I’ve received most of the answers I needed about LPP after emailing Bob (CFO). Here’s my current take.
1. Number of shareholders
I had expressed earlier that it was oddly suspicious that LPP is accepting investments of $5k from people after having raised a few million dollars and valuing themselves close to $30m. I had shared how later on if sophisticated VCs joined as investors and LPP was not in position of strength (ie., they really needed the money) that VCs could find ways to wipe out earlier shareholders, especially if they saw a lot of tiny non-involved investors. After reading through the private placement memorandum LPP provided, it appears that they do have various shareholder dilution provisions in place. Further, it appears that Eric Lerner has full voting control over the company. This helps as Eric can help make sure earlier shareholders (esp. the tiny ones) aren’t wiped out in later rounds.
I had mentioned that VCs could wipe out earlier shareholders and there are various ways that VCs can do this. A lot of depends on the company and if the company is in a position of weakness or not. If the company is weak (ie., is really struggling to survive) during a later round VCs could come in and take a large portion of the company. They could also issue arbitrary amounts of stock or even take control of the board. They can even shut down the company and move the IP to a newly created company. It can be quite brutal if the company is struggling to survive. I’m not saying that all this will apply to LPP since their situation can be unique with the founder perhaps refusing to relinquish control ever. However, the risks I shared earlier are just a reality of angel/VC investing. It’s not a concern necessarily specific to LPP, it’s more of a general issue people ought to be aware of when investing in early stage companies.
In the case of LPP, they appear to have quite a low number of investors (far below the 500 sec cap). So I don’t think they’re at any risk of running into legal problems with the numbers of shareholders. It’s more of a minor concern of how tiny non-involved shareholders might be viewed by sophisticated VCs at a later stage, if that happens.
2. Accredited vs Foreign investors
It appears that LPP is accepting investment from only accredited investors if they’re in the U.S. But for foreigners, they’re accepting investment from anyone. They claim that this is legal and I have no reason to doubt their claim.
Some people have mentioned that since only accredited investors can invest in LLP that they are experienced enough and have enough assets to make a speculative investment into LLP. However, since LPP is accepting foreign investment from non-accredited investors then I think it’s wise to caution these investors to do full due diligence before investing, as with any investment of this nature.
3. Tech/Science
I’m not going to comment on the science and tech behind LPP and what they are trying to accomplish. The reason being is because I don’t have expertise in the field of fusion and wouldn’t add much value here. So most of my comments aren’t related to LPP as a product/science but rather just highlighting some areas of due diligence (ie., non-product related) that investors should look into.
4. Size of company
It appears LLP is a very small company. According to their CFO, LPP has three full time employees and one full time contractor. In addition there are 3 part time employees and two part time contractors. Now this is both a pro and a con. The pro is that their headcount is small so their expenses are relatively small. The con is that they don’t have a large staff and the manpower to do a ton of work that a large team might be able to do. This is something that the person interested in investing in the company should be aware of and should be comfortable with.
I asked their CFO how much investment they raised and how much their total expenses were each of the past 3 years. I won’t share the info here since I’m not sure the company wants that info out in the public. But if you’re interested in investing, I think it’s worth asking them so you can get a better feel of their size, their budget/expenses, and the investment they’re bringing in.
5. Valuation
The company is valuing itself at $27.8m. I have mixed initial feelings about this. On one side, I think $27.8m is quite a high valuation for a company so small. This is a company with just a handful of full-time employees, yet their raising money at a valuation of close to $30m. On the other hand, since I don’t understand the tech/science behind their product/research, it could be that they have a ton of IP that really is worth that much money.
When I asked about valuation prior, a few people mentioned that the stock offering was for $100/share. But $100/share really is meaningless. It’s more important to understand at what valuation is the company raising money at (ie., valuing their company at $27.8m). So whatever money you put in, you’re getting a small piece of that pie. For example, if someone puts in $1m then they’ll get 1/27.8 of the company.
It’s also important when thinking about valuation to recognize that your investment in an early stage company will be diluted by later rounds, unless the company never has a need to raise funds ever again which is rare. There are many scenarios how dilution takes place but it largely depends on what kind of position the company is in at the time it’s raising funds (ie., is the company negotiating from a position of strength or weakness).
I know some of the people who have invested in LPP think that in just 12 months, LPP will have a breakthrough and investors will be knocking at LPP’s door begging for an opportunity to invest. This could happen. It also could not happen. And if it doesn’t happen, then dilution becomes an increasingly larger concern as the company needs to raise funds without it’s promised breakthrough.
