Buzz Boom Bust

The wine cost $12,000 a bottle.

It was a '71 Chateau Petrus, maybe a '73—Jason Martin can't remember. But he does know it was Las Vegas in January 2012 at the Consumer Electronics Show, and that everyone was telling him the Zooka was going to be a major hit.

The company he helped start only four months earlier, Portland-based Carbon Audio, had invented a cylindrical little Bluetooth speaker called the Zooka designed for laptops and tablets, in particular the iPad.

The person buying the wine was the owner of a factory in China that was the size of a small city, and he'd just agreed to manufacture thousands of Zookas. The factory executives celebrated by downing the expensive wine in gulps, then leaving their glasses half-full at the table.

Martin had done business in Asia, where he enjoyed drinks at lavish factory dinners. But this time it was different.

"We'd never experienced a dinner like this before," he says. "This was more, we're making this deal, we're producing these products."

Martin picked up the half-finished glasses and drank the wine.

Carbon Audio introduced the Zooka to the world in February 2012 by asking for what, in business terms, was barely more than spare change: $25,000 in Kickstarter funding. At the time, Carbon Audio had nothing to offer but a hacked-together prototype of the speaker and a collection of molded rubber tubes.

But within seven months, Carbon Audio had wireless speakers on retail shelves. Just over a year into its product launch, the tiny company has sold more than 100,000 silicone speakers that look and feel a bit like sex toys. Indeed, the Chinese company that fashions the silicone sheaths makes female pleasure products in the same factory.

Apple adjusted its stores' shelving to accommodate the Zooka. Best Buy, Target and Wal-Mart placed huge orders. Zookas are sold in Brazil, Poland and Japan. The device has been featured on the websites for Rolling Stone, Wired and The New York Times, along with pretty much every tech consumer blog in existence. Janet Jackson highlighted the Zooka on her website.

But even with $5 million in first-year sales, cash is now so tight that Carbon Audio in August had to barter three Zookas to procure a keg of beer from nearby Base Camp Brewing. One of the company's partners says he hasn't taken a paycheck since June. And three months ago, the fledgling company fired half its workers, including the founding CEO, shrinking to eight employees. 

As recently as September, the company didn't know whether it would continue to exist. Carbon Audio is a prototypical startup: one step away from shutting down, and one step away from cashing in, big time.

Carbon Audio and other tech-related startups—from software coders to makers of drones—may be Portland's best chance at economic growth in the next decade.

Our city's public image may be dry-cured salumi and hand-sewn bike panniers, but much of the real money is in the digital world. Since the depths of the recession in 2009, tech jobs have grown at about twice the rate as the rest of the state's economy, according to statistics from the Oregon Employment Department.

But each startup is a wild risk, hungry for funds to get off the ground. About half disappear within four years. "There are some companies who've managed to beat the odds," says Skip Newberry of the Technology Association of Oregon. "But they're not all a runaway, wild success. They're doing just well enough to sustain a couple people."

"I've got two kids at home, so I'm panicked," says Carbon Audio designer Carl Jonsson. "It's scary. I'm taking the risk with my children and family as collateral. They just don't know it."

He pauses, then smiles nervously. "It'll work out," he says. "In terms of being driven to want to do it, there's no option."

Jonsson, a blunt-speaking Swede, is one of Carbon Audio's many partners, a hodgepodge cobbled together according to the company's investment needs. Everyone who invested—including denim magnate Danny Guez and rapper M.I.A.'s baby-daddy Ben Bronfman—gets a stake and a voice in the firm. And in a familiar situation in the tech scene ("Where the Tech Is She?," WW, May 23, 2012), all of Carbon's partners are male.

Like other startups, Carbon Audio was conceived, in part, as a gesture toward freedom. After moving here from Chicago in 2001, Jason Martin was part of a tiny team at Nike that made early prototypes for what would become the tech-geeky Nike Fuelkknd speed and distance wristbands. "We were slapping PC boards on people's shoes," Martin says. "It was powered by two AAA batteries."

