SBIR – Non Dilutive Funding for Your Company

This is a reblog of an interview I did last year for IEEE-USA, the original can be found here.

What if I told you there is a funding opportunity in the US that is restricted to small companies, focuses on technology, and takes no equity (non-dilutive), debt stake (grant or contract, not a loan), or claim on Intellectual Property (IP) for what may be a seven figure investment? The SBIR – Small Business Innovation Research – program has been operating since 1982, providing funding totaling over $2 billion per year, and giving early starting capital to companies that grow from there including the likes of Symantec, Qualcomm, Intuitive Surgical, and Illumina. 

History

The SBIR program came into law in 1982, founded by Roland Tibbetts, whose goal was to fund innovation, supporting American companies and giving them the support to take ideas to a stage where other private investment can take over. It was last renewed as part of the 2017 National Defense Authorization Act and is currently authorized to September 2022.

All federal agencies with a large R&D budget are required to set aside part of that budget (3.2%) exclusively for small businesses, with 500 or fewer employees, that are majority owned by Americans and permanent residents. There are 11 agencies that administer SBIRs - the Department of Defense (DoD) and National Institutes of Health (NIH) are by far the largest and account for nearly 70% of the ~$2.5 billion of funding, then Department of Energy (DoE), National Science Foundation (NSF), and NASA provide under 10% each, and the remainder is split between the other 6 agencies. Application processes vary between agencies, but there are common factors between them.

The Small Business Technology Transfer (STTR) is a sister program to SBIR. It is similar but requires participation of an academic partner, is restricted to a smaller number of agencies, and with a smaller set-aside. Aside from these differences, the broad strokes of SBIR also apply to STTR.

SBIR Phases

Most SBIRs start with an application for a Phase I – often a proof of concept – that is expected to take between 6 and 12 months, with funding for $100,000 to $400,000 (depending upon agency and project area). Applications usually take the form of a 6 to 12 page technical proposal, a project plan, a commercialization plan, a single page budget, personnel biographies, letters of support, and other relevant information. The proposal is reviewed by a committee, and typically awardees are notified and funded within 4 to 6 months. By the end of Phase I, the company has ideally demonstrated a proof of concept, and its competency, to take the project further.

Phase II is a more substantial effort with greater budgets – up to around 3 years and $2,000,000 (again, depending on agency and topic). Usually an agency invites a company to apply for a Phase II after a successful Phase I – there are some Fast-track and “Direct to Phase II” options but are unusual. The application is usually much more detailed, and budget and timelines come under more intense scrutiny, and so is recommended for more seasoned applicants. By the end of Phase II, a successful project is usually expected to have something between a working prototype and a commercial product. 

Phase III is the commercialization phase and receives no specific SBIR funds, though some agencies do have matching and follow on funding. Agencies with very specific needs often try to ensure valuable technologies make it to market, such as the DoD connecting a small business with primes like Boeing.

With a few months between Phase I and II, it can take as much as 5 years to get from application to the end of a successful Phase II – these are not small projects or commitments!

Application Process

Companies applying for SBIRs need to follow a few administrative basics – the first is setting up a for-profit company (e.g. an LLC, C-corp etc) in the US, with >50% ownership by US citizens or permanent residents, and obtaining an Employer Identification Number (EIN) from the IRS. The company should then apply to Dun and Bradstreet for a DUNS – a unique identifying number. (They may try to sell you other services. Just keep telling them you need it for a federal grant application and you get it for free). The next step is registering with the System for Award Management (SAM) to apply for government contracts. As you can see, all this takes some time and effort, and can take a couple of weeks to complete. The SBIR.gov site has a walkthrough to help here.

Each agency has a specific application site. NSF uses Fastlane, the NIH uses eRA Commons, the DoD uses DSIP etc. Each site has its own registration requirements for the company and potentially the key investigation staff, that also may take a few days to setup. I usually tell applying companies to allow a month prior to submission to get this process completely done the first time. Subsequent applications are then much faster.

Each agency like the DoD, NIH, NSF, DoE, and NASA maintain their own SBIR websites, while there is also an overall SBIR site, where more details on submission can be found.

Every proposal has key staff and a Principal Investigator (PI) who must work at least 50% of their time at the company. Proposed budgets may cover items such as salary for key staff, consultants, equipment, and materials, justifiable travel, as well as reasonable overhead costs. The majority of the budget must be spent within the company (not outsourced), and any outsourced work should be done within the USA.

Agency Specifics

As mentioned, each agency administers the SBIR in its own way. The DoD has very targeted needs and this is reflected in its methodology. Twice a year the DoD SBIR topics are opened up, and each branch has a number of targeted topics (For example, the Navy may call for development of a more compact and higher performing SONAR buoy. The application deadline is about 2 months after the topic release, after which the topic is gone.

The NSF has a different approach, with 4 deadlines a year, where a submission on any topic within its remit is encouraged. Companies can pre-submit a short description to the NSF, and receive feedback on whether an application is warranted or not.