6. Lack of Revenue
Another area of risk is the company’s lack of revenue. It appears that the company is at a research stage and isn’t able to “sell” a product to anyone. As a result, they’re relying almost completely on raising funds from investors to pay their bills. This is typical of certain types of startups (ie., biotech) where a company is spending years trying to develop a hit product (ie., new medicine) and doesn’t have any revenue until the product is developed. This type of investment tends to be more risky since sometimes it’s difficult to gauge if the startup really is on track to make it’s hit product and when that hit product will be finished, if ever. That’s why investors in these type of startups probably ought to have deep domain experience to be able to evaluate the current state of the startup and it’s technology/science.
Contrast this approach with the approach of SpaceX, where in order to fund Elon Musk’s mission for a colony on Mars he ingeniously created a company that brings in revenue (ie., satellite launches and space station trips) to fund the continual development toward a reusable rocket that will take people to Mars.
I’m not saying LPP’s approach (ie., lack of revenue) is destined to fail. Rather, I’m saying that there’s a revenue challenge. They need to find a way to bankroll all their research. And if their research takes longer than expected, or if they hit some unexpected challenges, then they’ll need to come up with ways to find funding or else their venture will eventually die. I have to say though that the company has found a way to manage to survive until now and appears to be quite scrappy.
7. Fundraising challenges
It appears that LPP has had some challenges in raising funds. In their October 2012 presentation,
http://lawrencevilleplasmaphysics.com/images/Presentation Script 101212.pdf, they mention the following:
“Q: What could make us move faster?”
“A: Well, there’s too few of us…So that’s the problem... it’s too small of a team.”
“Q:If you had your funding, $2M you’re asking for, what do you believe your timeline for feasibility?”
"A: Well I hesitate a little to say timeline because everybody underestimate deadlines, but we do look to get feasibility in the next 12 months."
And then in their 2014 kick-off report,
2014 kickoff report: Looking back the year ahead
"While our progress in the laboratory was severely hindered by a shortage of funds, preventing us from advancing as rapidly as we could have otherwise, we did take significant strides forward.”
"Shortage of funds constrained our work by impeding the hiring of additional scientific staff and by imposing on us the need to seek the least expensive suppliers of the tungsten electrodes, which has delayed by months their acquisition.”
"we don’t expect to complete the demonstration of scientific feasibility in 2014, but we do expect to take large steps towards that goal.”
In other words, in Oct 2012 they said if they had adequate $2m funding that in 12 months they could demonstrate feasibility. But then in Jan 2014, after sharing their struggles with lack of funds, they say that they don’t expect to reach feasibility by the end of the year.
When investing in an early stage startup one of the areas I look at is execution. I look to see if the company is executing on what they’ve projected to do or not. And if they’re not, then why. I’m unclear how well LPP executes. Their struggles with fundraising appear to be a warning sign to me. However, on the other hand they seem to be scrappy and to be raising funds via grassroots and are holding together their handful of full-time employees. So, in some ways they are executing simply by not giving up and continuing to stay alive as a company. On the other hand, they haven’t met their fundraising goals and this has severely hampered the speed of development. So, execution (esp. with fundraising) appears to be a risk factor.
8. Overall impression
On a personal level, I have my concerns with the level of execution that LPP demonstrates with fundraising. I also get a sense from the above links I referenced that they might be overly optimistic in their timetables as well.
There are certain really difficult businesses where you need to get a lot of things right in order for the business to have a chance to succeed. For example, Tesla and SpaceX are good examples. You need to get a lot of things right in order to just have a chance. I don’t know the fusion field but it would appear that in order to succeed at fusion you really need to get a lot of things right. While most of those items are science-related with the product, fundraising is equally important. The company needs the money to survive. Sometimes surviving is enough because as you survive you come across discoveries and you might get lucky. But sometimes surviving isn’t enough and you need money not just to survive to to innovate at a fast pace. In other words, in certain fields just surviving isn’t going to cut it. You need to execute brilliantly and fast in order to have a chance. I wonder if fusion is one of those really difficult fields where surviving just won’t be good enough. I really don’t know. But if I’m investing in any field that appears really challenging, then I want to see the team be brilliant at executing in all the important areas.
Due to my concerns regarding LPP’s challenges with lack of funds and what I view as potentially weak execution in fundraising/business, I’m not very interested in investing in the company. But of course, they might be on to something truly amazing with their approach to fusion and I hope that they really do succeed. For people interested in investing, my suggestion is to do your due diligence and ask questions. And if you’re able to really understand the fusion field, then you’re at a greater advantage because you can evaluate the various approaches out there as well.
I do have concern when people don’t do much due diligence and they don’t understand the fusion field, yet they throw money into a company like this out of fear of missing out and because others are investing into it. But for those who’ve done their due diligence and who understand the fusion field, then more power to you and best of luck. I really do wish the best for LPP and all companies trying to make a difference in this world.
Looks like LPP is really efficient with the money they are spending. Apart from solving the energy needs of humankind and minimizing our impact on climate, the success of this enterprise would greatly help Tesla's case (but, ironically, would hurt SolarCity).
