sensors to reduce false alarms and improve the signal to noise ratio. And then the machine learning algorithm. So, there’s 24 plus issued patents in that stack. We’re the number one brand in the top three metrics. And again, brand really matters in this category to parents. When it comes to, you know, what ecosystem you’re going to use for your child? You know, brand, quality, safety, those all make a huge difference. And so, you know, I think that’s also a moat. And we submitted to FDA at the end of 2018. We’re investing heavily in clinical research in medical devices to continue to improve our offerings to families. And I think that also becomes a competitive mood for Owlet.
Julian Klymochko: A lot, going on. Sandbridge Acquisition, really exciting deal, going public via SPAC $1.1 billion dollar enterprise value. If you could really wrap things up for investors in a sort of elevator pitch, 90 seconds or less, could you summarize the investment case for Owlet as it completes this going public transaction? Why should investors want to pay attention to this story?
Kurt Workman: Yeah, parents spend $12,000 dollars per year on their children and that’s going up every single year. It’s a very fragmented and disjointed market. That’s traditionally been 10 years behind the technology. And Owlet consolidating the smart nursery from conception to kindergarten, and we’re leveraging our incredibly large data set to integrate telehealth and healthcare at home. And so, there’s not only an incredibly strong growth story, but we believe a big rerating opportunity as we integrate some of these pieces over the next 12 months, frankly. And we’re sitting at this intersection of the consumerization of healthcare and med tech like we’ve seen with Livongo and the digitalization of professional services at home, similar to Peloton. It’s just this incredible blend of the two, but for parenting in this category, that’s been unserved for too long. It’s an $80 billion dollar opportunity.
Julian Klymochko: Great. So, I’m sure investors will be interested in looking into this story plus consumers. I mean, the value proposition to parents is clearly there. So, say if you’re a parent with a young one at home, or even an investor interested in learning more, where’s the best resources for them?
Kurt Workman: Yeah, you can go to owletcare.com and check out all of our products. We should be standing up an investor page here soon too for investors to go take a look. So, thank you for having us, appreciate it.
Julian Klymochko: Thank you, Kurt. We wish you all the best. We’ll be cheering you on from the sidelines. We are long, the Sandridge Acquisition stocks. So, looking forward to seeing how things progress here and yeah, you got your work cut out for you, so we’ll let you get back to it and thank you for your time today.
Kurt Workman: Yeah, Awesome.
Julian Klymochko: All right. Cheers.
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