Power

Inside the collapse of Daqri's $300M bet on AR

Former employees detail the company's rocky path to failure.

A man tries on a Daqri AR helmet

Daqri burned through $300 million trying to invent the future of computing, only to end up in an asset sale.

Photo: Los Angeles Times via Getty Images

Everything went wrong for Daqri. The startup rode a wave of augmented reality hype and about $300 million in funding to a series of half-baked products before failing spectacularly and shutting down last year.

One of Daqri's last remnants was recently acquired by Snap: The company confirmed to Protocol that late last year it took on certain Daqri assets and about two-dozen employees, who now work in the company's newly opened Vienna office under the leadership of former Daqri CTO Daniel Wagner. Snap didn't disclose the purchase price, but the timing lines up with a $34 million acquisition disclosed in its annual report to shareholders.

Get what matters in tech, in your inbox every morning. Sign up for Source Code.

In interviews, more than 10 former employees detailed Daqri's demise. In its decade of existence, the company built a retro-futuristic augmented reality helmet with a hefty $15,000 price tag, used fancy videos to sell the world on visual computing, and acquired a series of other startups in offices around the globe, only to see it all slip away when its glossy AR dreams collided with reality. It's a story that anyone working in the AR and VR space should take to heart, if only to avoid a similar downfall.

The early days, and a big pivot

Daqri launched in 2010 as an early mobile AR company that used QR codes and real-world objects to create interactive experiences on smartphones. Its first projects included a multiyear partnership with Crayola, which used Daqri's technology to turn coloring book pages into digital 3D objects on your phone.

The company also worked on a platform to let others develop their own AR content and experiences, but executives quickly realized that they were way too early for consumer AR. In 2014, a Kickstarter campaign for Daqri-developed interactive blocks attracted fewer than 200 backers, which was enough to fund the project but hardly a critical mass.

That's when company executives decided to change course and focus on businesses instead of consumers. It's also when Daqri started to get massive cash infusions from Tarsadia Investments, a Southern California-based private equity company. And, according to a number of its former employees, it's when a lot of Daqri's troubles started.

Former employees who talked to Protocol all did so on the condition of anonymity for fear of retaliation, including from the company's main funder, which still controls legal entities connected to Daqri. Some also expressed concerns about getting singled out at their current place of work for talking to the media.

As one might expect, any company that ends up laying off most of its employees will leave some with ill feelings. It's also worth noting that not everyone who Protocol talked with was critical of Daqri. Depending on their time of employment, position and location, some praised Daqri, its leadership, and job perks that included unlimited vacation, yoga classes and nap rooms, as well as frequent offsite events and parties.

Daqri's founding CEO Brian Mullins, his successor Roy Ashok and its main investor Tarsadia did not reply to requests for comment.

From a $5 million valuation to $275M in funding, with strings attached

There aren't a lot of public disclosures about Daqri's funding, but a lawsuit of a co-founder, who alleged that he got cheated out of his fair share, reveals that the company was valued at $5 million in an asset transfer in May 2013. The company announced a $15 million fundraise later that year, and Tarsadia went on to prop up Daqri with a steady flow of cash that had amounted to a reported $275 million by 2017. Sources told Protocol the total amount put into the company was in the $300 million range.

Tarsadia had made several bets in the pharmaceutical space and saw in Daqri a chance to invest early in a nascent technology that could be transformative to the workplace. Daqri employees with knowledge of the relationship told Protocol that Tarsadia was anything but a typical startup investor. Instead of taking a minority stake, the private equity company bought out Daqri. "None of the employees really owned any part of the company," said a long-time senior employee.

The ownership structure was problematic, multiple former employees told Protocol. "The incentives were wrong," said one former employee. "Everyone had already cashed out."

Daqri's executives were left without power, effectively turning them into subordinates. "It was a group of middle management that was reporting to the investors," the former senior employee said. Tarsadia executives are even said to have taken part in Daqri's executive off-sites, which resulted in Daqri's leadership avoiding frank discussions about problems at the company. "The investor was always in the room," the former senior employee said.