But, Martin adds, "There's more passion for doing stuff on your own."

In 2006, he left Nike to start a consultancy called New that designed golf putters for Nike, chronometers for Columbia Sportswear and a whole lot of speakers for Logitech. He says those companies were all good clients, but he got tired of working for other people.

Serial entrepreneurs seem to share a contagious optimism and compulsion to create—a gambler's urge to split hands or double down.

Two years ago, about half the current partners at Carbon Audio started a now-defunct incubator called 8, intended to mentor would-be companies into health—but quickly realized the products they wanted to incubate were their own.

Martin had a watch company called EP Martin. He co-started a company called Original, centered on a little device called the Baby Ba that allows babies to hold their own bottles; the main backer was Courtney Taylor-Taylor of the Dandy Warhols. This year, Carbon Audio co-founder and designer Patrick Triato—the designer behind the first version of the Zooka—has spun off a doggie-backpack company called Bravery.

Triato was working to develop a laptop speaker to pitch to a client when he hit on the basic Zooka design. It looked so promising Martin, Jonsson, Triato and others decided to try to make the speakers on their own.

The Zooka is styled like no other speaker on the market. For one thing, its exterior is soft. It's a curvaceous version of a clipboard clip, with a Bluetooth-controlled speaker tube stuffed inside it like Vienna Beef in a corn dog. The device is made to grip tightly to the slim sides of a tablet or laptop and amplify the thin, tinny audio of those devices by up to five times.

"With audio, you need air," Martin says. "You need space to make noise. As things get smaller, the sound gets worse. More space goes to batteries."

This is why bulky laptops used to blast sound, while the new tablets struggle to be heard over the refrigerator—leaving a wide-open frontier on Apple's shelves for a friendly looking, aftermarket speaker bar that can enhance that sound.

The Carbon Audio team showed the prototype to Apple in the spring of 2012. Expectations weren't high. "[Apple is] very detail-oriented," a consultant warned them. "They're going to be harsh."

The Zooka they showed was built from off-the-shelf speaker parts that still had wires sticking out. But they had a Pantone array of colors that the Apple buyer loved.

"Oh, finally," she told them. "Someone who gets it."

In a still-new Bluetooth speaker market—getting crowded with old-school speaker company Bose, celebrity powerhouse Beats by Dre, and tech-forward Jawbone—the response to Carbon Audio's Kickstarter campaign was just as ebullient as Apple's. The campaign doubled its $25,000 goal in just two weeks. After a month and a half, it had almost tripled that figure, mostly from more than 700 pre-orders for a product that didn't yet exist. The Kickstarter backers also suggested a component that made its way into the final design for the Zooka: a little metal kickstand that allows the speaker to double as an iPad stand.

But Carbon Audio wasn't really funded by Kickstarter. It was publicized there. "Kickstarter did more to get us coverage in magazines than a public relations company that cost us $5,000 a month," says marketer and designer Drew Downie.

By the time the Kickstarter campaign closed in March, Carbon Audio had already brought in $1.5 million from outside investors.

And before the Kickstarter campaign even began, the company's first CEO, Mark Schneider, a former vice president of Eastman Kodak, had tossed in $200,000; Martin and Schneider had met while Schneider worked at Logitech.

To set up the Zooka's production line, former Logitech audio designer Jason Riggs traveled to China and stayed there for six months, overseeing every detail at the various factories that made parts for the Zooka. His pre-existing connections to the Chinese factories were pivotal in getting the speaker manufactured to the company's specifications.

"It's all about keeping the design intact," Martin says. "With the Zooka, it didn't change that much from the original design drawings. It got 2 millimeters bigger in diameter. That's pretty close."

Apple was onboard to buy Zookas for its stores. Best Buy was onboard soon thereafter. In contrast to the 18-month or two-year lead time customary among larger companies, Carbon Audio had put together a full factory production line and distribution network in seven months. And the speaker would cost only $99, half the price of its nearest competitor. Everything was in place.