The NIH has a mix, with three submission dates a year for most applications, which similar to the NSF can be anything within its broad remit. Applicants are usually encouraged to speak to the SBIR manager in that area to gauge general response, and as a courtesy to let the NIH staff for review. The NIH also has calls on specific topics that run for a limited period, for example one to two years, on areas of particular need. Dates on some topics may vary slightly.

How Agencies Benefit

What do the agencies get for this money? First of all, they don’t get equity in your company, they don’t get paid back, they don’t own any product or IP that is created, and provided you label everything sent to them in reports they don’t own data rights either.

They do get research and products in areas critical to them. The products may not sell, or the research may show an approach is not viable, but it’s understood that there is risk involved. You owe them the reports, milestones, and deliverables listed in the proposal. Even then if the ongoing research shows a pivot is needed, every monitor I have been involved with has been very reasonable about changing course.

In most cases the project monitors are have spent their career in these fields and care deeply about curing disease, advancing technology areas, or helping those in the military get the best equipment and tools, or whatever their area is. They aren’t in this for personal reward, and they want you to commercially succeed because it means more and better products in their key areas. In my personal experience, almost every government agency representative is an exceptional advocate for their field, and works hard to get positive outcomes for the company, agency, and the country.

The other side of this is that the funding for SBIRs comes from an overall pot, not from an individual group’s budget. Getting awards in their area effectively increases their departmental budget, and your success benefits them in multiple ways. They *want* you to be the next Qualcomm.

This is one of the few times you will have a counterparty who doesn’t care solely about the bottom line.

The Downsides

So far it seems easy – write a few pages, join some websites, and you get up to $2.4 million. These awards are competitive - there are many others applying, and your application is only one of many other worthy contenders. NIH Phase I submission success rate averages around 15 to 20%. Phase II averages around 30 to 40%, and there is no guarantee you will be in that pool. An excellent idea with a top notch team and a well written proposal will put you above that average, but you are unlikely to be there on your first application. When I work with companies writing SBIRs, I advise them to consider them for the long term, and that several attempts will be needed before they succeed. 

As with anything new, the first proposal you write will take some time. Just the administrative preparation can take a few weeks, as you work with various websites and develop the company boilerplate sections, key member bios, and learn budgeting methods.  You’ll also need to write compelling research and commercialization plans. Companies should expect to invest about 6 man weeks into writing their first SBIR proposal (apart from the administrative setup), 2 weeks into the next, and a week every one after that. As the business minded among you are calculating, it does not make sense to have one of your most important staff members spend 6 weeks for a 20% chance of $150k – but if you are in for the long haul and assume this is going to continue over years, then it quickly shifts to being worthwhile. Over time, you will learn not only how to write SBIRs but when to apply and which ones not to. Ultimately, you can get to the point where a few days' work on a well targeted application gets you a >50% chance of success.

After receiving the award, you are subject to Federal Acquisition Regulations (FAR), which require careful financial tracking and reporting and limits how you can spend your funding. It is not a pot of money that can be used any way you want, but a well-run company with good accounting should have no problems meeting FAR.

While the federal government will always pay, sometimes it takes time for federal payments to arrive, or for contracts to be renewed. This can leave periods where your company is left without income but still has employees. While agencies try to minimize this, it is a concern. If possible, try to maintain sufficient revenue or cash in your company to pay staff during these uncertain times.

The Upsides

There are several upsides beyond “up to $2.4 million of non-dilutive funding”. The agency is a customer, giving you input and feedback as you develop, and may ultimately be a source of revenue. This third party endorsement proves to others your idea and team have merit, and if you are raising money from other sources, helps validate you.

Even if not initially successful, the process of creating the research and commercialization plans often focuses a company on where they are and where they need to go I’ve often found that this is the first time a company has laid out a formal plan for their technology and business. Further, the reviews returned can be eye opening as to what other experts feel are the strengths and weaknesses of your approach, and can direct future improvements. Of course, there’s always the chance that “Reviewer 2” is simply an idiot who doesn’t appreciate your genius, but that’s been grant applications throughout history!

One often forgotten benefit of SBIRs is that because they are competitive, if you have won one in a particular field, you have now met the competitive requirement in any such federal contract, so it can be a rapid way to beat your competition to the punch.

Writing a Successful Application

Beyond having an excellent idea and a great team that meets the need of a federal agency, how do you write a good application? When writing my own, the first thing I think is that I’m not writing a report, I’m telling a story. I’m leading a reviewer on a journey so by the end they know this proposal needs to be funded. I start with a title that combines an obvious and important problem and solution, and catches the eye and makes them want to read the first paragraph. The first paragraph conveys the core of the proposal over and makes them want to read the rest of the first page. Then I have the rest of the first page to make it obvious that this is the solution that’s needed. That first page is critical. The rest is only showing that you have the background and team to make this work, and not giving them a reason to doubt you. Have people you trust outside your company read your first page, and find out what excites them and why, and build that feedback into the next draft.

