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

Raising Capital for a Startup: Convertible Debt

You have an idea, it's awesome and will change the world, something like a juicer or a toaster oven. Right now only you can see the potential, and you just need some funding to get started. You can use savings, but ultimately anything that's going to be amazing needs cash either to scale, or to get to market quicker - how do you raise that money? 

You can go to a bank for a loan, but they'll ask about sales, revenue, and profit, and seeing as you have none, they won't talk to you. So instead you go to an angel  (a rich individual or small group of rich individuals) or VC company, and offer them equity (shares) in your company in return for the money - but you still don't have anything, so how can they value your company to determine how much stock they should own? It's a large and expensive exercise to work that out (and you have no money to pay that with), at the end of which you may not think it's fair or viable for your needs.  

So with no revenue, product, idea of actual value, how can you reasonably raise money? A common way this is done is Convertible Debt. Convertible Debt is a hybrid between a loan (debt) and equity (shares) that tries to keep things simple in terms of the paperwork to get going, and puts off the tricky bit about valuation until later when there's more information to base that on.

Here's how Convertible Debt works - the company and investor agree on an investment amount, say $100,000, which the company will use to further the business/product. This is usually after a few rounds of meetings and presentations, where the founder has shown a basic pitch deck, presented a plan and a vision, and been vetted to some degree by the investor. Each Convertible Debt note can be different, I'm presenting a common version, but expect every one to have its own idiosyncrasies.

This money is given as a loan, same as with a bank loan, complete with an interest rate and repayment period - for example it might be at 3% interest, with a 2 year repayment timeframe. At the end of those two years the debt, along with interest (which has been accumulating all that time), is to be repaid in full. There are no debt payments made during that time, unlike a regular bank loan. 

That's pretty straightforward for a loan, but there's the equity part - if there is a "funding event" at some point in that 2 years (usually defined as a certain total amount of money raised) then the loan converts instead to equity (shares). Basically it starts as debt, then converts to equity, hence convertible debt.

How does the 'convertible' part happen? At some point a valuation of the company can be performed - but here the company has (say) 2 years of work behind it, perhaps a product prototype or early customers, and the VC firm putting in the Series A money (sometimes called "institutional money") has the capability and reputation to place that value on the company.

So, let's say that $100,000 of Convertible Debt was put into a company that a VC later values at $10,000,000 pre-money, puts in $2,000,000 for a $12,000,000 post valuation - that converts based on the pre-money valuation (usually, but not always) so those original investors get around 1% ($100k/$10m, ignoring interest) of the $12m company. They gained about 20% ($120k) on a pretty risky bet over 2 years, so it's a decent return but not earth shattering considering they basically made the company possible, were likely to lose everything, and the VC now has ~17%. 

This is a little unfair to the original investor, so this is why there is also a "discount" or "kicker" in the Convertible Debt agreement, where there is a discount on the price, often around 20%, so they get a bit more. With a 20% discount, they'd be getting 1.25% of the company ($100k/$8m) - now they've made a 50% return in value which is better, but still not that great, especially when that money isn't liquid and they still have the risk of future rounds of funding and it all going wrong. If the company happens to go stellar with that initial money, say a $100m valuation, then the investor gets an even smaller % of the company - that's a great deal for the founders and VCs!

Sophisticated investors in Convertible Debt often ask for a cap on the note (since it's debt, the term 'note' is often used for Convertible Debt). In the case above, they might have a note with a cap of $2m - in that case if the valuation goes over $2m at the Series A, the conversion of debt to equity is calculated at the cap - so it's ~5% ($100k/$2m) and now they've got a (paper) 500% gain, which will make them much happier. (Whether cap and discount both apply is down to the details of the note, sometimes it's just one of them).

So Convertible Debt has the benefits of keeping things simple in the legal papers (it can be done in a couple of pages), puts off the tricky aspect of valuing a company, and allows for the upside of equity in a growing company if things should take off. This is why Convertible Debt is a common financing vehicle early in a company, often in what's called the 'Seed Round'. 

What are typical terms? Usually these notes are for amounts in the $10k or $100k ranges (by definition it's a small company trying to prove things out, with a 'non-institutional investor'), but sometimes go into the millions. Interest rates are usually nominal, say 1 to 5%. The discount is also variable, but 15 to 30% is not uncommon. The term is a bit trickier, how long to make that? Well, you need to be actually able to do something with the money, and then with your new prototype or product go to a VC and the process of raising a Series A. Conventional wisdom tells you that if all goes great, a Series A raise takes 3 months, and it generally doesn't go well so assume it's 6 months. Basically, however long it's going to take you to get to something worthwhile, plus 6 months, is how long you want. For example, if you think it's going to be 9 months to a year to get to prototype, don't make your note term shorter than 18 months, and you probably want to give a little headroom in there for things going wrong. I've rarely seen a single year as a term, but I'm more a hardware person and those projects take longer, with the bulk in the 18 month to 2 year range - longer than that is rare as running a company for 3 years on convertible can be tough. Terms can also be conditional - that is they change with certain events - for example the discount may increase at certain points during the term of the note, starting say at 15% on a two year note and increasing by 2.5% each year. A founder may offer these terms to entice the investor to give a longer term, or the investor may want to encourage alacrity on the part of the company.

