Flip Video: Wrong, Wrong, Wrong And Then So, So Right.

Pure Digital Technologies, the creator of the Flip Video line of digital video recorders, got their payday today: $590 million in Cisco stock, a deal we first reported may be happening a couple of weeks ago.

The San Francisco-based company is well known today for creating extremely small, well designed and inexpensive video cameras that take exceptional video. And the software that comes with the devices provides easy to use tools to edit that video and upload it to the web. But Pure Digital wasn’t always selling hit products – it took seven years for the company to get it right. In the meantime, they launched products that just weren’t quite the right thing at the right time.

The company isn’t young by startup standards – it took its first round of funding in April 2002 from Mike Moritz at Sequoia Capital with a plan of creating $20 disposable digital cameras that people brought back to the store for processing. The camera’s memory would then be wiped and the device resold.

Those cameras weren’t a commercial success because of the unexpectedly quick shift towards cell phone cameras. The Pure Digital Camera, at $20, just wasn’t appealing to enough people.

Next up was a disposable camcorder, with a similar model. You bought the device for $30, shot video, and returned to a store for processing to a DVD (the cameras were then wiped and resold). But the video cameras got atrocious reviews, and it was time to move on to something else. By this time the company had raised and presumably spent more than $28 million in capital.

Then, the seed of something great. Pure Digital still wanted to build a cheap video camera for the masses, but forget the in store processing and hope of reselling the same camera over and over to multiple people. The first “Pure Digital Point & Shoot” video camcorder was released in March 2006 and immediately had some success.

But not enough success. The camera couldn’t take still photos, and the video quality wasn’t as good as what you get from normal point and shoot cameras. They also didn’t play nicely with Macs or most video editing software. The cameras were great for low quality YouTube type videos, but they weren’t going to get the company a half billion dollar liquidity event. Most people just bought a high end video camera, or took quick videos with a point and shoot camera. In June 2008 we compared the Flip to a cheap Canon camera, and the Flip lost the battle.

Still, the camera was selling. $50 million in revenue in 2007, and $150 million in 2008. They created a new category of video camera, priced between $100 – $200, which is now being copied by just about everyone.

And then, nirvana.
In November 2008, just a few months ago, Pure Digital released the Mino HD, and it is a perfect device. It weighs just 3.3 oz and takes stunning 1280 x 720 high definition video. It handles low light well and sound quality is great. It works with Macs. The editing software that comes embedded on the camera is easy to use. And best of all, there are no cords at all. Recharge the internal battery and access video via a USB connection.

Today Flip says they have 20% or so of the total camcorder market (which doesn’t include point and shoot cameras with a video feature). All product design is done in house in San Francisco, they don’t even outsource industrial design of the beautiful little gadgets.

The Company That Shouldn’t Have Happened

I spoke with Sequoia Capital partner Mike Moritz earlier today about his decision to invest in Pure Digital way back in 2002. It wasn’t easy, he said, to invest in a company that intended to “drive straight into the radiator grill of huge Japanese and Korean electronics companies,” but added that Sequoia like to invest in things that no one else would consider prudent. In later funding rounds Benchmark Capital, Crescendo Ventures and others joined the party, but even then it wasn’t clear that Pure Digital would eventually find success. Consumer electronics is a tough business.

Moritz says serious conversations with Cisco started last Fall. Earlier discussions with Sony had flatlined over price, but he says the company was willing to continue to fight independently, too. They would have had to raise another round of financing, perhaps as much as $50 million, to expand sales significantly outside of the U.S. Whether that was a bluff or not we’ll never know. But Cisco took the bait, and now owns the company. And with their distribution assets, getting Flip cameras into new markets won’t be a problem. Let’s just hope that having a huge corporate parent won’t stop Flip from innovating.