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I have received more information from multiple sources as a result of my story, All Magic Leap Patents Have Apparently Been Assigned To J.P. Chase Morgan As Collateral. So this article is following up on that story.
The discovery of Magic Leap “mortgaging” (more on that later) their patents to J.P. Morgan and my reporting on it came at a bad time for Magic Leap. Unbeknownst to me a couple of days ago, Magic Leap is in the middle marketing tour for a Series E funding round.
As I discussed last time, almost all the $2.6 billion (that we know of) money has been spent. And the Magic Leap II money monster needs more feeding like Audrey II from “Litte Shop of Horrors.”
It was another wild ride on this blog Sunday after it became the #1 story on Hacker News. Variety Magazine cited the Hacker news thread on my article the next day in Magic Leap Is Raising Another Big Funding Round. The amount of interest didn’t take the site down, but the response was sluggish for about an hour.
Next Reality on Monday had a similar story (better written, but a day later 😊) to mine titled, Magic Leap Patents Signed Over to JPMorgan Chase as Collateral Just Months After Major Funding Push. In their update to the story, when they asked for comment on the I.P. collateral issue, they got the following response from Magic Leap:
“’Magic Leap is in the midst of a significant financing round, which will become our Series E when complete. We have already closed a major portion of this round, some as equity and some as convertible debt that will become equity when the round is complete. The participants in this round include existing investors, new investors, and strategic partners,” a spokesperson for Magic Leap told Next Reality.’”
The response from Magic Leap is for word identical to what Magic Leap has been presenting to the press, including Variety Story on the E-round. As correctly pointed out by Next Reality author, Adario Strange, “Unfortunately, that statement doesn’t directly address our questions regarding the company’s decision to enter into the patent security agreement with JPMorgan Chase.”
It looks like Magic Leap is trying to conflate the mortgaging of the patents with needing to raise even more money in their E-round. It is unclear whether the J.P. Morgan Chase loan that used the I.P. as collateral, it part of the round. But I doubt it as Magic Leap dance around Next Reality’s question.
Also, for a company that has been rasing more hundreds of millions of dollars per round, what does it take to be “a significant financing round?” I’m told that Magic Leap did not give numbers on their finance marketing tour.
Last time I said that people were figuring that Magic Leap had sold between 5,000 and 8,000 units have been sold, but I have been informed that the number is likely below 2,000 units were sold with a large number being given away. Doing some simple math indicates that it cost Magic Leap to date more than $1.3M in investment per unit sold.
With such a small number of units sold, most of the units sold were to companies/competitors curious about what Magic Leap was doing. This leaves next to no installed base for software developers.
I also hear there is a warehouse with more than 10,000 unsold units. One has to figure that their whole supply and contract manufacturing chain is unhappy with low volume and no need for more units.
I have not been able to find out a lot on the technical side, but apparently it not completely new display technology but more of an improvement over the Magic Leap One (ML1). The word is that it has a wider field of view (FOV) which would put it wider than Hololens 2, but I don’t know by how much. Also, in an effort to please AT&T (which has been putting and unknown money into Magic Leap), SK Telecom, and NTT Docomo, the ML2 will support 5G. It will also, as no surprise, have more compute power.
It’s not clear whether they are giving up on their “focus planes” concept that greatly degrades the image quality (as I have written about in past articles). I have heard some rumors that they may go to a single plane, like everyone else, to reduce cost, but I don’t know if this is true.
IMO, it sounds like they are just rearranging the deck chair on the Titanic. The ML2 will be dead and buried long before 5G is commonplace, but it is there and adding significant cost to have a “story” to tell the telecom companies (with Magic Leap is seems to always be about the “Big Picture Story”). Bigger FOV will please the techno-geeks, but that was not their biggest problem.
I have a lot of faults with Hololens 1 and 2, but at least they built what I would consider a “product” that could meet some customer’s needs. Unlike Magic Leap One, Hololens had large eye relief that allows people to wear most normal glasses and interchange headsets; this makes Hololens bigger and uglier, but it is vastly more practical than Magic Leap’s Steampunk goggles. Also, Magic Leap’s cord to a computer pack concept (wired in at both ends no less) as I reported when I first saw it, an accident waiting to happen. I didn’t hear anything about them fixing these major flaws.
As would be expected when a company is trying to raise more money under the duress of running out of cash, I’m hearing that Magic Leap has been laying people off quietly since January and that this has accelerated in recent months. It sound’s like part of the severance package is that they can’t talk about it.
Magic Leap was apparently hoping that Apple would buy them like Apple bought Beats for $3 billion. In addition to having Scott Henry as CFO (former Beats CFO) since 2014, Landon Cortenbach, V.P. of Business Engineering (former Beats Director of Accounting), in 2018 they hired Yul Vanek as V.P. of Technology Solutions & Services (former Beats V.P. of I.T.).
The only problem was that A) Beats was selling a lot of audio headsets and B) that Apple didn’t think they needed Magic Leap’s technology (most of which is hardly that new). The problem with the “big company as your savior” strategy, is there are very few people that have to say no.
There were some complaints raised about the terminology in Sunday’s headline that Magic Leap patents had been “Assigned as Collateral” to J.P. Morgan Chase. Next Reality did a better job explaining it. I was trying to be clear that while the assignment shows as change at the U.S. patent office, it was because the patents are being used as collateral on a loan.
This like a mortgage on a home, Magic Leap still has control of the patents in similar to how a person owns their home with a mortgage. But like a mortgage, Magic Leap was to not fulfill the terms of the loan contract, such as paying back the loan, then J.P. Morgan Chase would own the patents (and not any other investors which would be unsecured). The exact terms of the contract between J.P. Morgan and Magic Leap are not known, but in order to perfect J.P. Morgan’s position as first in line to get the patents, the needed to register it with the U.S. Patent Office.
“Mortgaging the patents” usually happens when a company can’t raise money any other way. It’s bad for current investors in that if a high-tech company goes bankrupt, selling patents may be the only that has significant value to sell. Depending on the terms of the contract, which we have not seen, it may or may not tell future investors that the patents will not be there if Magic Leap goes under, thus making raising money more difficult.
In any event, it gives a pretty clear signal that Magic Leap is (finally) having some trouble raising money.
File this under learning from WeWorks and Theranos. I have personally seen good high tech startups be put through the wringer in due diligence for a few million dollars. Then you see companies get literally billions in what I call “lemming financing.” All it seems to take is one big name and big ego’ed lead financer does poor due diligence and people with more money than knowledge follow suit.
Magic Leap may not quite be Theranos, although the whole fiber scanning display is very Theranos-like. Like Theranos, Magic Leap sold the concept but had no rational knowledge of how to build it. In the end, like Theronous, they used the pile of money they raised to buy a solution that everyone knew about (in Magic Leap’s case, diffractive waveguides driven by an LCOS display) and pretended it was revolutionary.
I have been writing on this blog for about 3 years on why Magic Leap was technically dumb. This blog has been read by over 20,000 people in a month, and many of them are executives at high tech companies and investment firms, hopefully none of my readers invested. And I don’t even charge for this blog.
Magic Leap has taken in over a billion more dollars more since I started writing about them. And they are still trying to put out the fire with more sacks of money. Sadly, Magic Leap has soaked up and wasted so much money in the AR space that many fear it is going to leave nothing but a big stink behind it.