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Wednesday, November 15, 2017

uBeam Funded? A Greater Fool Found?


After months of waiting, the day is finally here when uBeam are talking about their next round of funding - and if you want to get a piece of this action yourself, then you're in luck. Given it's such a phenomenal investment opportunity the Venture Capital community, renowned for their desire to see the little guy get a slice of the profits, is going to let you in on the deal. OurCrowd, a crowdfunding investment company who pool money from lots of individual smaller investors, is participating in this round and has sent out a solicitation for you to join in. The entire message is at the bottom of this post, but here are the introductory paragraphs:

OurCrowd is investing in uBeam, a US based company pioneering long-range wireless charging for electronic devices. In an era when consumers are attached to electronic devices, one of the most common pain points is poor battery life. uBeam has developed an innovative solution which enables untethered long-range wireless charging for battery-powered devices. 

We are joined in this round by Andreessen Horowitz (Facebook, Twitter, Airbnb, Skype), Upfront Ventures (Bill Me Later, Ring), Founders Fund (SpaceX, Palantir, Lyft), Ludlow Ventures (AngelList, Product Hunt) and Mark Cuban, owner of the NBA's Dallas Mavericks.

Very impressive. This would be the Series B for the company, a funding round often associated with a product that's about to scale and be really taken to market. uBeam appear to have been looking for this funding round since February this year when they gave a demo of their system, so over 9 months in the making. Given the hype surrounding the company, and the very favorable conditions for fundraising at the moment, I've been surprised it's taken so long for them to get here - surely all the big players will be desperate to put in money?

Some history
As a recap, Crunchbase lists the company as having raised a Seed Round in 2012/13 of around $1.7 million, a Series A in 2014 of around $10 million led by Upfront Ventures, and a Convertible Note round in 2015 of up to $15 million - a total of around $27 million. It's been two years since the last big fundraise, so it's near time for the company to be getting more. Some pointed out that a Convertible Note round was unusual, as normally crowdfunding is done prior to major institutional rounds, not after, and in this case uBeam did the Convertible Note after Series A. I cover some of this in a previous post, as does Garrett Reim of the LA Business Journal. It's worth remembering that this $15 million is from less sophisticated investors (though still accredited), and that the original Series A investors then are behind the convertible note holders in any liquidation until they convert to actual equity. Nearly $5 million of that $15 million came from OurCrowd. Remember that $15 million number, and that the bulk of uBeam's funding has come from smaller investors, not institutional VCs.

The current round
While it doesn't say clearly, I expect this round here has to be an Equity round (that is, investors get stock in the company), not a Convertible Note round (investors get debt that may become stock) - two consecutive Note rounds would be really messy, and at some point someone has to value the company - basically, a large institutional investor has to put a price on the company and convert that debt. Any investors here will be paying for actual common stock in the company.

The solicitation also indicates that major players such as Andreesen Horowitz (a16z) and Founders Fund are invested in this round - these are previous investors from the Seed and A rounds coming back in (or at least, that's what's being said here). These are serious players, who don't want a ton of tiny investments, or cap tables (who owns stock) that are large and varied - they want to put large sums in and get an Uber. If this were an impressive technology on the verge of 'take-off' they would be all over this round getting as large a slice as they could. So - are they?

Caveat
I'm going to put in a caveat here that I am working off only public information, and things may be different, and I do not have access to the information listed in this solicitation - I have avoided downloading it so I do not have to sign up to the Terms of Service that limit what I can do with it, nor will I watch the webinar - so what follows is my best guess, and opinion, based on info I have at this time, along with questions others should be asking.

Passing the risk
I've written for some time about another wireless power company, Energous, and that to me the genius of them is that rather than waiting until company sale or IPO (offer stock in the stockmarket) to realize profits, they bypassed that and went straight to IPO without a product or revenues. The money flows into the company (and the richly rewarded executives) while the risk is borne by the individual investor. The SEC regulates this and at least there are stringent rules, even if they can be gamed. Initial Coin Offerings (ICO) are relatively new and essentially use a 'cryptocurrency' (similar to BitCoin) to crowdfund a project. There are few protections on these and here the money flows to the company, and the risk to the investor - the SEC warns ICOs can be pump and dump scams. Kickstarter can get small amounts of money for projects, but again there are little in the way of protections for those putting money in (not even investors), and there are public cases of the company taking the money, and the "investor" left with nothing and no recourse.

