Can you hear the Unicorns?

In October 2020, the hearables industry acquired its first unicorn.  Eargo, a startup making hearing aids, had a successful IPO, with its market valuation rising to $1.3 billion.  It’s been on a roller-coaster ever since, nudging $3 billion last month before sliding back to $2.3 billion.  Some might argue that it’s not the first hearables unicorn, as Apple acquired Beats for $3 billion back in 2014, but Beats was never really a unicorn.  Beats had received a $500 million investment from Carlyle the year before, which gave it a valuation at just over $1 billion, but a large chunk of that valuation was based on their music service, not their hardware.  Ironically, the success of Airpods means that Apple now almost certainly outsells its acquisition, making Beats the junior hearables partner.  We’ll probably never know whether Beats played any part in the Airpod’s development, or whether it was a purely internal Apple development, but that’s history.  The question on everybody’s lips in the hearables industry is “Who will be the next unicorn?”

Before we start getting too excited about the next unicorn, we should put the Eargo valuation into perspective.  At the point of their IPO they had sold around 50,000 hearing aids.  That’s only about 20% of the number of Dash earbuds that Bragi sold.  For those who have forgotten, Bragi essentially started the whole hearables market in 2014 with their Kickstarter campaign which raised $3.4 million from 16,000 backers.  They managed to get several generations of products to market, but realised that making hardware and building a brand is just too difficult.  They’ve pivoted to becoming an audio O/S supplier and provide the technology behind a fair number of the exciting innovations we see in other hearables on the market today.

It seems a bit unfair that they didn’t achieve unicorn status.  Bragi takes its name from the Norse god of poetry and music.  Norse mythology has its own flying horse – Sleipnir, which would have been a nice concept to apply to a Northern European business success.  Sleipnir was certainly a lot more elegant than Pliny’s original definition of a unicorn; his unicorn had the horn we recognise today, but it also had the feet of an elephant and the tail of a boar.  Maybe not such a bad analogy for some of the companies which have achieved unicorn status.

It’s worth comparing Eargo’s $3 billion valuation, based on sales of 50,000 units, with the established hearing aid companies.  The five main ones, who supply around 90% of all hearing aids, sell around 18 million hearing aids globally each year – which means that each ships approximately fifty times as many hearing aids as Eargo.  Yet their market valuations range between $7 and $20 billion – not significantly higher than where Eargo is now.  As some of these companies include other divisions, it feels that the Eargo valuation has little to do with reality.

That of course is one of the features of unicorns, whether we’re talking of companies or mythical beasts.  What drives Eargo’s valuation is probably that it plays to something that is very close to Silicon Valley VCs’ hearts – it’s challenging regulation.  In many countries, including the US, hearing aids are classified as medically approved devices, which have to be prescribed by an audiologist.  That has helped protect the market for the five main companies.  Prices are high, not just because they’re difficult to make, but because repeated visits to audiologists adds to the cost.  That, reinforced by an ongoing stigma against wearing them, means that only around 10% of people with hearing loss who would benefit from a hearing aid currently have one.  At the level of just 10% or the total addressable market, it is still very profitable, with the potential to grow massively.

In the US things are about to change.  Hearing loss groups have been lobbying for changes to the current regulations to allow hearing aids to be acquired “Over the Counter”, resulting in new OTC requirements from the FDA. The Act introducing these changes was signed in 2017, but the publication of rules for OTC hearing aids has been delayed, largely because of Covid taking priority in medical policy decisions.  Last November, Senators Grassley and Warren wrote to the FDA requesting a timeline, but the US is still waiting.

