OTOY- Virtual Reality Company Gets Real Money

There is no denying that the Virtual Reality industry is taking off, with Magic Leap being valued at over $3 Billion & Oculus being acquired for $2 Billion, the space is heating up and the investments into these companies are anything but augmented. One company that has flown under the radar is OTOY, investment details are scarce so we wanted to provide a little insight into what we have found so far.

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You can find more financing details for these companies and thousands more with our Intelligence Database. It’s free to create an account – so what’s stopping you?

What Do Those Deal Terms Mean?

In today’s venture financing environment, knowledge of the venture financing process is vital to ensuring fair business practice between entrepreneurs and investors. Many times, deal terms are often agreed to by entrepreneurs without a clear and concise understanding of what the terms actually mean to their company.

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Valuation of Private Securities: The Way the Pros Handle It

In a recent opinion by Vice Chancellor Laster in the Delaware Chancery Court, he made the point, and I quote from an Orrick alert. [1]

“Among other things the Court found that the valuation firm … did not perform a comparable companies analysis even though only months before, during the ordinary course work, it deemed another transaction in fact to be comparable.”

The securities in question had been extensively analyzed as to valuation by various professionals who had focused on methods such as discounted cash flow (“DCF”), which entails an estimate of future cash flow and then discounting the number back to the present time to arrive at a valuation. And, of course, there are a number of other methods for valuing illiquid property and, in particular, securities in a company which are not traded on an exchange. [2] The problem with DCF and like valuation methodologies is that one can arrive at just about any number which is this side of the absurd, depending on how the various elements of the methodology are tweaked.

For example, in a situation in which I participated as counsel several years ago, each side had hired an internationally recognized valuation service to compute the value of the stock in the company which an individual (who was a good or bad leaver, depending on how you looked at his performance) had owned. The valuation expert retained by the company which was paying for the shares in accordance with a put/call agreement entered into when the individual joined the company came up with a valuation of $160,000. A well-known expert, which the former executive had retained, came up with a valuation in excess of $11 million. The legal fees run up while the parties went after each other, given (among other things) this disparity in opinions, were well into the seven figures because settlement negotiations were rocky from the start.

The second reason that comparables are used so frequently is my experience in the venture capital business. The fact is the way the VCs often arrive at a valuation when making, say, the Series A investment is best described as the herd instinct. The investment managers, the members of the general partner, will look at a company in the same line of business and in the same general location and their first question is, “How did Greylock or Sutter Hill value this other company?” With that information under their belts, the answer as to the ultimate valuation is tweaked in accordance with a comparison of the size and profitability of the two companies. And what counts is the comparable information.

It is available through VC Experts on a quarter by quarter basis, one can track, for example, pre- and post-money values of medical device companies in New England over the last seven quarters. That’s the kind of information the pros very much want to review when they approach this critical inquiry. It doesn’t mean they won’t use other methods as well; but comparables are the way at least to smoke out bizarre results such as the ones in the example above cited.

[1] Halper & Rooney, “Flawed Valuation Leads Delaware Court to Award Damages to Option Holders,” Orrick, Client Alert, 08/14/2015.

[2] Disclosure: I am the chairman of the Board and co-founder of VC Experts (www.vcexperts.com) which provides officially derived comparable valuations with respect to which investments have been made as contained on, e.g., the MoneyTree Survey..

Late Stage Deal Term Teardown

Take a moment to check out some of the trends surrounding Late Stage Valuations and Deal Terms. Included in the report is an analysis of over 200 companies and 270 deals.
VC Experts – Late Stage Deal Term Teardown is FREE, please don’t hesitate to pass it along.

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Cloudcade’s Harsh Series-A Term Sheet

Following up from last Thursday’s blog post about certain deal terms that entrepreneurs and employees at startups should become familiar with, our analysts found an interesting scenario with the October 2014 Series-A financing for Cloudcade, Inc. Founded in late 2013, Cloudcade is a free-to-play mobile games developer with a tablet-first approach towards deployment. Since inception, Cloudcade has assembled an all-star team with extensive experience in the gaming industry and an undying passion for creating the next generation of mobile entertainment. While its games will be optimized to be played on tablet devices, the company aims to bring gaming to the next level by releasing cross-platform on mobile, web and TV to allow users to play synchronously across any platform around the world.

Over the years, we’ve analyzed thousands of term sheets from venture capital financings in our Intelligence database. Most of the time, you tend to see investor friendly deal terms in later stage financings or in Healthcare/Biotech/Medical Device investments. With Cloudcade, however, this was their first round of institutional money in the booming “gaming” industry. IDG Ventures invested $1.5mm into the company in October 2014, with the following terms:

  • Round: Series A
  • Liq. Pref.: Not Applicable
  • Liq. Multiple: >1 – 2x
  • Stock Type: Participating Preferred
  • Capped Participation: No
  • Anti-Dilution: Full Ratchet
  • Redemption: Yes
  • Cumulative Dividends: No
  • Dividend Rate: 8%
  • Pay to Play: No
  • Reorganization: No
Notice the “Full Ratchet” Anti-Dilution provision? “Full Ratchet” (sometimes called “Ratchet”) Anti-dilution provisions reduce the effective per share purchase price of the investor’s shares purchased in a round to the actual, lower price set in a later offering or event (for example, a subsequent financing round or issuance of shares as consideration for a transaction) thereby raising the number of shares of Common Stock into which the investor’s Preferred Stock will convert. Full Ratchet is more favorable for the investors who receive it and can result in significant dilution for founders and other holders of Common Stock in the event of a Down Round. “Vanilla”, or company friendly, terms have been the norm for Silicon Valley early stage financings as of late. With IDG publicly  professing their appetite to invest in gaming companies, what could be the reason(s) for the harsh terms so early in the capital infusion process?


Friday Feature Company: Beepi, Inc.

Early Stage Tear Down

View the Early Stage Deal Term Report

After posting our Early Stage Deal Term Report we decided to dive deeper into one of the companies that caught our attention. Beepi is the first and only 100% online peer-to-peer marketplace to buy or sell a car. According to their website they “…take up to 9% of all transactions. To put that number in perspective: dealers mark cars up to 54%. [They] are able to offer low prices because [they] connect buyers and sellers directly and don’t have overhead like salespeople or physical lots…”. Beepi has raised north of $57M based on regulatory filings and we valued them at $166 M post-money after their Series B round.  You can see the investment profile below.

beepi_logo_transp_2Investment Data

View the Entire Company Report for Beepi, Inc.