A futuristic helmet that remained a prototype

As part of its focus on businesses, Daqri announced the development of a futuristic-looking hard hat with integrated AR glasses in 2014. It was an audacious project that was pitched to construction companies, manufacturers of heavy machinery, and even the U.S. Navy.

The project required a lot of technical expertise so Daqri embarked on a spending spree, acquiring AR software specialist ARToolworks, EEG headband maker Melon, manufacturing startup 1066 Labs and holographic display developer Two Trees Photonics. The company quickly ballooned to around 400 employees from different corporate cultures in six offices in Los Angeles, the Bay Area, Ireland, the U.K. and Austria.

And the technical challenges remained immense. Daqri initially bet on Android to power the helmet, only to change course and switch to Linux soon before the product was supposed to ship in 2016. "A lot of people were unhappy" about that switch, said one employee who worked on the project for multiple years.

Daqri also learned the hard way that you can't develop workplace products exclusively in the lab. The helmet, which cost $15,000, was a highly specialized piece of equipment with sensors like a thermal camera that made for a good sales pitch. Workers in the field on the other hand often cared about much simpler features, like the ability to see what's behind them. Or they didn't want to be bothered with technology at all and found all the bells and whistles alienating. "We received pushback for the same exact thing that gave us orders," said the former employee who had been working on the project.

On top of that, Daqri had trouble obtaining the necessary certifications needed to use the helmet in industrial workplaces. "It was a product that was never finished for scale deployment," said the former senior employee. "I wouldn't say that it was functional," said the former employee who worked on the project.

Another employee, who was with the company about four years, had an even franker assessment: "None of it was real."

Marketing as a core part of the business

You wouldn't have known about any of the issues from looking at Daqri's marketing. The company received favorable coverage from a number of publications. It also churned out a steady stream of polished videos on its own, showing Daqri's helmet in a variety of industrial settings, on a Navy ship, and, inexplicably, worn by a man donning a jet suit, Iron Man-style.

"There were people making videos all the time," said the former senior employee. "It absolutely was showmanship. That was part of the company DNA."

"That became a core part of the business, that marketing arm," said another employee.

In conversations with Protocol, multiple employees attributed some of Daqri's heavy focus on marketing and promotion to its proximity to Hollywood. The company's Los Angeles headquarters was in the Los Angeles Center Studios facility, where it occupied two floors, including one that used to house the set for AMC's "Mad Men" and where decorations included movie props.

Daqri's relentless marketing wasn't just about selling AR to the world. It was also meant to woo the investor-owner, and ultimately convince staffers of the company's potential as well. In one instance, Daqri staff even produced a video for an internal holiday party that portrayed senior executives in the future, talking about how big of a success the company had become.

It worked: While some were skeptical about aspects of Daqri's technology, many bought into the vision of its founders. "We didn't even see the demise coming," said one former employee.

Layoffs, spin-offs, 'Hunger Games' jokes

That demise started around the beginning of 2017, when it became increasingly clear that Daqri's smart helmet wasn't going anywhere. In March 2017, Business Insider reported that 80 employees worldwide would be laid off. It resulted in the closing of two offices, according to a former employee.

Additional layoffs followed every couple of months. In Los Angeles, one of the two office floors quickly emptied and was subleased to another company. Former employees said that the atmosphere at the company quickly changed, with some criticizing the executive leadership for not handling the layoffs well.

Staffers who were let go were forced to leave the office as quickly as possible, at times without having a chance to say their goodbyes. One employee who stayed on well into 2018 said that it had turned into the most toxic workplace of their career. Another employee recalled that the team started to make "Hunger Games" jokes. "It was very stressful," that employee said. "The company was just hemorrhaging people."