Keep the proposal simple and targeted. A straightforward application that picks one clear goal is easier to explain but more importantly does not give “targets” for reviewers to pick on and make negative comments. Remember that when you are up against other good applications, one small criticism may cause the agency review panel to pick another awardee over you.

Lastly, remember these are reviewed by experts who are volunteers. They have day jobs and this is usually done at midnight after a long day working. Make it easy for them to read. Use large font, short paragraphs, lots of figures and bullet point lists so they don’t have to work to understand your genius. Remember, nobody likes opening a document to see 10 pages of nine point font!

Summary

The SBIR program is a great way of accessing millions of dollars of non dilutive funding, feedback from experts, and gaining a prospective customer. It involves a lot of upfront work and discipline, but a consistent approach can yield a significant benefit to your company.

Theranos Updates - Loan defaults, layoffs, bankruptcy, and mega-rich families burning half a billion dollars.

Last month Theranos were back in the news, barely a few weeks after being admonished by the SEC for using lies and exaggeration to raise over $700 million from investors, this time for the CEO to announce that they were running out of cash and would likely have to close by the end of July. Approximately 100 employees will be let go in early June, leaving less than 25 who will most likely oversee a winding down of the company.

Theranos received a funding round last December, with a $100 million loan from Fortress Investment Group, which had many had been shocked to hear given the widespread knowledge of the company's difficulties. In my December article I pointed out things likely weren't as they seemed at first, and this was simply a predatory loan made in the knowledge that Theranos would in fact default, and that the lender would then take ownership of the company assets at firesale prices.

"So Fortress have arranged a deal where they don't have to put the full amount in up-front, but are still ahead of any other investor, get to own the only valuable part of the company if it goes wrong (the IP), and get discounted stock in the company if it, through some miracle, succeeds. With the right milestones and triggers, this could be a deal where Fortress win no matter what happens, and may actually come out better should Theranos fail. I wonder if Fortress have essentially arranged a deal to make sure that all the good parts are gone by the time everyone else reaches the bankruptcy auction.

Why would Theranos take such a deal? Well, because they have to choice - it's this or bankruptcy."

Well I'm feeling pretty smug right now, as that's exactly what looks to have happened. According to a letter Holmes wrote to shareholders (included at the bottom of this post, from Buzzfeed), despite having received $65 million from Fortress in December, they're about to miss a deadline for FDA approval on a device which will result in them not receiving the next tranche of $10 million. Most significantly though, should Theranos' bank balance drop below $3 million, they are in default of the terms of the Fortress loan, and the company predicts that will happen in July. According to Holmes:

Fortress would be entitled to control a foreclosure sale and/or monetization of the assets and to realize up to a three-times return on its investment (including, in addition to the amounts loaned by Fortress, the costs associated with Fortress’ monetization of the company’s assets). 

So Fortress get three times what they loaned, including whatever legal costs they have in extracting this money. A factor of three on the loan plus costs means they won't just get most of the company, they'll get all of it.

That $65 million gets Fortress around 1,175 patents (granted and applications) in the biotech space. They can sell them, licence them out, or use them to sue other successful biotech companies for payment. Given some large patent infringement payouts can result in 9 figure cheques, a single win like that will result in a great payday for Fortress.

It may not have even cost Fortress $65 million. I do wonder if they invested saying something like "This money cannot be used for legal expenses. It must be kept separate from all other cash and used only for salaries, facilities, and equipment." Knowing that Theranos had legal troubles they may have wanted to ensure the cash was not spent on that, and then set a stipulation that if the "other cash" account dropped below $3 million, the company essentially became theirs - regardless of how much of the investment was left. $65 million gone in basically 6 months, for a company of 125 people, is a monster burn rate. Even at a fully burdened cost of $400,000 per employee that's 'only' $25 million spent in 6 months. Facilities etc can be expensive, but not $40 million worth. In that case, Fortress would be owed $195 million (3*$65m), take the ~$40 million out the bank account that remains, then start picking the best $155 million of assets left (pretty much everything else) - making the cost of the whole company $25 million. Or maybe I'm just thinking too hard and Fortress didn't care, and just let them burn through it all with legal fees, thinking $65m was still a bargain.

Regardless, barring a miracle, Theranos are headed for default on their loan, and will end up being fully owned by Fortress. TheCEO amusingly asks for further investment to stave this off, but with the SEC judgement, and a skeleton staff, it's not going to happen. It will be interesting to see how Elizabeth Holmes does without the company to pay bills for her, such as for bodyguards, and with a likely criminal lawsuit coming. 

