Light Phone – Angel Investment Deal Memo

Light – The phone designed to be used as little as possible, reconnecting you with the world and people around you.

Quick Overview

Minimum Investment
$100

Funding Goal
$25k – $428k
($12M Valuation Cap, 20% Discount)

Date Funding Closes
Wednesday, September 20, 2017 at midnight PT

Crowdfunding Platform

Deal Positives

Reasons in favor of Light
  • They already went through the process of manufacturing and shipping a hardware product. This is HUGE.
  • Already sold and delivered 9,000 units, proving consumer interest.
  • Industry veteran on their leadership team to run operations and help them navigate key conversation with major existing cellular providers.
  • Addresses a relatable need.
  • If Light can grow beyond the Phone and transform other areas of our life to better find the right level of disconnect or disruptiveness, this could be big. Don’t expect to see an attempt at this until 2019 or 2020 – unless they took their eye off the ball in solidifying a healthy business built on Light Phone sales.

Deal Concerns

Challenges Light will face
  • Can they manage their supply chain to scale production as fast as they want for 2018 (10X!) while keeping qualify high?
  • Just because units have been sold doesn’t mean Light has achieved product-market fit. Will enough people actually keep using the product beyond the initial novelty? They have to grow past early adopters to build a sustainable business.
  • Something as simple as “Is my Light Phone charged when I want to use it” can get in the way of usage retention.
  • Hardware is HARD for so many reasons. Capital intensive. Unpredictable supply chains. Even after proving you can ship a product, is it resilient over the long term or does margin evaporate if too many phones require warranty replacements due to higher than forecasted failure rate.
  • Hardware is historically a low margin business. If diversification into subscription business fails, is hardware enough to build a sustainable business on?

Jump down to Investment Summary





Product Stage

Existing product, product-market fit, traction in users or sales?

Light Phone is a second phone to complement your primary device that allows you to leave your smart phone at home and disconnect while still being selectively reachable. When’s the last time you were able to go out to dinner or drinks with your significant other or friends and someone didn’t give into the temptation of pulling out their smart phone instead of engaging in conversation?

In our hyper-connected society, Light Phone dares to help us break the cycle of micro-reward addition. It’s a phone that just makes and receives phone calls. That’s it. It works with your existing phone number. You can use the Light Phone app on your primary smartphone to setup an approved list of people that can reach you on your Light Phone (keeping those pesky telemarketers out of your most precious moments). Don’t worry about not having your address book from your smart phone and having to remember phone numbers. You can program up to 10 phone numbers into the Light Phone.

Hardware is hard. I’ve backed a few hardware projects on Kickstarter and the teams always under-estimate how much work and length of time it takes to bring a physical project into being at any kind of scale with high reliability. Most hardware Kickstarters are one to two years late and the other half never deliver.

That’s why I like Light. They’ve shipped a physical product already. In May 2015, they had a successful Kickstarter which was followed by additional pre-orders that allowed them to prototype the Light Phone. They sourced the right parts and manufactures in China to deliver 9,000 orders in 2017.

I wasn’t part of their original Kickstarter but looking at the timelines, they weren’t the hardware project exception. They still sustained delays along the way, but that was because their timelines were too aggressive in my opinion. They’re on the other side of that now and know how to ship a product. They are actually accepting orders again for their next production run of the Light Phone v1, which is their original 2G 2015 design. The Light Republic page shares a small teaser for the LTE 2018 design, but no further timing details.

This product clearly fits a need in the market for people that want to practice stretches of disconnected time without getting rid of their cell phones or smartphones completely. Light has a lot great testimonials from social media from happy customers, but they do not talk about usage retention. Does the Light Phone become a daily or weekly part of my routine? Or does it go the way of the step tracker bands where two-thrids of them stay in the sock drawer after the first 6 months, never to be seen again.

Market

Size, Growth, Maturity, Competition, Alternatives?

The mobile phone market is huge. As of this writing, GSMA Intelligence real-time counter puts the number of mobile devices at 8.2B (more devices than there are people on Earth) with 5B unique mobile subscribers. Statistia estimates $435B in global revenue from smartphone sales in 2017. While still growing somewhere between 5% – 8%, the market is mature and slowing, especially in the developed world.