At about the same time, the company shifted its efforts from the smart helmet to a simpler set of AR glasses that retailed for $5,000 — more than Microsoft's HoloLens AR headset, which first went on sale for $3,000 in 2016. Daqri's leadership was swapped out, with Chief Product Officer Roy Ashok taking over as CEO, and founding CEO Brian Mullins being forced to leave.

By this point, investor-owner Tarsadia was already looking for ways to minimize its losses. Instead of pouring in more money, Tarsadia proceeded to spin off some of the company's acquisitions into separate entities. The Two Tree Photonics team, which had started to develop AR for car windshields while at Daqri, incorporated as Envisics. A team headed by early Xbox architect Seamus Blackley, who had joined Daqri in March 2017, got spun off into an R&D company called Pacific Light & Hologram.

Daqri's staff dwindled in subsequent months, and the company ultimately shut down operations and let go its final staff in September 2019. Its office furniture was auctioned off soon after, and its patent portfolio went up for sale earlier this month. The lawsuit of Daqri's co-founder against the company is still ongoing and is expected to go before a jury soon.

Lessons from Daqri's failure

Asked why Daqri failed, former employees offered a range of opinions. Many of them cited excessive spending fueled by big checks, a lack of direction, and the inability to pivot from projects in time. They also cited the role of the owner-investor and failures of leadership.

But ultimately, the demise also has a lot to do with factors that aren't all that unique to Daqri: Making hardware is difficult, as is inventing products for a use case nobody yet wants. That's a problem that AR companies like Magic Leap face as well. The Florida-based startup, which raised over $2.6 billion in funding to date and is currently looking for more, is also known for blue-sky marketing that aims to not just sell its product, but AR in general.

Like Daqri, Magic Leap and Microsoft have also more recently pegged their hopes for AR's commercial success to enterprise use cases, betting that companies will buy hardware at price points out of reach to the average consumer. But as Daqri shows, selling to big companies, and getting AR to work in industrial contexts, can be extremely challenging as well.

And while Daqri may have failed, it may still play a significant part in the future of AR. "Daqri was also the beginning of a lot of people's careers," said an employee who went on to work for a different AR company. If anything, alumni could help other companies avoid the same mistakes.

Lessons learned from Daqri's failure may be valuable to any company looking to build AR products, including Snap. The Vienna team formed from Daqi's wreckage is said to be working on AR software for the company.

Software, one might add, that could ultimately also power a future AR version of the company's Spectacles wearable — just don't expect it to look like a helmet.

Enterprise

The Uber verdict shows why mandatory disclosure isn't such a bad idea

The conviction of Uber's former chief security officer, Joe Sullivan, seems likely to change some minds in the debate over proposed cyber incident reporting regulations.

Executives and boards will now be "a whole lot less likely to cover things up," said one information security veteran.

Photo: Al Drago/Bloomberg via Getty Images

If nothing else, the guilty verdict delivered Wednesday in a case involving Uber's former security head will have this effect on how breaches are handled in the future: Executives and boards, according to information security veteran Michael Hamilton, will be "a whole lot less likely to cover things up."

Following the conviction of former Uber chief security officer Joe Sullivan, "we likely will get better voluntary reporting" of cyber incidents, said Hamilton, formerly the chief information security officer of the City of Seattle, and currently the founder and CISO at cybersecurity vendor Critical Insight.

Keep Reading Show less
Kyle Alspach

Kyle Alspach ( @KyleAlspach) is a senior reporter at Protocol, focused on cybersecurity. He has covered the tech industry since 2010 for outlets including VentureBeat, CRN and the Boston Globe. He lives in Portland, Oregon, and can be reached at kalspach@protocol.com.

Sponsored Content

Great products are built on strong patents

Experts say robust intellectual property protection is essential to ensure the long-term R&D required to innovate and maintain America's technology leadership.

Every great tech product that you rely on each day, from the smartphone in your pocket to your music streaming service and navigational system in the car, shares one important thing: part of its innovative design is protected by intellectual property (IP) laws.

