How Is This A Thing?

When talking about what sort of companies get funding from VC, I have a saying: 

Even when you take into account that VCs will fund companies more pointless than you can imagine, VCs will still fund companies more pointless than you imagined.

In that vein, I was amused today to read about Juicero, a company that makes juicers (the things that squeeze fruit and veg and make glasses of juice), and was funded to what was believed to be a total of $120 million. Yes, $120 million. I know it's been covered earlier this year but somehow I missed it, perhaps I assumed it was an April Fool's joke and ignored it, but it's for real.

So what is it? It's a $700 juicer that you buy (yes, seven hundred dollars), and then in the same way you buy different coffee pods for a Keurig, you buy different types of juice packets which range up to $10 each (yes, ten dollars). Hey, pre-cleaning and chopping organic (of course) fruit then putting it in a non-degradable packet is hard work! Pop the juice packet into the juicer, press a button, and a minute later you have a glass of juice. Then you throw away the packet, nothing to clean. But wait, there's more. The packet has a QR code on it (those square, 2D barcodes) and the system reads the QR code to compare with an internet database (it's WiFi connected of course) and see if the packet is in date - if you're in luck the system will press the juice for you just right. If not, or your internet happens to be down, no such luck and the $10 you spent will get you nothing.

So the skeptic in me sees:

• A solution to a non-existent problem. This solves nothing. No pain point other than a bit of washing up
• Vastly more expensive and environmentally damaging than the existing method
• Multiple points of failure and unnecessary complexity
• At best serves a tiny demographic

Buying the most expensive organic pressed juice in Whole Foods (you know, stuff someone has pre-cleaned and chopped and put in a plastic packet) and putting it in your fridge would be cheaper than this, wouldn't need an initial $700 investment, and you could still drink it when you the WiFi goes down. It's the sort of thing that you'd ridicule an undergraduate student for in their final year "Entrepreneurial Studies" final project, or congratulate them for the best parody startup you'd seen. But it got funded. For $120 million. How?

Industrial Design

The system looks beautiful. Just look at that sleek Jony Ive style design, it's like an iPhone on your countertop, how could you not want that? That alone makes it worth $120 million. OK, you think I'm, joking here? One of the things I've observed in the last few years of watching startup funding is this: Never underestimate the value of the mock-up, it's about the most important thing to show when fundraising. Not the prototype, the mock-up (but be sure to call it a prototype).

As an engineer, I've been more the "show something working even if it's a bag of circuits and wires, cleaning it up later is the easier part". More fool me. What I've learned is that such demonstrations press the 'off' button with investors - instead, show a mock-up or better yet the Industrial Design (ID). Best if you can put it into their hands, but an "artist's rendering" works amazingly well too. Seriously, investors seem to lose any ability to ask questions about the actual product when they're handed a piece of cardboard covered in plastic with a logo on it. "Hey, look how cool this thing is! It's amazing! All the hard work is done, all someone has to do is all the engineering/user design, validation, and testing to make it happen!"

I can see this having been part of the pitch deck to investors, a cool image and saying some ID firm run by ex-Apple designers is on it, and they'll think it's 90% done. Just be sure to accidentally say "prototype".

Market Penetration

Next I can see the slide showing some data on growth in juice bars, which if you live in places like SF or on Main Street in Santa Monica, there seem to be one every block running a 'special' of "4 for $30". I used to sit in the bar or ramen place opposite and count how many went inside during the day. If it got over a couple in an hour it was unusual, I've no idea how they survived. However, if you've got too much money then you all friends know people who 'juice', it's a health thing, and $10 for a juice isn't ridiculous so that's all OK.

Then we get the market equivalent - the Keurig. They'll have some curves showing Keurig's rise to around $4 billion in sales in 2014, and a tag line such as "The Keurig for Juice!". What's not to love about it? They sell the hardware, but then get the lock-in on the juice packets and receive ongoing revenue from that. Even better, the QR code means it won't work with third party packets, and unlike Keurig's failed attempts to create such a lockin, the fact the system is internet connected is the way they'll ensure that it can't be bypassed. Thought it was stupid that there was such a point of failure? No, to investors that's a positive! 