One thing I did not like about Light’s campaign on Republic was how they calculated their Serviceable Attainable Market (SAM). That’s the estimate of “If everything goes amazing, how much of the market can we capture?” $435B from above represents the Total Available Market (TAM) annually, which is “How big is the total industry?” Light said their SAM is 0.5% of the whole pie. +$2B?! That’s a lazy estimate I wasn’t expecting, and never works out. “If we can just capture 1% of the market” said many a failed business plans.

Where they redeem themselves is in thinking about their 2018 forecast, which we will use as their Serviceable Obtainable Market (SOM). This represents their realistic annual reach in the foreseeable future. This target is 100,000+ orders shipped and activated in 2018, resulting in $10M+ in revenue.

With limited research, I didn’t find any direct competitors of the Light Phone device, so let’s talk adjacent competitors.

First, Apple – a hardware and software maker. If the recently announced iPhone 8 and X prices that break the $1,000 mark are any indicator, Apple has no intention of making mobile devices in the $100 – $150 range that would make owning a second phone possible for most.

While having some silencing features or granular ability to control push notifications, I don’t see Apple as a software maker going much further than this. Their entire hardware and app ecosystem relies on the addictive nature of the micro-rewards our brain gives us when we check our phone and are met with new information to consume. Don’t expect anytime soon a mode that time-locks your iPhone at the OS level to just be a phone and doesn’t give you access to apps.

Then there is Google. Also a hardware manufacturer, but most of their impact is felt from the Android operating system. Android dominates two-thirds of the global market, but is just a tad over half in the US. Either Google proper, or someone else branching the open source Android OS may create a version meant to be used on a second device as just a phone.

I could see Google building a low-cost phone to offer in the developing world and supplementing the project by selling them at a higher but still reasonable price to people in the US and EU as secondary phones. It plays into a long-game Google, but not likely though since Google wouldn’t drive bread and butter search ad revenue from these stripped down phones.

For the same reasons mentioned for Apple, Google can’t afford to build a less-disruptive version or mode of their OS for your primary phone. They rely even more on app marketplace sales in their phone division than Apple does.

The last alternative I want to mention is the good old fashioned lo-fi solution of not being a jerk. Resist the urge to look at your phone when out with friends or significant other. People try tactics like phone roulette where everyone puts their phone in the middle of the table and the first person to grab their phone before the meal is over has to pick-up the check. Or a lower-stakes version of leaving your phone in a basket at the door when attending a dinner at someone’s house.

Unfortunately, the chastising by a significant other hasn’t broke our mental urge to stare into a glass rectangle looking for rewards instead of making conversation. Society has deemed it acceptable more often than not and we aren’t going to 90-degree starboard turn this freighter around.

So instead, turning to a solution like the Light Phone puts us back in control. Anyone that’s attempted to change their nutrition habits knows that it’s easier to resist snacking on cookies if you don’t buy cookies at the store and bring them home in the first place.

Team

Key team members. Ability to execute?

Kaiwei Tang (Co-Founder) has brought 12 mobile devices to life over 10 years of product development.

Joe Hollier (Co-Founder) brings the artistry and design to the Light direction

Eileen Bayers (Sales and Operations) is the mobile business veteran with +12 years, including as CFO at CREDO, a telecom reseller that puts it’s mission of donating 1% of profits at the forefront of it’s positioning.

Both co-founders have connections to Google. Eileen Bayers is like the adult supervision to ensure the trains run on time and on budget. They also have a substantial supporting cast of teammates and advisors you can see on their Republic funding page. This is because they already operate as a real company. Not a proven quantity yet, but beyond the phase of a couple people dreaming up the future in a garage.

Business Model

How do they make money and is it fiscally sound? Previous Revenues? Unit economics and Forecasts?

Light Phone is currently selling the 2G model for $150 each and they claim over 9,000 units shipped in 2017. When rolling in the discounted Kickstarter orders, that puts them slightly north of $1M in revenue for the year.