From 5G to artificial intelligence, IP protection offers a powerful incentive for researchers to create ground-breaking products, and governmental leaders say its protection is an essential part of maintaining US technology leadership. To quote Secretary of Commerce Gina Raimondo: "intellectual property protection is vital for American innovation and entrepreneurship.”

Keep Reading Show less
James Daly
James Daly has a deep knowledge of creating brand voice identity, including understanding various audiences and targeting messaging accordingly. He enjoys commissioning, editing, writing, and business development, particularly in launching new ventures and building passionate audiences. Daly has led teams large and small to multiple awards and quantifiable success through a strategy built on teamwork, passion, fact-checking, intelligence, analytics, and audience growth while meeting budget goals and production deadlines in fast-paced environments. Daly is the Editorial Director of 2030 Media and a contributor at Wired.
Climate

Delta and MIT are running flight tests to fix contrails

The research team and airline are running flight tests to determine if it’s possible to avoid the climate-warming effects of contrails.

Delta and MIT just announced a partnership to test how to mitigate persistent contrails.

Photo: Gabriela Natiello/Unsplash

Contrails could be responsible for up to 2% of all global warming, and yet how they’re formed and how to mitigate them is barely understood by major airlines.

That may be changing.

Keep Reading Show less
Michelle Ma

Michelle Ma (@himichellema) is a reporter at Protocol covering climate. Previously, she was a news editor of live journalism and special coverage for The Wall Street Journal. Prior to that, she worked as a staff writer at Wirecutter. She can be reached at mma@protocol.com.

Entertainment

Inside Amazon’s free video strategy

Amazon has been doubling down on original content for Freevee, its ad-supported video service, which has seen a lot of growth thanks to a deep integration with other Amazon properties.

Freevee’s investment into original programming like 'Bosch: Legacy' has increased by 70%.

Photo: Tyler Golden/Amazon Freevee

Amazon’s streaming efforts have long been all about Prime Video. So the company caught pundits by surprise when, in early 2019, it launched a stand-alone ad-supported streaming service called IMDb Freedive, with Techcrunch calling the move “a bit odd.”

Nearly four years and two rebrandings later, Amazon’s ad-supported video efforts appear to be flourishing. Viewership of the service grew by 138% from 2020 to 2021, according to Amazon. The company declined to share any updated performance data on the service, which is now called Freevee, but a spokesperson told Protocol the performance of originals in particular “exceeded expectations,” leading Amazon to increase investments into original content by 70% year-over-year.

Keep Reading Show less
Janko Roettgers

Janko Roettgers (@jank0) is a senior reporter at Protocol, reporting on the shifting power dynamics between tech, media, and entertainment, including the impact of new technologies. Previously, Janko was Variety's first-ever technology writer in San Francisco, where he covered big tech and emerging technologies. He has reported for Gigaom, Frankfurter Rundschau, Berliner Zeitung, and ORF, among others. He has written three books on consumer cord-cutting and online music and co-edited an anthology on internet subcultures. He lives with his family in Oakland.

Fintech

Wall Street is warming up to crypto

Secure, well-regulated technology infrastructure could draw more large banks to crypto.

Technology infrastructure for crypto has begun to mature.

Illustration: Christopher T. Fong/Protocol

Despite a downturn in crypto markets, more large institutional investors are seeking to invest in crypto.

One factor holding them back is a lack of infrastructure for large institutions compared to what exists in the traditional, regulated capital markets.

Keep Reading Show less
Tomio Geron

Tomio Geron ( @tomiogeron) is a San Francisco-based reporter covering fintech. He was previously a reporter and editor at The Wall Street Journal, covering venture capital and startups. Before that, he worked as a staff writer at Forbes, covering social media and venture capital, and also edited the Midas List of top tech investors. He has also worked at newspapers covering crime, courts, health and other topics. He can be reached at tgeron@protocol.com or tgeron@protonmail.com.

Latest Stories
Bulletins