Swinging for the fences: Stephen Lake on Thalmic Labs' Series B round

It’s been the talk of the Waterloo Region tech community for months now. What, to paraphrase Tom Waits, is Thalmic Labs building in there?

Of course, the handful of people who know aren’t talking about that – yet. But Monday’s news that Thalmic, maker of the Myo gesture-control armband, had raised a US$120 million Series B investment round, clearly suggests some big thinking has been going on behind the brick walls of the four-year-old wearables company in downtown Kitchener.

How big? Big enough that Thalmic, rather than iterate on the Myo, hopes to create a new computing category, and in the process, a company with annual revenue north of $1 billion.

As for the company’s short-term goals, it aims to significantly grow its technical team here in Waterloo Region, while opening a small satellite office in San Francisco for sales, marketing and business development.

I caught up by phone with Stephen Lake, Thalmic’s CEO, on the day of the big announcement. Here’s what he told me about the company’s ambitions.

Q – Just over three years ago, you raised US$14.5 million, the largest round ever for a Y Combinator company at the time. Now, you’ve raised one of the biggest rounds ever for a Waterloo Region startup. Why are you raising so much money?

A – Ultimately, we have an ambitious roadmap for where we want to head over the next few years, and a vision of where we think wearable technology and the company will go. This amount of money allows us to both aggressively invest in the short term, in launching new products that are in development, but also invest in that research and development S-curve for products that might be two, three, five years away.

To do that will require us to not only spend money on R&D and experiments, but also grow our team on the engineering, research and development and production sides. The funding will allow us to do all those things.

Q – So this isn’t strictly about the next product, but it’s about a roadmap for the future?

A – Yes, it’s about that product vision. Obviously we’re highly focused on step 1 and the next thing, but there are those investments we have to make now that take one, two, three, four years to mature, so this lets us do all those things in parallel, which is a flexibility that is not super common to have in a startup; that longer-term focus.

One of the reasons we’re really excited about this is that we can have both the short- and the long-term focus that traditionally you’re more limited to having in a more established company, where you’ve got that steady cash flow and base, and can plan years ahead instead of months ahead.

Q – What does this say about the confidence of your investors in what you’re planning to do?

A – It’s been great. Intel Capital was an investor in our Series A round in 2013, so they’ve been following us along for several years now, and they’ve seen that whole progression. They’ve seen the execution on the first product, and ultimately, have seen how far we’ve come with the new products that are in development.

We’re highly, highly excited about that roadmap, so it’s a great vote of confidence to have them provide this level of investment in the company.

Q – What can you tell me about how this round came about?

A – We initially had planned to raise money a bit later in the year. We started having some conversations a few months ago, kind of previewing what we were doing, and the vision, to a few different folks. It was really a small handful of folks. And we ended up having a lot stronger interest than I think we expected.

We had a number of potential investors who were interested in the company, and ultimately we started spending time with those teams, getting to know the partners we’d be working with; the alignment of our vision with their interests and so on.

And ultimately, out of that process, this investment led by Intel, Amazon and Fidelity was what emerged as being really the right choice for us.

In summary, it was a bit earlier than we expected to do this, but there was just such a great opportunity and good alignment with the investors and what we wanted to do, that we felt there was no sense in waiting, and we’d do this now and ultimately move faster because of that.

Q – I’ve seen reports that you’re planning to double your headcount over the next year. Is that the plan?

A – We’re kind of projecting forwards from the last couple of years. A year ago, we were a little over 50 people; we’re well over 100 now, and we anticipate continuing to grow quickly going forward. We don’t have exact numbers for a year from now, but something in that ballpark would be about right.

Q – Is most of that growth likely to be happening here in Waterloo Region, or at the new San Francisco office?

A – The vast majority is here. We are building a sales, marketing and business development team in San Francisco, but it’ll be quite small in comparison to our overall size here, so that the vast majority of the growth will be happening here.

Q – Will these be mostly R&D and engineering-related positions?

A – Exactly, yes. It’ll be engineering, research and development, production, manufacturing engineering – generally all very technical roles. A bit of product, as well. That’s the bulk of it, because the marketing, BD, sales-channel roles tend to fall more in San Francisco, with technical roles here.

Q – Is all of this pointing to the world post-smartphone? Is that where we’re going with all of this?