An Idiot and Their Money are Soon Parted

So who are the investors that Fortress jumped ahead of in their deal? Who put in the $700 million that got the company to this point? The Wall Street Journal recently published a list of major investors in Theranos, and it's now clear that the company was funded mostly by individual family investment vehicles, not traditional VC. Key investors were:

• Walton Family $150 million
• Rupert Murdoch $125 million
• DeVos Family $100 million
• Cox Family $100 million

So nearly half-a-billion dollars from four family investment groups, and they will probably see nothing back. (Murdoch already got out for a grand total of $4 million, a 97% loss). Pretty stunning, that. Now I'm going to bet on how much due diligence these companies did before investing, and I'm going with a number near zero. It was widely reported in March that when Theranos claimed revenues of over $100 million to investors, no audited accounts were provided, and investors failed to call a single supposed customer - and the actual revenue was $100,000. That's pretty basic due diligence that even the technically illiterate can understand. Think about the scrutiny you get when you go to the bank for a loan, and then realize that for $475 million no-one even picked up a phone and asked for a reference or a bank statement.

As for technical due diligence, they could have found a few well qualified scientists and executives in this area, and paid them a few thousand dollars each for technical and business evaluations. Total cost, less than 1% of the investment, but nope they couldn't do that either.

I've got no sympathy for them, they deserved to lose that money through their own carelessness - it's just frustrating that there are so many genuinely great companies out there that could work wonders on just a few million. That ~$500 million could have funded >100 hardware startups to a prototype/proof point, and made some genuinely useful advances - but the people that run those types of companies don't lie like Holmes, or exaggerate their technology, just to get a cheque signed (or, as in Holmes case, have well connected parents).

One bright side for Silicon Valley VCs, they can now say "See, wasn't us!", they really weren't the ones funding most of this decade's biggest fraud.

We'll definitely be hearing more about Theranos in the coming months, with the June layoffs, the July default, the inevitable bankruptcy and the possible criminal charges, but next up is John Carreyrou's book "Bad Blood". He's the WSJ journalist who broke the Theranos story, and his book is a history of the company, and will be out in two weeks (May 21st). My copy is on order, and looking forward to it. I fully expect a tale of insanity, greed, selfishness, and stupidity, and I'll review it as soon as I read it.

Holmes' Letter to Theranos Shareholders

April 10, 2018

Dear Theranos Stockholders,

We last wrote on December 22, 2017, shortly after closing a secured debt financing transaction with Fortress Investment Group. We said that the transaction provided us runway to continue work on the miniLab and to position the company for additional financing events—but acknowledged the narrow path forward.

Unfortunately, we are behind schedule on our first product milestone under the Fortress loan, and as a result will soon face a cash shortage. Below we detail our situation, apprise you of our options, and ask for your help as we continue to work to realize value for your investments. As we describe below, we are evaluating parallel paths, including potential investment terms that would provide a large stake in the company at what we believe to be a favorable price.

*****

The Fortress financing, which closed on December 11, 2017, provided Theranos with up to $100 million of liquidity, subject to product and operational milestones. The first funding tranche of $65 million gross was released at closing. The release of a second tranche of $10 million gross was contingent upon FDA approval or CE marking of the Zika assay for use on the miniLab. Achieving that milestone within the first half of 2018 was crucial to our business plan.

Development of the Zika assay has taken longer than anticipated. While the miniLab hardware and software have progressed steadily since we last wrote, we continue to face issues with the reliability of the Zika assay chemistry itself. As a result, timing for finalization of our FDA submission remains uncertain. We have raised with Fortress the possibility of releasing the second tranche of funding despite the lack of regulatory approval, but its willingness to do so is not assured and we understand that in any event it will likely depend on our securing additional commitments from our existing investors.

These developments leave the company in a difficult situation. Taking into account the substantial cost-cutting measures we are implementing today, including the reduction in force described below, our best current projections indicate that—absent further funding—our cash reserves will by the end of July fall below the $3 million minimum liquidity threshold required by the Fortress loan. Under the terms of our credit agreement with Fortress, our failure to maintain this minimum liquidity would constitute an event of default. Such an event of default, or other events of default that may accompany the company’s decreased liquidity, could precipitate an exercise of remedies by Fortress, including Fortress’ taking full control of our assets to satisfy the company’s obligations to Fortress. We expect that path would negatively impact the amounts, if any, available for distribution to our stockholders.

To avoid or delay a default under our credit agreement, we intend to take every step we can to preserve our remaining capital. Accordingly, today we provided notice, consistent with the WARN Act and other applicable law, to all but a small group of employees that their jobs will terminate in 60 days, on June 11, 2018. Difficult though that action is, we estimate that the associated cost savings will help conserve capital sufficient to fund our operations through approximately the end of July, without default under our credit agreement. After June 11, our remaining staff will consist primarily of financial, legal and administrative personnel alongside a core technical team, who will dedicate their efforts toward generating the maximum near-term return achievable for our stakeholders, likely through a sale of the company or its assets.

The most viable option that we have identified to forestall a near-term sale or a potential default under our credit agreement is further investment by one or more of you. In light of where we are, this is no easy ask. However, given your support of the company over the years, we wanted to provide this opportunity before we proceed too far down the current path.