The upshot of all this is - there are more and more ways for companies to take financing from less sophisticated investors, while pushing the risk onto them. An institutional VC can at least do due diligence, has a legal team, and full time staff to monitor the situation - they can even go to court to get money back from the company in extreme cases, such as what happened with Theranos and investor PFM. This is not to say there aren't legitimate and great uses of these fundraising avenues - there absolutely are. And it's not to say anything untoward is happening here. However there is clearly an increasing set of options for both small investors to get in, but also for the risk to be passed to them, the people least able to evaluate effectively. Crowdfunding groups are there to do some due diligence on their part, but is it enough?

Some, Most, or All?
So the question then becomes - who is taking the risk in this round? How much of this round is OurCrowd (and thus the individual investor) taking in % terms? Is it some, most, or all? How much are they putting in compared to Andreesen Horowitz, or Founders Fund? If it's a small amount, say 10 or 20% then that makes it look like the big guys are serious, and in a way the smaller guys get the "protection" of the heavyweights fighting on their behalf. If it's 50% you have to wonder why the institutional VC is letting such a sure thing out of their hands - and if it's over 75% then alarm bells have to be going off. If the Crowdfunding component of this round is the majority of the new money, then something is off. It means the institutional VC is running from this investment and there will be a reason for that - they view that the company will not sell for enough to warrant their investment. Typically, the rule of thumb is "sell for 10x money invested" so if the total the company would have raised after a round is $45 million, they have to view it will sell for $450 million or more to be worth their time.

So are the VCs leaving $100 bills on the floor for you to pick up?

New vs old money
One other thing to remember is how a round is 'sized'. If someone says "it's a $100 million round" do they mean the company valuation, or the money going into this round? Usually it's the latter, the amount of money going in. That can be a little more complex though - sometimes in the case of a priced round, a the total from a previous convertible note round gets "rolled in" with the new money to give a bigger total. So for example if there had been a $2 million convertible note, then a $5 million equity round, that can be classed as "$7 million". You need to know what's in there. So whatever this new round is, if it includes the previous note of $15 million, it sounds bigger than it is. I'd watch that number carefully. (Note, there are multiple methods of doing the calculation,such as a Pre-money conversion method that changes things. Looks like an actual $20m round. So likely what will happen is there will be a set value for the pre-money for the B round, the Convertible Note will trigger at a valuation that takes the "convertible note post-money" to this Series B pre-money, then the Series B dilution occurs. I'll do an example of this in a later post, it's not straightforward - but essentially it's a clean $20m round and the $15m is not included in that)

Questions, questions, questions
So if I were on the call, what would I want to know to answer the above? I'd want to know:
  1. Who is the lead investor and pricing the round?
  2. Are the named VCs like a16z, Founders Fund etc actually putting money in on this Series B round? How much each? Or are they just names of previous investors, or putting in token amounts?
  3. What are the pre- and post-money valuations of the company?
  4. How big is the Series B round in total? 
  5. Is the Convertible Note round included in that Series B total number?
Summary
So it's no surprise that uBeam are getting another round, but what is a surprise is that it's taken so long, and that it appears to be led by Crowdfunding and not institutional VC. If this is what's actually happening, it points to concerns on the part of VC and their willingness for small investors to take the risk. Are they following the path of Energous and others, looking to bypass the standard fundraising methods? If so, expect a continuation of uBeam walking back earlier claims of performance, attempts to diversify into other areas before solidifying their primary market, and moving to the "fabless" model of licensing rather than production. 

I'm eager to see what's happening here, and as I get more information I'll update. Whatever OurCrowd set as the target, I expect an oversubscription. At some point though, this will all have to be public through SEC filings, so we'll see what's actually going on eventually. 