That, as it turned out, was the honeymoon.

"One-point-five million dollars sounds like a lot of money," Martin says of the company's first big investment, "and it is—but for what we're trying to do, it's nothing."

For perspective: Mass-fabricating the little tube inside the Zooka that houses the speaker components—one of many parts in the speaker—first requires constructing a metal tool to make the little tube. That runs about $10,000. And before making the metal tool, you need a soft version of the tool that costs about $5,000.

"For even something like the Zooka," says Graham Crawford, who handled logistics for Carbon Audio between February and July of this year, "$100,000 isn't out of line. And that doesn't count salaries, operating costs, paying your sales team, building an inventory, and all the investment you need for infrastructure, sales and distribution systems.

"Now you've got to ship it. If you've got time to put it on a boat, that's great. Otherwise, you've got to put it in the air from China. That'll do something to you."

Unlike large companies, startups can't get credit from factories. So when Carbon Audio manufactures a run of thousands of Zookas for Apple or Best Buy, it must pay the money up front or it will never get the speakers delivered. But the stores that buy your speaker might not pay for up to 90 days after delivery.

This leads to near-constant limbo and cash shortages, which lead to near-constant fundraising. "You have to have an incredible amount of passion," Jonsson says, "because you're gonna need that passion. You might starve. You're going to go through some rough times."

"I'm divorced now," Martin says. He was married 15 years. "Everybody's put blood, sweat and tears in. Everybody's made sacrifices: time and money and family. I've slept here many a night."

"There's this idea," he says, "that you're 100 percent committed for a few years, then you can have an easy life. That's never the case. It's a nice fantasy in your head, but it just doesn't work that way. "

Before long, Carbon Audio, under Schneider, cut major deals with Target and Wal-Mart that amounted to sales of tens of thousands of Zookas.

"If anything," Riggs says, "we bit off more than we could chew the first year."

In late 2012, Target placed an order for thousands of Zookas for the holiday season—a big risk for the company.

"You either keep lean, or you distribute to a lot of retail stores," says Downie. "They say they want 3,000 units, and you have to pay for it. Instead of saying we're not ready, we overextended to get money to get things into the store."

Carbon Audio borrowed $1.1 million to fill Target's order, as well as orders from Apple and Best Buy.

But at Target, the speakers didn't sell. Carbon Audio sent someone down to see the product in Target stores, and quickly discovered why.

The speakers had been placed in a locked case in the computer accessories section, instead of in the speaker section.

In order for a customer to be interested enough in buying a Zooka to track down a Target employee, they would have to know about the Zooka in the first place. Few did. Carbon Audio had spent almost nothing on marketing, aside from a series of charmingly low-budget YouTube and trade-show ads designed by WiedenkkndKennedy 12, each with the tagline "LOUDERER."

"The marketing guys say sales didn't place the speaker in appropriate places," Schneider says. "Sales—in my opinion, rightfully—said we didn't place the marketing to sell the product."

In March, Target shipped back over half of the Zookas it had ordered from Carbon Audio, along with a sizeable bill asking for money back, plus shipping.

"It should have been an eye opener," Downie says. "But it happened again with Wal-Mart. We tried again. We had to get money, and borrowed against [the sale]."

Beginning in July, Carbon Audio faced a similar situation with 13,000 Zookas ordered by Wal-Mart. Carbon Audio scrambled to absorb its losses, in part by selling off returns or unsold Zookas to Eastern Europe and South America, places more forgiving than Canada or Germany when it comes to receiving products in the mail in English-language packaging.

The company cut deals on the fly—sometimes at discounts—with distributors that sent its speakers to mom-and-pop stores in Lithuania or Argentina and online stores based in Brazil.

"If the big boxes aren't working," Martin says, "it wasn't, 'Oh, my God, we're fucked.' We learn from that lesson and not do that again. Cater to early adopters versus mass consumers."