Of course, even with new capital, the future of the company would remain highly uncertain. Nevertheless, additional investment may come with some meaningful benefits. A further investment could help protect your current one by providing the company time to continue developing the miniLab and/or to monetize its patent portfolio (subject to the terms and conditions of the Fortress loan). Further investment could also help us to avoid a sale for an uncertain amount—including a foreclosure sale following a liquidity-based default under the Fortress loan. Any such sale could significantly diminish the net realizable value of our assets. Moreover, in certain scenarios, Fortress would be entitled to control a foreclosure sale and/or monetization of the assets and to realize up to a three-times return on its investment (including, in addition to the amounts loaned by Fortress, the costs associated with Fortress’ monetization of the company’s assets). As a result, those scenarios would significantly reduce or eliminate any prospect of distributions to the company’s shareholders.

Our patent portfolio—which provided substantial support for the Fortress financing—contains more than 1,175 granted or pending patents worldwide. We believe our patents cover broad and important technologies, including: (i) the core technologies in the miniLab; (ii) technologies underlying point-of-care devices currently on the market and generating sizable revenue; and (iii) still-emerging technologies, such as an ingestible digital sensor that recently received regulatory approval for use in monitoring medication compliance. We also believe these patents have the potential not only to eventually protect the miniLab, should it receive FDA regulatory approvals, on the market, but also to support a licensing campaign that could generate significant additional revenues.

We have real progress to build on. Having rebuilt our quality system and implemented process-oriented safeguards for development and manufacturing, late last year we were granted a California Manufacturer’s License following an audit of our manufacturing facilities. Last month, representatives of a third-party notified body conducted an audit of our Quality System; we understand that the auditors will recommend issuance of the ISO 13485:2016 and MDSAP (Medical Device Single Audit Program) certification for the Theranos Quality System. We have also engaged a financial auditor, which expects to complete work on an audit of our 2017 financials by the end of June.

We recognize that the vision of distributed laboratory testing is what inspired many of you to invest, and we strongly believe that continuing our work toward that end could increase the near-term value of the company, and could provide the basis for building significant long-term value.

Although not yet set, the investment terms we are considering would provide a large stake in the company at a favorable price, in light of what we estimate is the intrinsic value of the company’s assets. We expect that new investment would take the form of a senior class of preferred stock, which would also feature substantial governance rights, allowing participating investors a significant role in steering the company forward.

Please note that if we offer new equity securities at a price per share less than the applicable conversion price of our existing series of preferred stock, the resulting anti-dilution adjustments could cause significant dilution to our existing stockholders. Such an offering would likely require the consent of the holders of a majority of our existing Series C-1B and Series C-2A Preferred Stock. The interests of these stockholders, who are senior to all other classes and series of stock with respect to payment upon a liquidation or deemed liquidation of the company, may differ from holders of other classes or series of our stock. Holders of Series C-1B and Series C-2A Preferred Stock should also be aware that their failure to participate in a financing having a purchase price of less than $5 per share would result in mandatory conversion of their shares into nonvoting Series C-1B* or Series C-2A* Preferred Stock.

Subject to our compliance with the preemptive rights of certain investors, we will offer this opportunity to all stockholders who are accredited investors within the meaning of Rule 501(a) under the Exchange Act of 1933, as amended. For any accredited investor who is interested in exploring it, we can provide a term sheet and are available to meet at any time. Irrespective of your future investment intent, we value your engagement as stockholders and welcome your questions and comments.

*****

This letter and its contents are confidential. We request that you not share or discuss this letter with others, except your attorneys, accountants and other advisors bound by confidentiality obligations. The unauthorized disclosure of this letter could violate the terms of agreements between you and the company, and could additionally depress the amount realizable upon a sale of our assets. This letter shall not constitute an offer to sell or the solicitation of an offer to buy securities, nor shall there be any sale of our securities in any state or jurisdiction in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of any such state or jurisdiction or a valid exemption therefrom. Any offering that we conduct will be made only to accredited investors and only pursuant to definitive offering documents, including a disclosure package.

Thank you again for your support.

THERANOS, INC.

Elizabeth Holmes

Chairman and CEO

IoWTF?

I'm happy, because there's finally a chance for me to write about something other than Energous - in this case to return to the topic of "Things That Just Shouldn't Be". Previous recipients of this attention have been Juicero (the "Keurig for Juice") and June (a $1500 toaster oven). Today it's the turn of Sunflower by ShadeCraft - The World's First Robotic Shading System which you can now pre-order for delivery this fall.

Not content with just being a shade, this has everything you've always thought you needed when out on the deck in the sun. It's got lights in case the shade is a little too much, WiFi in case your phone lacks that kind of connectivity, speakers (Harmon-Kardon!), an app to control it in case your lazy ass can't stand up and move it,  security cameras to stop someone stealing your shade because they're jelly, solar power to keep it all going, and of course Artificial Intelligence in case you're too dumb to work out how to operate it. I'm surprised it doesn't mine bitcoins for you. Among any list of "first world problems", this product has to be pretty near the top of it.

