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Augmented Reality Experiences
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Software & Hardware
United States
Lack of Funds
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Brian Mullins, Gaia Dempsey, Philip Tolk
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Why Did Daqri Shut Down?

Daqri was an AR (augmented reality) startup that shut down operations in 2019 and sold its assets to Snap. The AR startup ran out of money despite managing to raise $275 million from two private equity rounds led by Tarsadia Investments.

The fate of Daqri wasn’t unique. Other extremely well-funded AR startups like Osterhout Design Group and Meta, which raised $73 million from venture capital funds and Tencent, were forced to sell their assets after running out of cash.

There is a view in startup circles that the best innovators can create demand and grow previously nonexistent markets. After all, the innovation and marketing efforts of companies like Microsoft and Apple were the main drivers behind the creation and amazing growth of the PC and smartphone markets. 

Yet, the above mentioned AR startups didn’t manage to achieve the same feat with the AR market despite their access to capital. The AR headset remains a niche technology that hasn’t been widely adopted by consumers.

Daqri’s History

The company was founded in 2010, and its first product was created in partnership with Crayola to utilize QR codes to create an AR experience on smartphones. It turned coloring pages into interactive 3D objects on the user’s phone.

Daqri also ran a Kickstarter campaign to create an educational AR app. However, while marginally successful, the campaign didn’t get a lot of traction and the team realized they were very far away from widespread consumer adoption of AR technology.

Because of this, the company made a pivot and moved its focus on AR tech for enterprise clients.

Daqri Product

The Daqri Smart Helmet used to sell for $15 000. Its main target market was manufacturers.

In 2013, the company was valued at $5 million when it attracted the attention of Tarsadia. The private equity company had made bets in the pharmaceutical space and saw an opportunity in Daqri to invest in nascent tech that would revolutionize the manufacturing workspace.

The company embarked on the ambitious task to produce an AR helmet that was pitched to construction companies, heavy machinery manufacturers, and even the US Navy. To acquire the technological know-how, Daqri went on an acquisition spree and bought multiple startups including ARToolworks, 1066 Labs, Melon, and Two Trees Photonics.

The acquisitions meant that the employees of the business grew in numbers very fast - about 400 people were working for Daqri in multiple offices across the US and Europe. Of course, this meant that the burn rate of the company increased a great deal. By 2017 the cash that flowed from Tarsadia to Daqri amounted to more than $275 million.

Lack of Product-Market Fit

While the equipment Daqri was building was certainly an impressive piece of tech, it wasn’t clear that the market needed it. The helmet had shiny features like thermal cameras to justify its hefty price tag during a sales pitch, but the workers that were meant to use the equipment weren’t overly enthusiastic about using the technology.

This pushback from the end-users heavily suggested the product didn’t solve any real market need. This is the most common reason for startup failure, and the reason why validating your idea and achieving a product-market fit is the most important thing for an early-stage startup regardless if you are bootstrapping or if you have $300 million in funding.

Without PMF, it’s almost impossible to achieve sustainable growth regardless of any polished marketing videos. While these marketing efforts were partly an attempt to jump-start the growth of the AR industry, it’s a virtual certainty that spending a lot of money on promotions is a huge waste before product-market fit.

Former employees argued that the focus on showmanship and selling the vision was done partly for the customers, but also partly for the investor and employees – to help them believe in the future success of the company.

When belief collides with objective reality, however, the latter always wins. In 2018 it became clear the helmet wasn’t generating enough traction and Daqri started laying off employees to reduce costs. The company tried to pivot to simpler AR glasses that sell for $5000. However, the product didn’t manage to win market share over Microsoft’s HoloLens which sold for $3000 and were launched in 2016.

Daqri Headset

The main revenue driver of Daqri came from Two Trees Photonics, a small UK startup that Daqri had acquired in 2016. Two Trees were building holographic display technologies and selling them to enterprise clients, namely car manufacturers – a product that had PMF, but that served a smaller market. In 2018, the division was spun out into a separate company with the name Envisics.

The AR helmet and glasses, however, continued to generate losses, which forced the startup to wind down operations and eventually sell its remaining assets to Snap for an unconfirmed sum of $34 million. Daqri CTO Daniel Wagner along with two-dozen Daqri employees started working in Snap’s office in Vienna.

Wrong Incentive Structure

Tarsadia’s investment into Daqri over the years was very atypical for a tech startup. VC funds and angel investors normally acquire a minority stake in a company, which means that the founders (and often early employees) are highly invested in the success of the business by being the major shareholders. This way the interest of the main decision-makers and the investors are aligned.

Tarsadia, however, bought out Daqri. This meant that Daqri’s executive team had already cashed out of the business and wasn’t highly incentivized to fight for its survival. This is a very questionable ownership structure for a startup that still hasn’t managed to become a self-sustaining business and hasn’t found a product-market fit.

Market Timing

To be fair, however, it’s hard to blame the fate of the project on its leaders or even investors. Tech giants like Microsoft that out-competed startups like Daqri in the space mostly did so because of their deeper pockets.

For example, Magic Leap raised over $3 billion, and both Magic Leap and Microsoft are betting on enterprise clients just like Daqri. Moreover, Magic Leap’s marketing is attempting to sell AR as a whole, not just its products, which suggests that the adoption rates of the technology aren’t as high as they would like. In reality, it’s quite likely that these projects are still burning money.

Ultimately, market timing is crucial, and it’s extremely hard to jump-start a whole new industry. AR and VR might be the future, but this future is not here yet. Before the AR market can grow rapidly, the capabilities of the tech and the needs of the users need to align. For the sake of these extremely ambitious projects, let’s hope that this moment comes sooner rather than later.

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