But the real problem, according to Schneider, had more to do with Justin Timberlake. Or, more to the point, with the lack of Justin Timberlake.

What little marketing strategy Carbon Audio did have involved landing a celebrity who could endorse the Zooka. And the executives thought they might even land a big name at little or no cost.

Carbon Audio partner and investor Danny Guez is a second-generation fashion mogul—his father founded Sasson jeans—whose many clothing companies trade in part on celebrity associations.

Guez founded his company William Rast with Timberlake. His company Dylan George was favored by Christina Aguilera, Vanessa Hudgens and Emmanuelle Chriqui. Guez's clothing line AbbotkkndMain was founded with Kellan Lutz of The Twilight Saga film series.

"You get a celebrity, you put him in denim," Martin says. "That's Danny's formula." It's also a formula that's worked in audio, with the company Beats by Dre. And Guez tried to replicate the success. (Guez didn't respond to WW's requests for an interview.)

"There was talk with rappers," Schneider says. "Danny kept promoting that he had access to Justin Timberlake. He said we could pay no money up front. We never closed the deal, never got people to endorse."

"We had so many celebrity meetings," Riggs says of that period. "Sitting around at high-end hotels waiting for some celebrity to show up."

Carbon Audio met with managers for Avril Lavigne, Kanye West and Troy Carter. "We were talking to [Jennifer Lopez's] manager," Martin says, "and then she goes to JBL."

"The deals they brought forward were ridiculously expensive," Schneider says.

Martin soured on the prospect of celebrity endorsements.

"They want $3 million in an escrow account based on the promise of future sales," Martin says. "Celebrities come and go, night and day. Will they be good in five years? Will Rihanna be stoned? I'm not going to put my brand in somebody's hands."

The celebrity deals went nowhere.

The Zookas continued to sell at Apple, but without a national ad campaign, they didn't move in the big-box stores.

Schneider says he never liked the idea of celebrity endorsements, and this summer pushed an aggressive strategy to continue wide distribution of the Zooka and future products.

In July, the company's board of directors voted to remove Schneider from his post as CEO—even as he remains the largest shareholder. The board then voted Martin and Riggs co-CEOs, while firing half the employees.

These days, the spacious Carbon Audio office is staffed on a day-to-day basis by three or four people. Everyone at the company now wears multiple hats—whether or not they fit. Their marketing writer is now also in charge of distribution. He shepherds shipments through Chinese customs.

Martin, a designer by trade, has been fundraising almost full time.

"We're doing stuff we probably shouldn't be doing," Martin says. "I'm drawing up finance contracts."

Amid the chaos of the past year, Carbon Audio has managed to set up production and shipping on a new product, the Pocket Speaker, that will debut in Apple stores Nov. 5. The Chinese factory had told the company it was impossible to make the speaker as small as Carbon Audio wanted, so again Riggs traveled to China for months until the factory brought the speaker within about 2 millimeters of the design specs.

The new Bluetooth speaker is the size and shape of a fancy cigarette case—small enough, indeed, to fit in your pocket. It comes in a bunch of pretty colors. It'll cost $99, same as the Zooka. And it's really, really loud. Carbon Audio is thinking of using the speaker to sponsor local underground dance parties.

There are two more audio products already being designed for next year. And though a similar deal fell through a month ago, Martin says the company is talking through a deal that might ensure its financial stability.

Pared down to the original design team, the company's remaining employees appear happy. Carbon Audio's dreams have left Wal-Mart and returned to markets more familiar to Portlanders: the Apple store, viral online sales. Though the company is only 2 years old, the remaining crew seems like a boy band at a 10-year reunion, swapping war stories from the old days.

Carbon Audio has no more plans to sell to big-box stores. The company is not talking to any more celebrities.

"Apple loves us," Martin says, "so we'll sell to Apple. We'll talk to tastemakers. We'll talk to consumers. We've been spending too much time on these other parts of the business. Let's go back to making amazing products. Let's go back to the core of what we do.” 

WWeek 2015