Venture Capitalists are interested, because they see any challenge to regulation as an opportunity for disruption.  They believe that the new entrants that they are backing in the hearing aid market could take a significant share of what could become a $100 billion per year opportunity.  Eargo is by no means the first challenger to the major hearing aid companies, but in the past they’ve been able to stave off competition by acquiring new pretenders.  A startup selling 50,000 units a year is normally quite affordable, as it would traditionally be valued at a few million dollars.  However, Eargo’s valuation makes that type of acquisition almost impossible, so, despite its tiny size, it has little to stop it growing to be a real challenger, other than the inherent difficulty of making and selling hearing aids.  Its investors obviously hope that it will help destroy regulation in the industry, providing the opportunity for more entrants to compete in hearing health.  This is essentially a repeat of the Uber strategy of piling money into a company to break an existing regulatory system and open the market up.  It has little to do with the intrinsic merit of the company.  It will be interesting to see whether this amazing valuation gives Eargo the momentum it needs to become a potential challenger, or instead ends up making it too expensive to follow the acquisition exit route of its predecessors?

I’ve not tried Eargo’s products, but they look very competent.  Selling direct to consumers has given them new challenges, not least training users to become habituated to a hearing aid.  It typically takes up to three months for your brain to get used to the new audio input that you get from a hearing aid, during which time users are likely to go back to their audiologist to get the performance tweaked.  Users who don’t put in that effort frequently give up, or request different hearing aids – actions which push up the overall cost of provision.  OTC vendors need to take a different approach, providing apps and online support to keep users engaged through that assimilation stage, and by all reports, Eargo are doing well, cutting the normal return rate by a factor of three to four.  It also plays well to the next step of market evolution – the Direct to Customer model (DTC), where there is no medical or audiological input involved in the purchase.

Advances in technology will produce new challengers.  Qualcomm, the main supplier to chipsets to the True Wireless earbud market has recently signed a partnership relationship with Jacoti – a Belgian company that develops algorithms for hearing aids.  Their business model addresses companies making millions of products, not just tens of thousands.  The means of enhancing sound is also advancing.  Chatables take an audio neurology approach to hearing, acting on voice conversations to make them more hearable.  Currently available as a phone app, it is beginning to move to firmware in the earbud as edge processing becomes more efficient.  Silicon vendors like Greenwaves and Syntiant a pushing the boundaries of low power edge chips, delivering around 1 TeraOperations per mW, allowing an earbud or hearing aid to do some serious audio processing in real-time. Going back to direct competition, another startup competitor – Nuheara, which has brought hearing loss capability to lower cost earbuds has just reported strong revenue growth of over 400% in its last half-year results, along with a partnership with HP. 

It’s not just hardware which is attracting attention. IPOs abound in the new industry sector that is attempting to find ways to repair hearing loss; something that we have so far been unable to do.  Decibel Therapeutics are at around the half-unicorn stage, approaching a half billion dollar valuation.  Akouos a company focused on developing gene therapies with the potential to restore, improve and preserve hearing has a current market capitalisation of 0.7 billion, which almost makes it a three-legged unicorn.  Frequency Therapeutics has done even better, galloping past to become a true unicorn, with a valuation of $1.6 billion, slightly down from its early February peak of $1.9 billion.  These are all long-term plays, unlikely to affect the current focus on addressing the full potential market for hearing aids.

Which brings us back to the fundamental question of “Who will be the next unicorn”?  There is massive innovation taking place in the hearables space, which will shift up another gear with the applications enabled by Bluetooth Low Energy audio when it begins to appear on the market in the near future.  The crowdfunding market is still actively generating new hearables concepts, both in the consumer and hearing aid space.  Bose had been setting the pace for audio apps with its audio AR project, but its demise last summer has cleared the room for others, and we’re starting to see new entrants.  The challenge they all face is that Apple is continuing to set the barrier and set it high; their latest Airpod Max may well usher in a new era of audio applications in much the same way as the iPhone provided the platform for the apps store as we know it now. 

Time will tell.  Although investors are cherry picking a few companies, I’m still not seeing a wider audio fund, which surprises me, given the meteoric growth of hearables and the untapped potential for hearing aids.  Despite that, I suspect we will soon be blessed with a few more.  Yes – the collective noun for unicorns is a “blessing”, although it has recently been suggested that a “crash” may be more appropriate.