Right now they are offering $25 off the $150 Light Phone 2G model on pre-orders of the next batch before Oct 30. Expected delivery is early November, so Light is charging forward without missing a beat.

Soon they will offer a monthly service of $10 per month that makes it easier for consumers to add a Light Phone to their existing cellular plan. Recurring revenue is a great thing for this business. It helps diversify growth from having to find new customers to sell a Light Phone to in order to make more revenue. Every $150 Light Phone sold will then drive $120 a year in recurring subscription revenue. Half of this is likely split with the cellular providers.

The question then becomes how long a person stays a subscriber. If the person is over the novelty of their Light Phone after 6 months, do they discontinue the service? Or is $10 a month a low enough price point like many other subscription services that the person just leaves it enabled. Much like my $10 per month Planet Fitness membership, do subscribers keep it active as a reminder to aspire to build healthier habits of unplugging from technology. What will the Lifetime Value (LTV) of these subscribers become? My guess is somewhere between 3 months and 24 months.

Light also plans to begin channel sales of their phone in 2018 with partners like ATT and Verizon that could sell it in-store as an add-on when a consumer is upgrading. What’s another $150 when you spread it out over an 18 – 24 month payment plan?

The plan is also to partner with retailers like Target and Lulu Lemon and experiences like hotels.

This could be great for reach, but will be less margin for Light compared to their direct to consumer business. Retailers will want to purchase the phones at a wholesale value much less than $150. Wholesale rates like range from 5% to 50% discount (aggressive) for electronics based on my knowledge.

Prior Funds Raised

Publicly available info

As mentioned, Light Phone had a successful Kickstarter in 2015 that raised $415k and provided backers with rewards, not equity in the company. Also, not every one of the 3,187 backers of the project did so at a level that got them a free phone.

Then there were additional pre-orders of the phone in 2016. Combine with the Kickstarter sales, they were able to ship 9,000 units in 2017.

Light was also able to raise a $3.2M Seed round from strategic partners like FoxConn, SOSO, and Pally Technology Investment Limited.

Light Phone already did an initial equity crowdfunding campaign on Republic that raised $107k and was filled quickly, so they decided to do this second Republic campaign vs trying to raise the cap of their first campaign in-flight due to the extra legal paperwork that would have caused.

This is a consumer good where they are looking for ambassadors to seed their story. Which I imagine is partly why they went to Kickstarter first and why they are raising an unaccredited investor round on Republic. To take a capital intensive hardware startup to the next level in 2018 of 10X the sales of the previous year, I predict a traditional VC round is short to follow. With their success raising on Republic, it continues to build a nice narrative for the Light storyline that the market still supports more of what they’re selling.

Exit Opportunities

Who would acquire this company? At what stage? Or is this IPO material?

I don’t see this company getting to IPO with just the Light Phone product (at least by today’s standards of how large a typical IPO company is). It could be possible though if they execute their bigger vision and transform multiple tech products to grow to IPO-worthy.

An ATT or Verizon could potentially acquire Light for the phone product and still be able to maintain cordial partnerships will major cell phone manufacturers if it’s seen as a supplement and not a replacement for the iPhone or Galaxy. Both have deep enough pockets that they could wait to see if enough people actually want the Light Phone and still pay more than the magical experience $100M threshold that prices out a lot of potential buyers.

You could also see an existing phone manufacture gobble them up to consolidate the market like Apple did with Pebble watch. Hopefully this would be on the upward trajectory and not in a fire sale situation like Pebble.

Google, Apple, and Amazon are focused on capturing the home experience right now with voice activated boxes connected to the knowledge and consumerism of the internet. If Light the company eventually creates a product to break our other tech addictions in the home, maybe one of these three companies would become more interested in acquiring Light.

My left field guess is that someone like Lulu Lemon who’s selling mindfulness and holistic wellness as their brand image would acquire Light to get into the tech market. I think there are also going to be large mindfulness companies in the next 3 – 5 years as that space evolves, creating a large enough acquirer at the time that isn’t even on the radar yet (like Headspace app).