Update:

It looks to be a $100 million pre-money valuation, with a $20 million claimed raise to give  $120 million post market value. The $15 million from the Convertible Note round of 2015 I would guess will be taken into account prior to the Series B, which with a typical "kicker" would mean a "pre-pre-money" of around $82 million (you add the $15 million with about a 20% kicker ($18 million)). That's quite a valuation for a company with clearly no product, no revenue, and first claimed product near two years away. It's still lower than the market cap of the likes of Energous, which floats between $200 and $350 million. 

Is there a liquidity preference on the preferred stock coming out of this Series B? If so, it might explain the high valuation. Liquidity preference is a way that certain shareholders get paid twice for their investment when the company is sold. As an example - imagine VCs invest $10 million in a company that gets them 20% of the stock, the two founders have 40% of the company each, and the company is sold for $100 million. If there is no liquidity preference then they get $20 million paid out, so a 100% return, and the founders get $40 million each. Now we do the same but with the VC on a 1x liquidity preference. Because of that 1x, first of all they get their initial $20 million back, and then they get 20% of the remaining $80 million, so they get a total of $36 million. This leaves $64 million between the founders who then get $32 million each. Here you see the founders go from making twice what the VC did, to less, just because of that liquidity preference. Go to a 2x preference and the VC takes $52 million, and the founders $24 million each. You can see why a VC would value the company higher under those circumstances.

Another interesting aspect is that there does not appear to be a single new investor - it's all investors from previous rounds. Did none of the other big VCs want in on this? I get the feeling this is now a race to flip the IP of the company before it's too late. How do you extract money from something like this after you've invested millions? This is going to be fun to watch. I'll update on the tech side in a few days - but there won't be anything new if you've been reading this blog, just a confirmation of what has been written before.



From here on down it's just a copy of the solicitation, nothing new here.

The OurCrowd Solicitation

OurCrowd is investing in uBeam, a US based company pioneering long-range wireless charging for electronic devices. In an era when consumers are attached to electronic devices, one of the most common pain points is poor battery life. uBeam has developed an innovative solution which enables untethered long-range wireless charging for battery-powered devices. 

We are joined in this round by Andreessen Horowitz (Facebook, Twitter, Airbnb, Skype), Upfront Ventures (Bill Me Later, Ring), Founders Fund (SpaceX, Palantir, Lyft), Ludlow Ventures (AngelList, Product Hunt) and Mark Cuban, owner of the NBA's Dallas Mavericks.

We’re hosting a webinar/conference call (Wednesday, November 15th at 7:00PM Israel / 12:00PM New York / 9:00AM San Francisco) for investors to meet CEO Meredith Perry and learn more about uBeam.

Register

The Need for Untethered Wireless Charging

Everyone who owns a mobile phone or device has encountered the struggle of low battery life. To solve this, uBeam has developed an innovative solution which enables true wireless charging for battery-powered devices. uBeam works by harnessing the power from ultrasound. The system wirelessly transmits focused beams of ultrasonic energy to devices outfitted with their proprietary receiver. The ultrasonic receiver technology (which can be attached to or built into a range of devices) converts acoustic energy into electrical energy, which charges the device. The solution is expected to be capable of delivering energy to charge devices like smartphones, wearables, IOT devices and more in real-world scenarios such as coffee shops, office space, homes, gyms, airports, or anywhere a transmitter can be placed.

Unique Solution with Fully Functional Prototype

uBeam has already built and demonstrated several fully functional, prototype wireless power transfer systems, which can charge multiple smartphones in the air simultaneously, even while the phones are in use. uBeam’s solution has been deemed the wireless power “category winner” by some of the largest electronics companies worldwide as it can transmit the most power over the largest distance to the greatest number of devices simultaneously while staying safe, within regulatory limits, and without issues of interference. uBeam’s technological approach has a clear advantage over others as it is the only known wireless power technology that doesn’t use electromagnetic energy for power transmission. As ultrasound isn’t on the electromagnetic spectrum, uBeam is therefore not limited by the regulatory, safety, and interference hurdles of its competitors. uBeam’s technology does not interfere with other electromagnetic technologies that use RF and microwaves such as standard communication systems and devices (WiFi, radio, cell phones, etc.). The Company has a strong intellectual property portfolio with 92 domestic and international patent assets, and 17 granted patents. 

