Fuhu

What did it do?

Fuhu was an El Segundo-based company that made the Nabi range of tablets designed for children. The Android tablets were sold with child-specific software, parental controls and rubber bumpers against knocks. In 2013 the company topped Inc. magazine's list of the fastest-growing companies in the United States.

Why did it shut down?

The profit margin per tablet could fall as low as $5, and the company tried to make its profit from accessories. In 2014 and 2015, as Apple, Samsung and Amazon multiplied their child-friendly tablets, demand for Nabi slowed. The Nabi Dream Tab, of which 150,000 units were ordered, was a commercial failure, leaving the company with surplus stock and a large debt to its manufacturer Foxconn. In November 2015 shipments to major retailers were cancelled. When a lender collected a $6.5 million debt and too little capital remained, the company filed for Chapter 11 in December 2015.

The story

For the 2011 holiday season Toys “R” Us ordered 10,000 Nabi tablets from Fuhu. Delivered a week before Christmas, the tablets sold out within two weeks. It was the start of a story that opened the door to a market for children's tablets, and then saw it swiftly close.

Fuhu was founded in 2008 by Robb Fujioka and the brothers John and Steve Hui; the company's name came from the first two letters of the founders' surnames. John Hui, a co-founder of eMachines, advised staying away from hardware because of its low margins and developing only software. In its early years the company built software such as the Fooz Kids platform for children's safe internet use. In mid-2011, when its software licensing partner Foxconn asked for ideas for a surplus of low-cost tablets it was holding, Fujioka and CEO Jim Mitchell set that advice aside and designed their own tablets.

The partnership with Toys “R” Us was short-lived, but Fuhu developed the Nabi 2 with a $10 million loan. Selling 750,000 units through Walmart, Best Buy and Target, the tablet lifted the company's 2012 sales to $117.9 million. In 2013 more than 2 million devices were sold, revenue rose to $196 million, and Fuhu took the top spot on Inc. magazine's list of the 5,000 fastest-growing companies in the United States. Experts talked of a valuation above $1 billion at a stock market flotation.

The break came when the big players entered the market. In 2014 and 2015 Apple, Samsung and Amazon multiplied their child-friendly options. The Nabi Dream Tab, of which 150,000 units were ordered, did not sell; only 4,000 units of the large-screen Nabi Big Tab were sold in the 2014 holiday season. A class action was filed over the tablets' overheating batteries. In November 2015 Bloomberg reported that Fuhu had cancelled shipments to major retailers because of a dispute with Foxconn; according to Inc., the company owed Foxconn between $60 million and $100 million. A Chapter 11 filing followed on 7 December 2015, and Mattel bought the company at auction for $21.5 million. Fuhu closed on 9 January 2016.

Fuhu's story shows how fragile rapid growth can be in a low-margin hardware business.

Lessons for founders

• In a hardware category that giants can easily copy, find a way early to protect your margin with software and content.
• Building up a large debt to a single contract manufacturer locks up your entire supply chain at the first crisis.
• Before placing a large stock order for a new product, measure real demand with a small batch.

Sources

1. Fuhu (Wikipedia)
2. Fuhu Holdings files for Chapter 11 bankruptcy protection (Reuters, 2015-12-07)
3. The Maker of Nabi Kids' Tablet Is Canceling Orders (Bloomberg, 2015-11-13)

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