Livescribe Gets $39 Million to Prove the Power of the Smart Pen

9/9/10Follow @wroush

Smart pens, which can record handwritten notes and drawings and transfer them to a computer for storage, searching, and sharing, have never exactly written their own ticket. The technology behind the devices was first developed in the late 1990s by Swedish firm Anoto Group, and has since been licensed to more than 250 companies around the world for use in record-keeping systems in airports, hospitals, and many other settings. But until Oakland, CA-based Livescribe came along, no smart pen maker had won over large numbers of students, business users, or average consumers.

Now that Livescribe has shown it has a foothold in those markets—selling nearly half a million of its Pulse and Echo smart pens since 2008—venture firms are betting that the company has the winning formula for digitizing note-taking, and are lining up to give the company a final boost toward mass-market success. Livescribe said today that it has raised $39 million in its third and presumably last round of venture funding, bringing the company’s total financing to $100 million.

New investor Crosslink Capital of San Francisco was the biggest contributor to the round. San Mateo, CA-based Scale Venture Partners was second in line, and was joined by Qualcomm, Translink Capital, Presidio Ventures, and Keating Capital, as well as existing investors VantagePoint Venture Partners, LionHart, and Aeris Capital. Crosslink Capital co-founder Michael Stark and Scale managing director Rory O’Driscoll have joined Livescribe’s board. VantagePoint remains the company’s largest investor.

Livescribe Echo smart pen“This support from major strategic investors is a great acknowledgment of our success to date and the opportunities ahead,” said Livescribe CEO Jim Marggraff in a statement. The company said it plans to use the new funds to improve the way data from its pens flows into existing communication and collaboration platforms, and to expand to new markets (it currently sells the pens only in the United States, Canada, the United Kingdom, South Korea, Germany, and Australia, although they’re available in 21 additional countries through Amazon).

But what are the chances that Livescribe’s latest push will finally help high-tech pens take off in a big way? At a time when tablet computing, with its promise of paperlessness, has burst onto the world in a huge way in the form of Apple’s iPad, are students, business users, and other consumers really looking for technologies that will help keep old-fashioned pen-and-paper note-taking alive?

I put those questions yesterday to O’Driscoll, who led Scale Venture Partners’ investment in Livescribe. He shared a number of interesting arguments for why Livescribe’s version of “pen computing” is poised to catch on among more business professionals (who already make up about 70 percent of the company’s customer base) and students (the other 30 percent).

1. Livescribe already has a strong track record. The company’s first product, the Pulse, came out in March 2008, and included an infrared camera for tracking the pen’s position on a page, a small OLED display, a USB connector, and—unlike most other digital pens—a microphone and internal flash memory for recording audio notes and a speaker forplaying them back. (Oh, there’s also a ballpoint pen in there for actually writing.) An improved version, the Echo, came out this July, featuring more memory. Livescribe has found a healthy population of early adopters for both of the devices.

“We’ve known the company for three-plus years, since before the product was on the marketplace, and the reason we invested, at a big-picture level, is that they’ve done much, if not all, of what they said they’d do,” O’Driscoll says. “They pulled off something that’s pretty darn hard to do, which is to get a consumer electronics product into the marketplace, get it shipping, and get it used not by tens of thousands but by hundreds of thousands of users…We think that’s the tip of the iceberg, in terms of how big it can be.”

2. Livescribe’s devices are different from the dozens of preceding digital pens, and are about to get more powerful. “The voice-pen synchronization, and the ability to upload your notes to your computer, and from there to the Web if you want, is a nice combination, and that’s fueled the growth so far,” says O’Driscoll. “What’s going to fuel the growth over the next three to five years is that it’s going to link to your core business productivity tools. You could type a couple of commands and have it sync to your e-mail, which makes notes actionable in real time.”

3. The price is right, and it’s going lower. The basic 2-gigabyte Pulse pen costs $129.95, and the basic 4-gigabyte Echo pen costs $169.95. “It doesn’t take a genius to figure out where you go from $129 downward,” says O’Driscoll. (I took this to mean that Livescribe’s pens will eventually be available for $99.) “That’s the kind of price where the consumer can purchase it—and for that you get a massive productivity and learning tool.”

4. Smart pens enhance tablet computers, rather than competing with them. The implications of the iPad for Livescribe was “one of the questions we talked a lot about [before investing], but actually I think they are complementary,” says O’Driscoll. “The iPad is an awesome consumption device, but only a decent input device. We have people in our shop who use the iPad for input, writing small cryptic notes to themselves, but for in-depth notes it’s very hard to use in real time. When you see some of the things these guys [at Livescribe] are doing to integrate notes, voice, and other file types over the next 12 months, you’ll see what a record you can develop using a Livescribe pen. It will be so much more compelling, if fidelity is important to you…And if you want to send your notes to the iPad, have at it, they are developing that too. It’s all part of the trend away from the laptop as the core computing device.”

Maybe O’Driscoll is right about all of that. But $39 million is still a major chunk of cash, at least in the infotech world, where many companies are getting by on smaller rounds these days because they’re working in areas like Web software with much lower capital requirements. My last question for O’Driscoll was why Livescribe needed that much money.

“It’s a new product, it’s a new hardware product, it’s a new hardware product in a new category area, and its primary mode of distribution is retail,” he answered. “All of that means you need the capital to aggressively attack the marketplace and do distribution right.” Scale Venture Partners, which specializes in helping mid-stage companies move from early sales success to massive growth, hopes its contribution to the Series C round will help keep the company going until it breaks even, O’Driscoll says. “We wanted them to be able to clear the next two-plus years of retail sales, so they’re not driven back to the market to raise money again until the product is validated and has proven its success. We anticipate that the next funding would be through an IPO.”

Wade Roush is a contributing editor at Xconomy. Follow @wroush

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