>>>View full diligence material on uBeam here

Market Opportunity 

According to Allied Market Research, the global wireless charging market is set to reach $37.2B by 2022, growing at a CAGR of 44.7% from 2016 to 2022. Research shows that increased sales in the portable electronics and wearables market, as well as in the electric vehicles market, have created demand for new forms of energy, further driving the growth of the wireless charging market. uBeam believes their technology has applications that extend well beyond power transmission - into haptics, autonomous vehicles, rear parking sensors, and more. The rear parking sensor market alone is a several billion dollar industry.

Skilled Management Team

uBeam is led by CEO Meredith Perry, who was selected for Forbes’ prestigious ‘30 Under 30: Energy’ list, and for Fast Company’s ‘100 Most Creative People In Business’ list. Meredith is joined by EVP & CTO, Larry Pendergrass, a physicist and former engineering executive at Tektronix/Keithley, Agilent, and HP, as well as COO Kostas Mallios, who recently sold his last two companies to major corporations in a span of 24 months. Kostas was a GM at Microsoft for 15 years and was also the Vice President of Intellectual Ventures.

I'm Interested
In the long term, the investment committee at OurCrowd believes that uBeam could become an infrastructure technology similar to Wi-Fi, providing seamless charging, data transfer, and seemingly infinite battery power. 

Looking forward to you joining us on the call,
OurCrowd Investments

Monday, November 13, 2017

What's up with WATT, Pt III (or "Is this thing still going?")

It's been nearly three months since I posted on Energous, the RF wireless power company that I've been quite skeptical of since the beginning of this blog. I wrote a two parter, the first covering the inadequate 'reporting' by the tech press on the company, and the second looking at the financials and share price of the company. As there hasn't been much in the way of press outreach by Energous lately, I wanted to do an update on the business side of the company as there have been some ups and downs.

If you look at the chart below, you can see Energous continues its highly volatile course, as it was around $16 a share in July, down at around $9 by the time of my articles, then a rapid rise and fall up to $13 and back down to $11 (see if you can tell the exact time the Apple announce the wireless charging in the iPhone was not Energous...), a slow rise to $14, then a fall to under $7, and so far a bounce back to about $9.40. If you timed your buys and sells well, you could have made quite some return on that stock.



Why the volatility in the stock price? Well, apart from the run up to Apple's WWDC when there was speculation the  iPhone wireless charging would be RF based (not rational speculation, it was obvious at the time it wasn't), and subsequent drop, there's no event or announcement that drives anything other than a drop in value of the company. The Apple September announcement removed any rational hope of the company getting into iPhones, which is really the only market that can give the company the 9+ figure valuation it needs, and should have sent the stock price even lower. Strangely, though, those who had been pumping the stock based on Apple being the "Tier One" customer that's repeatedly mentioned by Energous suddenly started saying that didn't matter, and it was all about FCC approval this year - basically everything rides on hopes, not facts. This is a *belief* stock. Think of it like a religion - if you show evidence the religion is valid belief in it goes up, and if you show evidence that it's a human-concocted fiction then belief in it also goes up. Take a look at Stocktwits on WATT and read the comments, and come and tell me that's not a bunch of true believers.

The downward slide continued until it hit $6.91, when the company released its 10-Q on quarterly results and had the public earnings call. In that call the company missed its earnings target, talked about a smart textile supplier as its big customer 'win', and said they'd sent some test results to the FCC - and so of course the share price leapt up over the next couple of days to $9.39. Wait, what?

Yes, the stock price went up despite no real positive or significant news, and an earnings miss. What happened? Well, take a look at this Stocktwits tweet.