I had missed the initial publicity for this product when apparently it was 'launched' at CES almost exactly one year ago. According to Crunchbase, the company was founded in March 2016, and received seed funding of $2 million in March 2017. So 9 months after founding, the company exhibited at CES to launch a product (concept only?), then raised its funding 3 months after that, and now a year after initial launch you can pre-order and get it in almost a year. 

If you have to have one of these beauties, I suggest you order it soon - you can get it today for the massively discounted price of $5,220. (Yes, Five thousand two hundred and twenty dollars) Don't wait, because at the end of the month it goes up to $6,900, followed by $7,800 in March, and $8,700 in April. Yes, nearly $9,000 for a garden shade with speakers, a camera, and WiFi. Oh, and an app.

What on earth is going on here? Even at $1000 each for speakers, camera, shade itself, motors, and solar panels you can't hit that number. Any good engineering project includes as one of the constraints a cost target, based on who the target market is. In this case, either that wasn't done, or the target market is people who have so much money they can just throw it away. Like trying to sell a juicer for $700, this is going to have a hard time - or maybe it's $8000 of pure profit and they're counting on only selling a few.

A clue as to what they may be thinking comes from looking at a previous product from the famed CEO/Founder, Armen Sevada Gharabegian. You've heard of him, of course - the designer of... The Maximillian Chair.

Want one of these gorgeous chairs? That'll be $25,000 please! And no wonder, as apparently it took him seven years to design. Don't worry though, you get a certificate of authenticity with it. So I'm going to go back to what I said earlier and say "This shade is for people with too much money."

Armen must be a talented guy as according to Crunchbase he's the only employee at Shadecraft. If he's not designing and building it himself, then that would mean that CES was used to raise interest in a then non-existent product on pretty sketches and mock-ups, to raise $2 million of seed, to pay outside design houses to get to a prototype, to put on pre-sale to get the money to build to deliver (or to show interest to raise another round). If so, it's a pretty nice way of bypassing a Kickstarter - though the designers should maybe have been given a little bit more of a cost constraint.

This will be interesting to see if the production, logistics, and other support costs have been properly factored into the pre-sale price, and the expected pre-sale volume predicted correctly. Get that wrong and you might end up with not enough orders to get manufacturing discounts you were counting on, or cover the unexpected costs and delays of hardware development. Kickstarter and other pre-sold hardware companies, such as Lily, have a long history of such 'ambitious' projects failing to deliver. Good luck to them.

It looks like they have grand ambitions and the sky is the limit for size - here's one of the images from a recent patent application. (Yes, a patent application for an internet connected umbrella).

If that's to scale, that's a pretty big shade. I wonder what that will cost?

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

uBeam Funded? Or on Fumes?

It's seems uBeam have been in fundraising mode these last few months - the newspaper articles, the demos, the apparent closure of the San Jose office, and that the last known round was in summer 2015, all point to an ongoing fundraising effort. It happens to all startups - you get profitable, you get another round, or you go out of business, no way past that. As far as I know there's no product, so uBeam need to fundraise. There's been no indication of how that's been going (publicly, I've spoken to plenty of people in the VC industry, it's interesting...) - until now.

It seems that the building that uBeam use as their headquarters is going to be available for rent from January 2018. Not just some of it, it seems to be the whole building. You can see the ad here on Loopnet, and there's a "For Lease" sign out front right now.

So what could this mean? A few things stand out as the strongest possibilities - uBeam has raised (or has nearly raised) their next round and are ready for their next expansion and are preparing to move to larger premises, or they're taking their time in negotiating a renewal and the landlord is being cautious to ensure no voids, or simply they don't have the money to commit to a long lease and the landlord is seeking the next tenant.

It could be any of these, or some other innocent explanation. If it's preparing to expand they must be about to hire a lot more people, however their usual job ads haven't changed. If you look here it's the same three key positions of Lead Acoustic Engineer, Lead Systems Engineer, and Lead Hardware/Software Engineer (seems kinda key to have those people...). Perhaps they're so busy signing the next round and counting the money they forgot to put the job ads up, and with my reminder they'll do so in the next few days. All production, sales, and marketing perhaps, since they have to be ramping up to consumer sales soon. Right?

Seriously, I do expect that they will get some funding, though the mix of cheque size, valuation, and % equity is something I've never been able to make work in my head with rational numbers. But I'm just a dumb engineer, what do I know? So it's most likely that they are in discussion trying to get a round signed, that can take some time if it's large. And that would be just as well for a few reasons. If there's no deal on the table from a VC yet, knowing that the company is on a timer to get funding can weaken the negotiating position, but even more importantly can you imagine coming to work as an employee and seeing that "For Lease" sign outside? You'd worry that your job was about to disappear, and begin to look for other work, and that can kill a company. So if they're working through that paperwork, management can tell the team:

Don't worry, we're just working out the details and the next round is imminent.