A – I think we’ve always been interested in that evolution. If you look back over the past few decades of computing, we’ve had maybe three or four different paradigms, going back to the mainframe computers we had in the 80s, to the personal desktop computers in the 90s, to laptops, to tablets and phones that we have today.

So we’ve had these big transitions that have defined decades of computing. We think wearable devices and wearable computers is that next big form factor, post-mobile. And ultimately seeing that trend of growth on one hand and miniaturization on the other hand, and increased frequency of use – going from the mainframe days, where you went from once a week using your computer to using your phone 300 times a day today – we see both of those continuing. And I think the answer to that, to those intersecting curves, is wearables.

Ultimately, we’re interested in this whole idea with wearable computing, of how do we merge digital information with our daily lives, and us as people, and bring those two very closely together in ways that are symbiotic; that we can really integrate that information and connectivity into our lives and let us be more effective in the world, or let us do things we couldn’t do before.

That’s really what we’re focused on.

Q – I read the piece by Nabeel Hyatt from Spark Capital. He basically said you had three doors you could have gone through, the first two of which would have involved building on the Myo and more incremental change. But you chose the third door, the more risky and ambitious route, and to do something completely different. What can you tell me about what went into that decision?

A – We’ve got big ambitions, and I think we have from Day 1. There’s a particular vision of what we think the future should look like, and ultimately, while risky, in many ways we’re swinging for the fences here, and want to execute on a vision, not sacrifice against that.

I don’t want to say in hindsight that it was easy; it’s never easy to tear away from the easy choice. But it wasn’t actually that hard at the time. We have a strong conviction in where we want to go, and we felt like, while full of technical and market and all kinds of other risks with this new direction, the payoff in the end is that we can build something that’s truly category-creating, that could have a huge impact on the world, we think.

We’re not there yet; we’ve got a long way to go to figure out if we made the right choice, but I think we’re headed in the right direction, and ultimately feel confident that that bigger bet was the way to go.

Our interest here is not in building a $10- or $20- or $30-million a year business. The choice is really, do we build an iterative version; do we continue to grow year-over-year and build an interesting, smallish company, or do we build something that could be a billion-dollar-a-year revenue company, or beyond?

It seemed like the third choice in that example (that Hyatt cited) was really the path that would get us there, and the only path that would get us there. I think that ruled out options 1 and 2 immediately.

Q – It’s a pretty common criticism of Canadian tech – deserved or not – that too many companies at your stage exit through acquisition. This round seems to suggest you’re digging in to build Thalmic into a really a big company.

A – We’ve got the resources now to do just that, so that’s certainly the plan.

Q – What are you able to tell me about the timing of your next product release?

A – Unfortunately, nothing today. We’re not announcing any details on that.

Q – Presumably, you’ve learned quite a bit as a CEO about building a tech company since your first big raise in 2013. How are you a different CEO today to the one you were three years ago?

A – I think the main point is, really, that three years ago, I don’t think I was a CEO.

There’s a difference between being a founder of a tech company and being a CEO. When we were 10 people, 15 people, 20 people in a room, you don’t really need a CEO in the traditional sense. There are the founders of the company, but it’s really hands-on; they’re all in the same room; everyone knows which direction the company is headed. It’s very much lead by example.

At that point I was probably still soldering prototypes of Myo.

Then there comes a time when a company crosses a threshold – I don’t know exactly what employee number that is, but maybe it’s when you’re 40 people, 50 people, maybe 60 people – where I think your job really transitions, for all the founders and not just the CEO, from focusing on those details day-to-day where you’re hands-on with the technology and with the things you’re building, to thinking more about, ‘Now I’m managing a company.’ You go from being a founder to being an executive of a company, where you’ve got to think about communication, about process, about hiring, about performance management, about creating the right culture, setting expectations.

So, it becomes much more about how do we put the right systems in place, and how do we communicate the vision and communicate the plans across the company and make sure everyone’s aligned. Whereas, in the early days, you didn’t really need to do that. It’s obvious, when you’re 10 people in a room, what’s going on.

So, I think after hitting that inflection point – that was some time after the Series A and some time over the last couple of years – your job changes a lot, and it’s just a different set of challenges than you would have faced early on.

Q – What are people likely to be saying about Thalmic Labs three years from now?

A – I hope they’re saying something along the lines of, ‘Wow, I can’t even,’ after they see some of the things we’re working on.

Photo: (Left to right) Thalmic Labs co-founders Stephen Lake, Matthew Bailey and Aaron Grant.