Now read the conference call transcript, and point out to me where the CEO "promised FCC"? If you read it, he's very careful to give you a positive view but absolutely not ever commit even vaguely. There is always a caveat in his statements like: 

"Regarding FCC certification of the first power-at-a-distance transmitter... The FCC reviewed the certification document as a novel or new application of previous testing methods. Because the certification will set a precedent, the FCC is being very thorough in their review to ensure that not only this certification, but any future certifications, comply fully with all the current regulatory requirements. As a result, the agency requested some additional tests, explanations and clarifications..."

Even when he's a little more committed with statements like "Our test data, once again, shows that our device complies with current regulatory limits." there's no statement as to what the tests are, or what regulation they are checking against. Like the last "FCC Certified" MiniWattUp product, it may pass the tests, but be of no use to anyone the power is set so low.

And here's where you should remember the phrase "If you're sitting at the poker table and you don't know who the mark is, it's you."This investor read what he wanted to read, not what was actually said. And that forms the basis of this irrational belief and hope the stock will go higher. What happens in this type of situation? Well you can expect continuous 'bounces' in stock price as the marks are fleeced again and again, until even the greatest zealot surrenders (or runs out of cash) and it all collapses.

You can read into the professional's views of the company by looking at what the amount of shorted stock is - that is, how many people are betting that the stock will go down, not up. Taking a look here and here, it's around 30%, which is high and not showing a lot of confidence in the company.

But what about the company executives? They must have faith in the company! Of course they do, that's why in the last 6 months every single time there's been an inside trade by the top four executives involving actual money, it's been to sell. Nearly $1.4 million dollars of sold stock between them. Why would you be selling your stock when you knew the company was going to be worth billions more in the next few years? Taking some money off the table isn't a bad idea for executives, but overall this does not seem like a company where the executives are in it for the long haul. (The "purchase" points you see there appear to be options, not purchases, it looks like no money was paid).



So what happens next? Well, there seems to be no end of people willing to gamble against reality, as well as those willing to encourage their delusions to sell them something. I expect there will be a few more "bounces" of the stock price, and the FCC approval either never forthcoming or we then find that the device approved puts out next to no power and is practically useless (see their WattUp Mini as a reference), and eventually the stock price will collapse and they'll be valued at a small multiple of their revenue from consulting services and a few licensed patents.

That is assuming, however, they can keep going. With a lowered burn rate of around $12m a quarter, and around $21m cash liquid, they've got until about March 18 before bills get hard to pay. IOnterestingly, in their 10Q they say they expect to be good for another year, so they either will cut costs or need another cash influx from somewhere. Who is going to do that? Their distributor Dialog? They did it once before so perhaps again, but at some point the owners there have to watch what's happening and wonder.

So, the summary is the same as before. Reality continues to be deferred while various parties rake in the cash. Energous have no product sales, negligible revenue, vague statements about FCC approval, and their executives continue to be richly compensated. Perhaps my next summary will return a different answer?

Thursday, November 9, 2017

uBeam Office Space Woes?

A few weeks ago I wrote about possible impending office space issues for uBeam, and from the CEO's recent Facebook posts it seems that they may still be having them. Yesterday this appeared on the feed.


For those of you unfamiliar with the term, HAZMAT is HAZardous MATerials and basically means things that can harm people, so corrosive, poisonous, radioactive, flammable, explosive, etc. For example, if you're manufacturing physical items you may need chemicals to etch or clean components that you can't just flush into the sewer, and so you need to both store the chemical safely and dispose of it in a safe manner. The semiconductor industry, for example, uses all sorts of etching chemicals you don't want getting near you, and when it first started often incorrectly disposed of them (basically, pouring them out the back of the facility) and created very toxic areas, some of what are now called Superfund sites - areas that are so contaminated they need special consideration to clean up. 