Of course, if you've been around startups long enough you know that even up to the day the money runs out the employees can be being told:

Don't worry, we're just working out the details and the next round is imminent.

I don't know which it is - Funded or Fumed - but it looks like we'll know by January 2018 at the latest.

Oh, and if you're looking for office space in the area, I'd suggest looking at the place - the office, the location, and the landlord are all awesome.

Update 28th Sept: There's a possibility they may be consolidating in the old uBeam offices in San Jose. These are offices that look to have been leased in Q1 2016, around 8500 sqft for 3 people, and then closed less than a year later (see here for details, last page). Loopnet lists the office as available since Feb this year, but still available. I had thought they had been subleased, but perhaps not. If that's the case, the company has been paying likely around $40k a month for an empty office, and if the lease in Santa Monica runs out, they may be in a position where there is no choice but to move to an office that they've had sitting empty for most of a year.

If true they'll have opened an office, closed it, and opened it again all in the space of less than 2 years, having paid near $500,000 for it to sit empty in the interim.

What's In A Picture?

Last Wednesday morning someone emailed me the below picture from uBeam, asking if I was going to be writing about it. A few seconds later, I realized that I probably wasn't, as really there's not much new to say - anyone who understands hardware and business knows what's going on, the rest don't want to be educated or are investors. I also realized a couple of days later that pretty much no-one else cares either - I only had a single journalist call me about it and after giving him my opinion, he basically said that he was just keeping his notes up-to-date and editors weren't at all interested in uBeam. Since then, I've had a few questions from the tech side, and I noticed that the EEV Blog is commenting on it, so given I've a couple of spare hours tonight, here's my take. (For those who have asked, I'm in the middle of a piece about the recent Silicon Valley: A Reality Check blog post that got some attention a couple of weeks ago and will get it up soon, honest - read the original if you haven't already) 

I'm going to split this into three sections - my reaction, the tech, and the business implications so people can skip bits that aren't of interest.

The Reaction
What we have here, I'm going to assume, is a uBeam transmitter (large box with hexagonal tiles up top) and attached to the phone a receiver (the black brick in the bottom right). What was my first thought in seeing this? (After finishing laughing that is) Clearly they aren't any better at handling publicity than they've been over the last couple of years, with the PR firm clearly so asleep at the wheel they don't even know they're being ridiculed. Given they can actually manage to turn a positive article from a journalist into another piece pointing out the ridiculousness of typical day to day life in the company, it's no surprise that this quality a job was done here.

This, I believe, is the first official public unveiling of a setup that's been promised almost every year since 2011 or so, from a company that's raised $25 million. Is there simply no realization of how bad this looks, or is there an absolute lack of shame or care? Your big reveal should amaze and wow, it should scream that you are delivering, at the cutting edge, that you know how to get the details right from the finest detail to the grandest strategy. What this says is "Hey Granny, do you think I'll win the school fair with this?" not "Thanks investors for the $25 million, we're about to change the world!"

How unprofessional does this look? First thing is that they don't seem to be interested in tidying up the lab and staging before taking a picture to send out publicly, with bags of paper, white board, old carpet, and generally an unimpressive setup visible. It's like leaving your dirty underwear on the floor when your partner's parents come round for the first time. It makes me wonder if, like President Trump impulsively sending out Tweets in the early hours while no-one is minding the store, uBeam staff came to work in the morning to see the FB feed and said "we posted what?". If any of that team have been laughing about 'covfefe' then perhaps it's out of sympathy for the Whitehouse staff and what they have to go through every day. I read the goings on with President Trump and his staff and every day I see yet another corollary to working at uBeam - just in that case it's actually about something important.

Allow me to give uBeam some suggestions as to what to do next time. Begin with "decide the image you want to present to the world". Is it "sleek consumer design that Jony Ive would be proud of" or "cutting edge sci-fi level tech", for example, then setup the situation to reflect that aesthetic. For the former, put it in a sleek case that you've built with impeccable industrial design, you know, kinda like the one that was shown at the Upfront Summit last year? Any reason you couldn't use that? Put it in a user setting with happy people pretending to charge their phones, at the office or at the coffee shop. For the sci-fi side, get it in the lab with oscilloscopes and other equipment arranged in an impractical manner that would never actually be used that way but looks really cool to the average Joe. Hey you could even take that last setup to the next step and even show the voltage and current at transmitter and receiver!

Whatever you do, decide on a marketing theme that can sell and take the time to do it justice.

Along with the pics, actually put out a press release that says something. Take a look at Energous, they're perpetually 18 months from product after a few years and yet they put out professional press releases. You've a model to work from - take a look!

And one final suggestion - and it's not like anyone would have ever told you this before - when you're doing wireless power, don't show any wires in pictures of things being powered!

Seriously - I've not worked there since 2015 and I'm embarrassed by this.