It could even be a next gen health insurance company like Oscar if they quantify that using Light phone decreases depression by curbing social media addiction, thereby reducing health care costs long term. Oscar already gives out free step trackers and rebates back to customers for every day they hit their steps goal.

Big Vision Upside

What the company could become in an ideal world beyond launch product?

Light the company is starting wth their first product, the Light Phone. In 2018, they plan to take the next step in their product roadmap by delivering a sleek new product that supports LTE (current model is only 2G, which has limited network support and will eventually be phased out). How they handle that will be a glimpse into their ability to handle transitioning into a different product market.

They don’t really give much of a hint what market they may go after next (which is good because it shows focus on the large task at hand). There is no shortage of experiences in our ever-connected world Light could attempt to tackle and provide a better user experience. Getting technology out of the way of experiencing and connecting with our surroundings and the people we care about.

Maybe it’s a slew of single use devices and we all go back to carrying different devices for each function instead of our all-in-one smartphones. These single function devices could be acceptable because we wouldn’t carry all of them all the time. They would be used to put us in the right mindset to focus and get more enjoyment from that thing.

Want to go for a walk and capture nature? Here’s a basic camera. Want to focus on writing or journaling without distractions but keep it digital? Here’s a light weight e-ink tablet that is just a notebook. Ever get distracted looking something up on the internet? How about a digital encyclopedia that only displays Wikipedia. An alarm clock so you can get your phone out of the bedroom? All speculation, but you get the point.

Investment Summary

Is this investment right for you?

The fact that Light figured out how to ship a hardware product and is working on delivering another batch next month is impressive. 9,000 units delivered is substantial. I think there is easily another 100,000 early adopters out their for Light to hit their 2018 targets without even answering if this product has mainstream potential.

Don’t let the $500 or $1,000 investment level that includes getting the current phone as a perk suck you in. You’re free to make your own choice if you do want to invest at that level based on your belief in the company. If you do want to get the phone to become an ambassador of sorts, a better move might be to invest the $100 minimum and then buy the current gen version for $150 (limited time get $25 off that) or wait and get the LTE version in 2018.

If you’re like me, I want to at least curb my addiction to the micro-reward loop my smartphone often traps me in. The Light Phone looks like a practical way to create that space to have unplugged meaningful outings with my friends and family. The kind that generates memorable conversations that only come with the absence of technology. I also want to unlock deep thoughts and reflections in times of mindfulness that lead to ideas and innovation in my work. That’s easier to do if I’m not using all my will-power to resist grabbing my phone every 7 seconds to see if I got an app notification so my brain can betray me with another serotonin bump.

This startup definitely hits home for me, is a topic I understand and can relate to, and addresses a problem I want solved in my own life. While there are never any guarantees with early stage startups, proving they can create interest, raise money, and deliver a hardware product, Light has a better than average chance of succeeding.

As an unaccredited angel investor, I have limited funds to deploy in a 12 month period, so I’m in for the minimum $100 so I can diversify across a larger portfolio of equity crowdfunding campaigns. Your call if this startup is something you connect with and decide to invest before their campaign ends at Midnight PDT.

Invest in Light Phone

Back up to Product Stage





Disclaimer

The information on this website is for informational purposes only. Neither the author or this website offer professional investment advice. Information contained herein is not intended to be a source of advice or credit analysis with respect to the material presented, and the information and/or documents contained in this website do not constitute investment advice. At the time of reading this, the author or Angel Memos teammates may be investors in this company. Always do your own diligence and seek independent professional advice before investing.

Due Diligence Sources

Any additional URL’s or conversations not already mentioned

Android Global and US Market Share…

https://www.netmarketshare.com/operating-system-market-share.aspx?qprid=8&qpcustomd=1

https://www.forbes.com/sites/johnkoetsier/2017/05/18/surprise-google-reveals-apples-ios-market-share-is-65-to-230-bigger-than-we-thought/#c541e8458903

https://www.neowin.net/news/comscore-publishes-us-smartphone-market-share-statistics-for-january-2017

 

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