There's a reason there are strict controls on what gets stored and and how it's disposed of, and cities have strong incentive to make sure they stay clean - and Santa Monica is pretty strict, the city do not want their pretty beaches turned toxic. Landlords are also usually careful about what gets into their buildings - no-one wants a spill that messes with other tenants, or precludes future tenants from moving in. You don't see many manufacturing facilities in city centers, as no-one wants to mix retail and restaurants with carcinogen storage.

There's sometimes no reason that many of these materials can't be stored safely, it just the buildings aren't setup to handle them, and neighbors just don't want it near them. It seems uBeam have not yet moved production away to some large scale factory, and need to be using hazardous material in their research. How much research? Well, 12,000 sqft is a lot - that's nearly 1/3 of an acre - and most estimates put space needs at 150 sqft per person. How many people does uBeam have, is it the 80 people that would indicate?


No it's way short. So assume they need 4,500 sqft for the staff, that's 7,500 sqft for the labs. That's an enormous amount of space. Do they need a wind tunnel or something? The listing for the building they are currently in states the space at 4,500sqft so what are they adding they need so much more? They used to have a San Jose facility at around 8,500 sqft but that was shuttered earlier this year.

So are they adding huge production lines? Doesn't make sense in a city area if you're moving to production. In that case you move to an industrial park and a much lower cost area, or offshore it. It's not something you do in Santa Monica.

Are they adding huge numbers of staff? If so, fair enough, but that implies a new large funding round, in which case they could afford some good locations - but the CEO is asking for 12,000 sqft at $40k/month, so $3.33 sqft/mnth. You're lucky to get anything decent in the SM area for less than $5/sqft per month. (Note that places like LA and SF list per month, lots of areas go per year, be careful in that metric.) Generally, if you've a lot of staff, office space starts to pale in cost - imagine you've 50 well paid engineers, that's several million a year right there. House them in a nice large building (let's say twice this cost) and it's still less than a million a year. That's not cheap, but labor costs are the largest slice of the budget pie - at least pre-production.


Interestingly the CEO's father piped in and seems to have trouble with basic maths of monthly leases. He's only an order of magnitude off. I wonder if he's doing the safety calculations? (Joking aside, see how easy it is to make the month/year mixup in rental costs?)

Other entrepreneurs are there to help though:


Which is bizarre as surely a well funded company like uBeam, on the verge of an enormous Series B and going to be worth billions, wouldn't be looking to share space with another startup? Also interesting is that they need it now. That's understandable - if you have equipment and labs you don't plan that move in a day, it takes weeks to do a good job of moving everything, and they need to be out January 1st. (How much is a few thousand square feet of storage in Santa Monica? Twenty or so 10' by 10' lockups should do it.)

So what do we see here? They are indeed moving out of their old place, as I blogged in September, but don't yet have anywhere new. They aren't looking to setup manufacturing facilities, and are apparently not adding staff (job ads also don't indicate that), but 'need' a monster 12,000 sqft (I honestly have no idea what on earth they need that much for). It also needs to be cheap, and $3.33 indicates they are either being exceptionally careful (that trait uBeam are well-known for), or simply can't afford more. Landlords also check prior to multi-year leases the credit worthiness of their prospective tenants - if they don't have clear revenues or money in the bank, they'll pass, as who wants a deadbeat tenant?

Now the company could be just signing the paperwork for their next funding round and waiting on the money coming in (I have said that despite my opinion, there's a ton of dumb money out there looking for a home, I think there's a >50% chance of another round for them), but this is a weird situation. If a round were completed we'd have heard of it, and they could afford something better. That they are failing for HAZMAT repeatedly and at the last moment has me wondering - are they really failing for HAZMAT, which can be determined in the first few minutes of an application? Are they failing for credit reasons, and the landlord just doesn't want to say that to the company for fear of offending their local VC investor who has many companies looking for space, or is this simply the public excuse given? Or are they really forgetting to tell the landlord about the HAZMAT until the last minute?

Who knows? None of this makes complete sense, it could be any of the above, or something ridiculous I just can't fathom. We don't have all the info, but it's just another interesting day in the history of uBeam. We'll see what the next chapter of that is soon enough.