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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

6 comments:

  1. Dear Mr. Reynolds,

    I have a question for you concerning some research I am doing with medical ultrasounds. How can I contact you?

    Regards,
    Lee Thai MD

    ReplyDelete
    Replies
    1. Contact me through LinkedIn - it looks like you viewed my profile there.

      Delete
  2. Thank you! I sent you a message through LinkedIn.

    ReplyDelete
  3. This comment has been removed by the author.

    ReplyDelete
  4. What are your thoughts about their EVP leaving in January, and the recent images of their technology?

    ReplyDelete
    Replies
    1. Any thoughts I have on these are the same as I've written here before, there's pretty much nothing new to add.

      Delete