Most times both investor and company assume that it will be a clear situation of successful funding and conversion, or that the company has gone under, but if it's in limbo or limping along as often happens, things can be uncertain. What happens if things go wrong?

The most common way is for the term to expire and there to have been no funding event - the investor is due the loan back with interest, but no institutional investor agrees the company is worth funding, and we assume there is no money in the company to repay it. What happens then is the same as with any debt - debtor must come to an agreement with lender as to next steps, and this could be anything from bankruptcy to a renegotiation of the debt. With smaller amounts, both sides might just ignore it and pretend it didn't happen, with legal costs likely to outweight the investment amount, but the larger the amount the more an agreement needs to happen. Bankruptcy doesn't make sense, usually, as driving the company under ensures no chance of future success, and they are unlikely to have significant assets to liquidate to pay the investor back. It makes more sense for the two parties to come to an agreement, for example extending the term for another year while increasing the discount by 10%, and so it's usually recommended that if money isn't already in, start talking to your Convertible Debt note holders at least 3 months prior to term about what happens next.

Regardless, any institutional investor coming in for a Series A will want that paperwork cleared up before their money goes in, as they don't want a lawsuit or trouble later on.  This leads to some interesting situations where the Convertible Debt investor can start to demand beneficial terms from the company and hold up the Series A, or the company can demand the note holder give concessions like the discount rate or they won't go ahead (it's a "give me what I want or I shoot my company" tactic but I've seen it work). In those cases, it's down to bad blood between Convertible Debt investor and founder, and if it wasn't before it certainly is after.

One interesting permutation I've never seen play out is if a company does a convertible note between institutional rounds - for example between Series A and B when there was an original valuation and equity investors. It's odd, but it does happen, as LA Business Journal's Garrett Reim notes this is a route uBeam opted to follow when they took an (up to) $15m Convertible Debt round in July 2015 after a ~$10m Series A in summer 2014. This leads to a lot of possible weirdness that may or may not occur depending on how uBeam's fundraising for their Series B (which they must be deep into, now nearly 2 years from last fundraise) plays out.

First weirdness is that the Series A VC investors, who all get Preferred Stock that guarantees them paid out first from any money, are very unusually in the queue behind the convertible debt for being repaid, as debt always takes priority in any liquidation. This puts the lead investor in the position of desperately wanting a conversion from debt to Common Stock so they can take priority again.

Next is that the convertible round size was likely based on the then valuation of the company, with the expectation it would rise in the time between loan origination and maturity. If the situation arises where the Series B is a down round (lower valuation) than the Series A, or even similar, then the Convertible Debt investors will end up taking a huge % of the company even before the shares of the new Series B investor dilute the company further.

Lastly is that if the company had a valuation prior to the Convertible Debt investment, then there is the assumption that there is actually some value there, be it product, customers, IP like patents, or even remaining cash in the bank from the original Series A. A Convertible Debt investor at the note maturity may decide that liquidation is the best outcome for them, especially if they can get paid off first (perhaps they know the company has more cash in the bank than they are owed), and they do not think the company has much of a future. This can lead to an acrimonious situation as the investor plays 'hardball' with the company - that's not going to happen at the $100k level, but go past $1m and things are different. An element of that played out with Theranos when one of their investors, PFM, sued for their $96m investment back claiming fraud, when they know Theranos had $200m in the bank - basically taking the money before lawsuits and time removed the potential for any return.

Overall, Convertible Debt is a well understood way of raising money in the very early stages of a company, with simple terms and paperwork, but it can lead to some very difficult situations should it not convert at the end of the term.  There are other options and variations, such as SAFE, but in the interests of simplicity, I'm focusing just on that.

Update: Interesting Techcrunch article on the issues that SAFE and convertible note rounds can cause. Further reading on the matter - some key quotes that emphasize what I wrote above:

Why is this troubling? Because it has become more common for VC funds to pass on investing in deals altogether, solely because the waterfall of notes would consume too much equity. If outstanding notes prevent a new lead investor from meeting their fund’s required ownership targets without triggering a complete company recapitalization, a null set of equity distribution possibilities may arise.

In these cases, the only valuations that makes sense for a Series B lead investor force the dreaded “down round.”