AI Kids Toys

Kids Toys

Technology is now the primary driver of change (and value) in the kids’ toy industry. What was once a market defined by dolls, action figures, and building sets is now increasingly shaped by smart devices, AI-enabled companions, and deeply interactive digital experiences. The numbers tell the story: global demand for tech-enabled and AI-powered toys is rising far faster than for traditional ones, bringing a new set of expectations for both kids and parents.

This week, we will reflect on the biggest technological breakthrough for kids toys and dig into the regulatory, technical, and business hurdles that could define the future of AI-powered play.

‍A History of Iconic Tech-Enabled Toys: Key Learnings‍

‍Notable Failures

‍Integrating new technologies into kids’ toys has not been without its hiccups over the last 30 years.

‍Furby (October 1998): Tiger Electronics' Furby was the first mass-market glimpse into tech-enabled smart toys for children. This owl-hamster hybrid had an electric motor system, simulating movement and the toy’s speech would gradually evolve from its native fictional language, “Furbish” into English through pre-programmed vocabulary and interactions - creating the illusion of learning and growth. The toy was immensely successful; it sold 1.8 million units in its debut year which snowballed to over 40 million sales in its first three years. Furby drove up Hasbro's Games segment revenue, accounting for 24% of segment sales in 1999 (7% in 1998).

However, Furby's technology sparked unprecedented government concern. The NSA banned the toy from Fort Meade in 1998, fearing its infrared communication and apparent "learning" capabilities could compromise classified information. The FAA issued alerts warning that "Furbys should not be on when the plane is below 10,000 feet".

Despite Hasbro’s reassurances that Furbies could not record or transmit sensitive data, the “Furby Alert” became a cultural touchstone that swiftly triggered national security debates. Predating formal children’s privacy frameworks, this controversy set important precedents for how “smart” toys would later be scrutinized by government agencies and parents concerned about surveillance capabilities.‍

‍Hello Barbie (2015): Nearly 20 years later, Mattel unveiled Hello Barbie, a Wi-Fi-connected doll that could hold "Siri-like conversations" with children, using cloud-based speech recognition to analyze and respond to kids' statements. Even before launch, Hello Barbie triggered unprecedented controversy. Privacy advocates worried about a toy that recorded children's conversations and transmitted them to cloud servers for analysis.

These concerns were well-justified. Research demonstrated that Hello Barbie was vulnerable to hacking, allowing potential access to Wi-Fi network names, account IDs, and audio files. Bluebox Security revealed additional vulnerabilities that could allow hackers to intercept encrypted conversations between the doll and servers. These privacy concerns became lawsuits, which highlighted a fundamental flaw: the doll could record conversations from any child playing with it, creating potential COPPA violations for unregistered minors.

Mattel shipped only 10k units of Hello Barbie compared to the typical 250k units for successful holiday toys and by 2017, quietly discontinued the product and software support (Fairplay). The failure was so extreme that Mattel's next AI attempt (Hello Barbie Hologram) explicitly marketed itself as internet-free and data-collection-free. Hello Barbie became a watershed moment for children's connected toy regulation. The doll's failure demonstrated that COPPA compliance was not enough; parent trust required transparent, local processing and clear data ownership.‍

‍Successes and Key Learnings

‍Despite these well-known controversies, there have been positive and interesting strides in the space too.

‍WowWee's Robosapien (2004) featured 67 pre-programmed functions, could pick up objects, respond to sound and touch, and exhibited genuine personality through grunts, belches, and karate chops. Robosapien sold over 1.5m units in its first five months alone, remarkable for a startup robotics company. By 2007, global sales had reached over 5 million units. Note that the device was “offline” and operated entirely through infrared remote control with no data collection, recording, or internet connectivity. While limited in adaptability and customization, Robosapien’s success demonstrated that personality and character (not just technical sophistication) were crucial for consumer robotics acceptance.‍

‍Anki Cosmo (2016) took advantage of another decade in technological innovation. The palm-sized robot used deep neural networks for object recognition, could map its environment in real-time, and featured an "emotion engine" (with an expressive “facial” display) with dozens of personality variables. Unlike simple programmable toys, Cozmo appeared to develop relationships with users, remembering faces and responding differently to various family members. Anki was commercially successful, selling >1.5m robots (Cozmo and its successor, Vector) and raised >$200m from investors such as Index Ventures and Andreessen Horowitz.

Cozmo’s cloud features and learning capabilities were advanced, but its privacy practices were clear and responsible: images and facial recognition data stayed local, data deletion was straightforward, and the app did not auto-upload photos or audio. Anki followed COPPA guidelines, offered parental controls, and provided opt-outs for sensitive data - keeping privacy risks minimal and transparent. The downfall of the company was purely financial; despite strong revenues and sales metrics, they failed to raise their next round of venture capital funding and Anki did not have the working capital with consumer robotics being a cash-intensive business with thin margins and high support costs.