The Tech

Now some time was taken to do a little blurring on the pic - you can see over the box that photoshop had a blurring filter applied in a circle over it. Perhaps this is to obscure that it's likely off-the-shelf components from Murata as I noted in a previous blog entry. (It could be an image overlaid to truly obscure and mislead, but I don't think so).  That's a bit strange, as I have pointed out in other posts that there's no issue in putting a mesh over the front to obscure what's behind, those Murata devices have it done to them by default. That mesh would also obscure the screws in the plastic and make it look at least a little more professional.

Blurring aside, the transmitter is now in a hexagonal arrangement, unlike the regular grid seen at the Upfront Summit, with 7 hex panels each around 15 elements across, so 45 or so elements top to bottom. If it is the Murata 40S4S then that's 45 cm top to bottom, and around 1600 or so elements total. At $3 each, there's $5000 of transmitter parts right there, and those are parts that sell in enormous volumes to car manufacturers so there's not a lot of room to lower the prices further. That implies a $15,000 transmitter, minimum (typical 3x markup from COGS to sale price). The box is maybe 3 to 4" deep, and it's positioned so you can't tell if there's a ton of electronics or power supplies sitting behind it - there were a lot of electronics in a large box in the Upfront demo, perhaps they've been downsized and rotated to fit in the box. Regardless, it's a pretty ugly box and nothing like the prototype that we were given a 'sneak peek' of at the 2016 Upfront Summit - what could have happened?

The hex pattern is interesting, and I wonder if it's been setup to beamform along the center line only only, no steering, in an annular array manner (concentric rings). This would really simplify the need for electronics, but if there are bad grating lobes (as you will get in an array where the pitch is larger than the wavelength), you can probably charge off to the side anyway as there's uncontrolled energy going in lots of directions. Basically, it doesn't seem the pitch is improved to allow for better steering and any real control - a big issue for safety in my opinion (beaming energy, you kinda want to control that). It also would not be representative of an array capable of steering in arbitrary directions.

The phone is attached to an enormous receive case that could be described as a 'brick' - it looks to be about 1.5cm thick which would allow for a number of the Murata transducers at about 1cm thick, along with an electronics board. Now an advantage of such a large box is that it will shield the MEMS gyros in the phone from vibrations which can damage them, but I doubt that's what it's there for - it's simply the smallest that can be made with Murata commercial transducers.

It may be that you've heard someone say that'll get better with "Moore's Law for Transducers", implying the transducers get half the size or twice the performance every 18 months. On the face of it is a bit silly as Moore's Law refers to the density of transistors on silicon and has nothing to do with ultrasound, but when you think about it and dig deep it's even sillier when you realise that the performance of ultrasound devices is generally tied through the laws of physics to particular device dimensions. Given those Murata devices were released at least 2 to 3 years ago, shouldn't there have been some major improvements to them by now?

But the phone is charging! Errr, well it shows 100% charge, but not that it's charging, and as before no idea of voltage, current etc that we really need to know the charge rate, nor of the overall efficiency of the system. Also, from memory, at >80% charge level the iPhone still shows charging even when less than 250mW are received.

So what do we learn from this picture? Not much other than there's a rearrangement of the previous demonstration, it's still apparently off the shelf parts, the receiver case is enormous, and there's no-one experienced in charge of publicity at the company to put out good pictures. As before, there can still be power received, even in the low 10's to 100's of mW, but as engineers and physicists have been saying all along, it's not transmitting power via ultrasound that's in question, it's can you do it at a useful amount, safely, in a practical way, at an acceptable efficiency, with hardware at a reasonable price. This still answers none of those.

The Business Side

As noted above, this looks like demo hardware, not even prototype, and still hasn't been shown working or efficiencies given. Can it work in a practical situation like an office or a coffee shop, or under standard use cases? What's the efficiency? Can it steer? How does it know where the phone is and track it? Most importantly, is it proven safe? Is it even legal at the dB level in most countries?

Reaction on Twitter seems pretty muted - in a week there's been a whole 3 replies and ~100 'likes' which is pretty telling. Seems the journalists know their audience...

What's really interesting though is that uBeam have not yet announced a new funding round. It's near 4 months since the Upfront demonstration, enough time to have completed a funding round with such slam-dunk technology. I'm saying 'no funding (yet)' as there are no new job ads, no publicity, and if one of the 'big guys' who a company will already have had come through to price the round were interested, they would not allow pictures of the tech to get out, especially if it's an Apple or a Google. Four or five months into fundraising things are starting to get stale, everyone knows that the first guys you spoke to haven't come up with terms (or acceptable terms), and that holding out will just get the company more eager to deal. Even with reducing burn rate by shedding senior staff and closing offices, runway only buys you so much in this type of situation. It's getting close to summer as well, and VC's are notorious for disappearing for July and August.

I have been expecting it announced soon, since there's no shortage of dumb money to go around these days, as when a 'low toxin butter-coffee' company can raise over $19 million, it seems anything will get funded. Perhaps they're holding out for the best valuation and getting that $100m round on an Energous-beating $400m valuation?

Who knows? And, from the public reaction to this picture, who cares?

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.”