VCs press play on connected toys

Children and electronics go together like peanut butter and jelly, so it’s no surprise that connected toys are gaining in popularity with consumers and investors alike.

Colin Beirne, a managing director at Two Sigma Ventures, the venture arm of Two Sigma Investments, is both a father of three small children and an investor who sees toys heading in the smart direction. He said he understands the challenges of bridging the gap between digital and physical worlds.

“Kids today are approaching the world in a different way than many of us did when we were kids,” he said. “They have access to a lot more information than we had and are so digital literate.”

He’s one of many investors who are intrigued by the sector.

Global funding in connected-toy startups surged to $104.3 million in 2015 from $6.6 million in 2011, according to a December 2015 report from Tandem Capital, which cited CB Insights and CrunchBase as sources. The biggest jump took place from 2012 to 2013, when funding more than doubled to $72.2 million from $27.3 million.

San Francisco-based Anki is perhaps the highest-profile startup — and darling — in the emerging field. The company’s mobile app uses Anki-developed artificial intelligence to bring its toy cars to virtual life. Marc Andreessen told Fortune in October 2013 that Anki was the “best robotics startup” he’d ever seen.

Tech giant Apple, too, was impressed. Anki’s first product, Drive, was originally available exclusively at Apple retail stores.

In June 2016, Anki raised $52.5 million from Beirne’s firm, Two Sigma Ventures, as well as from Silicon Valley Ventures, Index Ventures, JPMorgan Investment and Andreessen Horowitz. The robotics and AI company has now raised $157.5 million in funding since it was founded in 2010.

Another connected-toys startup, New York-based littleBits Electronics, has raised $62.3 million, including a $46.7 million Series B round in July 2015. Investors include Two Sigma, Khosla Ventures, Foundry Group and DFJ Growth, among others.

The company is an open-source library of electronic modules that snap together with magnets, enabling users to learn electronics via prototypes. LittleBits’ toys have been described by Bloomberg TV as “Legos for the iPad generation.”

Pi Lab so far has raised about $1.6 million in seed funding. The Carmel, Indiana, company’s product, Edwin the Duck, received the “Kids at Play Interactive Innovation Award” at the Consumer Electronics Show in 2016.

The app-connected smart duck is aimed at newborns, toddlers and preschoolers. It gives children a way to play learning games and can serve as a nightlight and thermometer as well.

Beirne said he met Anki’s founders in 2010 when a Two Sigma employee pointed the firm to the recent Carnegie Mellon graduates. Beirne said he was intrigued by the way Anki was innovating toy creation.

“The thesis around Anki and other connected toy companies is that they create experiences that meet the kids where they are by blending physical and digital worlds,” he said.

Two Sigma was a seed investor in Anki and has since participated in four other rounds of funding. The company’s products have sold well over the past two holiday seasons, ranking among the top-selling toys on Amazon.com, Beirne said.

Looking ahead, Beirne sees higher demand and lower production costs combining to boost the smart-toy industry.

“Kids are expecting it. The market is going to have to meet customer demand,” he said. “And the cost is making it easier to build these kinds of products. I see the space just continuing to evolve and Anki is at the forefront of it.”

Mary Ann Azevedo is a Texas-based contributor. She can be reached at maryannazevedo@gmail.com

Downloadable Data: startup-targets-in-the-connected-toys-sector

Photo courtesy ©iStock/weerapatkiatdumrong