‍These businesses highlight four key learnings for future tech-enabled toy companies:

1. Technology provides differentiation: Toys succeed when they offer unique, memorable interactivity - whether through engaging personalities, creativity, or educational experiences - demonstrating clear, differentiated benefits for kids.
2. Data privacy is interlinked with trust: Explicit, transparent handling of user privacy is essential to avoid regulatory, parental, and reputational risks. Offline and locally controlled features tend to build greater trust and resilience, while ambitious, cloud-based or AI-powered products require robust, sustainable infrastructure and continuous support to thrive.
3. Trust is influenced by the market: Sustained success depends not just on innovation but on adapting to changing norms - maintaining market and parental trust through consistent safety, compliance, and responsive communication.
4. Poor business models can kill even the best: Even the most advanced, beloved, or innovative tech toys can fail without strong financial fundamentals. Success in this market requires not just great products, but reliable margins, operational efficiency, and the ability to accumulate capital to combat high development and support costs, thin hardware margins, and unpredictable demand.

Headwinds: Adoption, Technical & Regulatory

‍As tech-enabled and AI-powered kids’ toys have gone mainstream over the last decade, the industry is facing rapidly mounting headwinds:

• Adoption resistance: Nearly 46% of parents are hesitant to buy smart toys due to fears over data collection and surveillance devices masquerading as toys. Concerns about high prices, technical complexity, and unclear value further slow adoption, even as the industry posts strong revenue growth.
• Privacy and security concerns: High-profile breaches like the 2015 VTech hack (exposing millions of children's and parents’ data) and the 2017 CloudPets leak (800,000 customer email addresses and passwords, >2 million voice messages) have made regulatory scrutiny and public skepticism a fixture; devices such as “My Friend Cayla” have even been banned as illegal surveillance equipment in some countries.
• Escalating regulatory pressures: The most sweeping regulatory changes have taken place just in the last 12-18 months; in April 2025, the FTC announced the first major update to COPPA in over a decade, introducing stricter parental consent, data retention rules, and security requirements for kids’ toys and platforms, while the EU reached a provisional agreement on new Toy Safety Regulations in April 2025 to include digital product passports and mandatory AI compliance checks (Toy Association).
• Technical and data management challenges: Privacy groups are pressuring manufacturers to build smarter, safer toys by handling more data locally (on-device AI) to minimize risks, but this means higher costs and engineering hurdles. Cases of “toy hacking” and accidental data leaks (e.g., CloudPets) have led to practical shifts in storage and processing, adding yet another burden for companies.

Tech-Enabled Toy Startups are Viable

‍We believe that startups in particular are better positioned than ever to compete with toy giants due to the convergence of advanced technology, accessible manufacturing, and evolving market dynamics:

‍1) Local AI: Edge AI is transforming what is possible in consumer devices. Neural Processing Units (NPUs) are becoming increasingly powerful and energy-efficient, enabling AI processing directly on devices without cloud connectivity (ensuring data privacy). TinyML technology now allows sophisticated machine learning (gesture recognition, adaptation to user behavior) on microcontrollers consuming just milliwatts of power. With this tech, companies can now offer personalized, intelligent, and energy-efficient interactions without collecting sensitive data.

‍2) Hardware prototyping is fast and cheap: Through methods like 3D printing, prototyping can be up to 75% cheaper. Entry-level businesses are able to start with under $500 in equipment and production-quality prototypes that once cost hundreds can now be made for a fraction of that cost. Projects like tscircuits, KiCad, JLCPCB, and PCBWay make PCB design, manufacturing and assembly accessible to everyone from hobbyists to large enterprises. To scale, contract manufacturing has evolved to embrace smaller players, with flexible partners offering services from design assistance to quality control.

‍3) Supply chain efficiencies are accessible to SMBs: AI is being integrated across manufacturing operations from quality control to product design, with startups like Think Digits and Ubivis providing innovative solutions. AI-powered supply chain optimization has become accessible to small businesses through cloud-based platforms for under $20 per month.

‍4) D2C is a viable channel: Retail is no longer necessary to be commercially successful. Major toy companies (Mattel and Hasbro) have validated D2C models. This shift creates opportunities for startups to build direct customer relationships without traditional retail intermediaries.

‍Takeaway: As toys become smarter, more connected, and more deeply integrated into children’s lives, the stakes grow higher than ever for families and founders alike. The next decade is not just about incremental innovation, it is about balancing the magic of play with the realities of privacy, safety, and sustainability. For startups, this is both an opportunity and a mandate: the winners will be those who deliver genuine delight without compromising on trust or responsibility. The future of kids’ toys will be shaped by those who build for smarter, safer play.