It's not even a system where they buy on demand like Keurig, nope here you go on a subscription and you get your supply sent every week. Better not miss your juice intake for the day, it's your health after all. They'll have that hockey stick curve of 1000 sales in year one, 10,000 in year two, and then a million in years three and out, with the consumables revenue from all those sales building nicely to make this a billion dollar company in year 5. Who wouldn't invest in that?

Supply Chain

Next they'll show how they'll corner the market in the consumable preparation, buying in vast quantities from the organic farmers and driving down the price, getting further margins there. They'll probably be something in there that shows how they can shift the content mix in each packet to use the cheapest ingredients available at the time. Something of a logistical nightmare, but it sounds great.

An Impulse Buy

It seems they aim for the "give away the razor, charge for the razor blades" approach of Gillette - except in this case they "give away" the first part for ~$700. Not a necessity and hardly in the impulse buy category, I have a sneaking suspicion they initially targeted a lower price point than this telling the investors it would sell for the price of a Keurig, with an entry level product in the $100 to $200 range, then just utterly failed to hit it. Right now I can imagine they're telling investors something like "This is the premium version, we've got a plan for cost down for the regular version!" when this probably was the standard version. It won't be the first time a CEO has demanded a product with every feature, in a really short timeframe, and then been shocked at the cost. When you're looking at time, cost, and quality, you only get to pick two, and time is never on your side as a startup.

That $700 may even be a subsidised number (though they claim not), but regardless if you assume that their COGs is around 30% of the price then you're looking at parts and labor of more than what an equivalent product retails for. They had two years to get this going, and while supply chain can take that long, without anything exotic in the design, time was not a restriction in getting this made, they should have had time to Design for Cost. Instead, I suspect a series of changing demands, feature creep, and failure to plan before initiating hardware builds made it take longer than should have been.

The Founder

And here we come to the main event, the CEO, Doug Evans. If ever you have a True Believer who is absolutely invested in this product and actually believes in what he's selling no matter how crazy, this is it. He compares himself and his product to Tesla, and that his method of squeezing gets more Chi, life force, and vibrational energy out of the juice. (Wait, vibrational energy? Maybe it can charge your phone at the same time!). 

How can you not believe in someone who can lead and inspire like this?

“Organic cold-pressed juice is rainwater filtered through the soil and the roots and the stems and the plants,” he said. “You extract the water molecules, the chlorophyll, the anthocyanin and the flavonoids and the micronutrients. You’re getting this living nutrition. It’s like drinking the nectar of the earth.”

He had the "Tenacity, Resilience, Perspiration" needed to never give up, so loved by investors. He even had Domain Experience, having run juice bars before. What does it matter this was a electro-mechanical system, consumer product, software app, supply chain, and retail play, none of which he had experience of. At least he later realised what a huge job it was to get it to market:

“I was just naïve,” Mr. Evans said. “I was like Forrest Gump. I had no idea what it took to make a piece of hardware that could ship to consumers safely.”

It's a pity more technically inexperienced founders don't listen to advice from those who tell them their timelines are ridiculous and that there are massive technical and safety concerns that shouldn't be ignored. 

What The VC Sees
Now imagine you're a Venture Capitalist, looking for somewhere to put your money for a possible 10x to 100x return and make your fund profitable, making up for all the other plays that tanked. Do you laugh this "Juicero" out the room, or do you make a mental list of all the positives and evaluate the risk versus the potential returns? If you did that, here's what you might get:

• A dedicated True Believer Founder
• A simple tagline, easy to understand 
• A comparison business model that shows billions in revenue
• Profit on the product, ongoing revenue from consumables
• A 'hockey stick' revenue curve
• No new technology needed, it's really an execution play
• Digital lockout of third party suppliers
• First mover advantage

Honestly, I look at that list and think "I can see why someone invested" especially if you can get them salivating over owning a part of "Keurig for Juice" early on and that it's going to be $200 a pop. If you even think there's a 10% chance it could match Keurig's $4 billion a year in revenue, a few million invested actually isn't totally ridiculous. 

So when you pitch your awesome idea to a VC and they don't invest, and then that VC pours a ton of money into a juicer company for a product that no-one is going to buy, have a look at how your business model compares to theirs. 

On paper, Juicero ticks all the boxes and makes sense as a VC investment. In reality, it's totally dumb. Do you see now why this is a thing, and you're not getting funded?

Update - Here's a link to a great Youtube video doing a breakdown of the Juicero. TL;DR - No cost constraints lead to lack of careful thinking, so overbuilt and clearly losing money on every one, to be made up for with the ~$2000 per year pack subscription.

Do We Have a Deal?

So it seems I was wrong about Energous, they announced a deal. I retract everything I said about them, because clearly based on what they say in their press release, there must be something to their technology.

"Energous ... today announced a partnership agreement with a market-leading specialty battery company in the hearing devices and wearables market. The company has signed a joint development and licensing agreement with Energous and anticipates shipping WattUp receiver technology as well as a Miniature WattUp transmitter.

In order to preserve competitive advantages, the partner has requested confidentiality. "

A Joint Development Agreement as well as a Licensing Agreement? That proves they are a legitimate company that will have products.

Well, no.

A JDA is basically an agreement between two parties that says "We'll try to develop something. What you develop is yours, what we develop is ours, and what we develop together we share." That's it. Doesn't guarantee a product, and it's all still at a research phase. More importantly, there's no requirement for funds committed from either party - other than the time to write it, a JDA is 'free'. I've worked with companies where they almost seemed to collect JDAs - drawers full of them and never a product, or a dollar of revenue, from a single one.

A licensing agreement is a little different - usually it says "One of us has some Intellectual Property. We agree not to sue you if you have a product with it in a specific field of use, a specific region of the world, for a specific period of time." In return the other side usually does something in return - license back some of their technology, pay some cash, pay a % of everything they sell with this IP, or sometimes nothing at all. You want this in place before you put a lot of work into a product, or even know if it's ultimately viable, as you need to know upfront the costs and business impacts.

In other words, licensing agreements are no guarantee of a product or revenue. What is valuable for revenue is when a legitimate company announces "We are releasing a product with Acme Corp technology and paying a license fee." Now this may happen with Energous and this unnamed battery company, but I doubt it. Notice this other company has not necessarily committed funds, or even sullied their name, with this technology. If they were certain it was going somewhere, they'd be announcing their exclusive benefits over their competitors in a press release themselves.

Even when you get an actual product, the licensor might just have gotten lucky and bamboozled a legitimate company into releasing a loser. Witness Theranos, with their tests being performed in Walgreens, and used to help justify the $9 billion valuation - yet now it's looking like those calling Theranos a con game are right, and Walgreens are now realising their mistake and ending the deal.

So in my opinion, Energous get what they want - the veneer of legitimacy to keep the money flowing.

Interestingly, their press release doesn't say what technology was licensed and who the licensor was. The way it's worded, it could be that the battery company is licensing their battery tech to Energous, even though you would think it's the other way around. If devious, Energous could pay the battery company, say $50,000, and include onerous confidentiality clauses in the contract, then announce the agreements, making it seem like it was an agreement in their favour - and never lie and get into trouble with the SEC.

Why do that? Well a 2% bump in stock value of a $170m market cap company is $3.4 million. Do that once a month for a year, and you've added around $45m to the cap, which some shareholders will take a nice cut of. And the $50k that was spent to make the deal, along with the lawyers fees? All from the company funds (paid for by other investors). (Looking at the ticker for WATT, Energous climbed about 2% after this announcement)

For some, it's about just doing what it takes to make it look like they're a legitimate company on the verge of releasing products. Just keep the party going as long as possible. Sometimes it's a real product and all above board. Some do it because they are simply trying to get as much money for themselves as they can, while they can, and they know it's a con. Some do it because they truly believe (rightly or wrongly) that the product is viable, but they just need more time and money to get it working, and when they prove everyone wrong it will all be justified.

But, hey, at least Energous have announced a JDA/licensing deal. Where are uBeam's announcements on that front?

Those Other Guys, Pt II

So back to Energous. Where we left them was that we had, through the use of physics, mathematics, and reasoning, completely demolished their claims and proven that what they are saying is unachievable - that is they are either idiots, or liars (or maybe I'm the idiot!). That's where we'd be in a sane world, but it got complicated and so you just switched off, maybe you heard 'blah blah' or sounds like the Peanuts' teacher, but overall you just didn't care. 

So let's take a look at the business side of Energous instead. You can find lots of information out by looking at their S-1 or their 10-K/Q, because they're now a public company - more on that later.

Energous was formed in late 2012 by an MIT graduate with lots of experience in wireless communications. His parents even invested $10,000 to get him started. Normal startup so far, but then it gets weird. Just three months later, an investment bank, MDB Holdings, come in and start advising and investing. Barely a year after that, they then file for an IPO - that is, selling shares to the public. A company with no product, no revenue, nothing at all, is filing for an IPO. They do have great publicity and a great story, however, and are talking about world changing products coming later that year. Who wouldn't want to get in?!

In March 2014, 18 months after forming, it sells $24 million of shares. That $10,000 his parents put in is now worth $26 million. Nice return. The company is worth well over $100,000,000 - remember, no product, no revenue. But you know someone's making money in all these transactions.

And now the SEC is involved - there are major penalties for lying in any statements from a public company, so they must be being honest, right?

Since then, two years on, and there's still no product, in fact they are backtracking and pushing dates further out, and drastically cutting performance specs on their product. But they've added lots of big names as boardmembers and advisors! These smart advisors and big name board members wouldn't join unless there's something there!

And recently, they admit that they still haven't demonstrated a commercial level product, even in their lab. Uh-oh, they must be collapsing and in terrible trouble.

Well, no. The CEO now makes $2 million per year - for a company under 4 years old, with no product, and no sales. The VP Engineering and VP Sales/Marketing each make $1.5 million.

That's $5 million per year in salary for three people, once again for a company with no product and no revenue. So let me summarise:

• Come up with a really good story for a product people just have to have
• Just make it believable enough, and for people to want to believe, for the skeptics to be ignored
• Create massive hype in the media to boost interest
• Announce fantastic products somewhere out in the future
• Never quite directly answer the critic's questions over the practicality, always dodge and claim 'proprietary'
• When eventually it gets to that time you need to show product or demos, get in some 'big names' instead and make them public to make outsiders think it's all still great
• Keep it going long enough someone eventually buys you and cash out

Remember I said earlier that in my opinion those behind the company are idiots or liars? Well, they made $5 million in one year from it. Which do you think they are?

Here's the genius of Energous. Normally a startup cycle works with the early investors trying to get it to the point where there is a product revenue, or more likely a buyout where they cash in. It usually takes several rounds of financing, with lots of dilution along the way, along with a big chance of failure. Energous bypassed that and went straight to IPO, and got their money out at the beginning. No risky and long slog to return - just jump straight there. It looks to me like they gamed the system, and did so brilliantly.

Now they had better hope they didn't lie in anything the SEC related, but otherwise, they're laughing. They don't even need to make a product to earn more money from this, each, than most people earn in a lifetime of 9 to 5.

But, hey, there has to be something there. People wouldn't just make stuff up to make money, that never happens. And if they did, it would be a one-off, an aberration. There couldn't possibly be other hyped technology companies following that bullet point list from above, could there?