How one of Silicon Valley’s hottest startups of the last 5 years blew a deal with Apple – twice

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  • Apple has offered to buy augmented reality startup Leap Motion multiple times, most recently in the spring of 2018.
  • Insiders said the figure discussed was between $30 million and $50 million, a fraction of the company’s Series B valuation of $306 million. But negotiations fell through just days before the deal was to be closed, according to people familiar with the matter.
  • People familiar with the company said Apple’s latest offer might have been a last opportunity for Leap Motion to sell a business that for years has teetered amid financial instability.

In the late spring of 2018, employees of the augmented reality startup Leap Motion were celebrating. The company was on the verge of being acquired by Apple, for what insiders said was a figure between $30 million to $50 million.

Apple had already started talks with Leap Motion’s human resources department to review company benefits and sent out offer letters enclosed in white folders emblazoned with its silver signature logo – the arrival of which caused many employees to break out in high-fives around the office.

But then, just days before the deal was expected to close, Apple’s offer mysteriously fell through, according to multiple employees at the company at the time who requested anonymity to avoid retribution or other negative outcomes.

The deal’s collapse was because of what one insider described as the result of “swirling negatives” surrounding the company, the blame for which many cast on the startup’s youthful cofounders, Michael Buckwald and David Holz.

At this point, however, Apple was familiar with the often eccentric behavior of Leap Motion’s founding duo; after all, this was at least the second time that Apple had weighed a prospective acquisition of Leap Motion in less than five years, multiple people familiar with the talks told Business Insider.

Not the first time

Leap Motion Peripheral Kevin Smith/Business InsiderLeap Motion’s first product.

The first time Apple expressed interest in buying the gesture startup was about five years earlier in 2013, when Leap Motion’s cofounders met with the company to discuss a sale. But the meeting went poorly, multiple people said, when Holz, the CTO and brilliant technical brain behind Leap Motion, said he had no interest in joining Apple’s team.

Not only did Holz seem disinterested in Apple’s prospective offer to acquire its team and intellectual property, the people said, but he was insulting. He told Apple representatives that the company was no longer innovative, that its technology “sucked,” and – to the disbelief of many there – went on to praise the virtues of Android.

“That’s why the Apple thing didn’t work out. David was like, ‘I’m never going to go work for those guys, they’re the devil,'” a person who worked for Leap Motion at the time said.

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That was only the first misstep in a courtship that continued to burn for many years, with Apple expressing continued interest in acquiring Leap Motion despite what appeared to be Holz’s marked distaste for both Apple’s team and technology.

Apple didn’t respond to repeated requests for comment. But the episode reveals both Apple’s continued interest in technologies it could use for its rumored augmented reality glasses and software, as well as what happens when a startup that was once highly valued lands on the sales block.

“Leap Motion is frequently solicited for acquisition by larger technology companies who realize the value of our team and the crucial role of our technology and research to the future of computing,” a Leap Motion spokesperson told Business Insider.

However, many familiar with the company described Apple’s latest offer as a last-ditch opportunity for Leap Motion to sell a business that for years has teetered amid financial instability.

Flying high

Leap Motion CEO cofounder co-founder Michael BuckwaldGetty/Steve JenningsLeap Motion co-founder and CEO Michael Buckwald.

In 2013, Leap Motion was flying high. That January, it had announced a $30 million Series B funding round from top-tier firms including Founders Fund and Highland Capital Partners.

Leap Motion had captured the imagination of the tech industry on the strength of a demo video that garnered millions of views that showed people interacting with a computer – even playing “Fruit Ninja” – using only their hands and gestures.

The promise was that Leap Motion’s algorithms could “replace the mouse and keyboard” with a piece of hardware that could sense the user’s hands and fingers “with no visible lag time.” The initial product paired with Windows and Mac computers, cost $80, and launched in July 2013.

At 25 years old, Leap Motion’s cofounders were listed in Forbes 30 under 30 alongside tech luminaries like Evan Spiegel, Tracy Chou, and Patrick Collison. They were revered by many as a brilliant but eccentric duo: Holz, a former NASA consultant, was the brains behind the project. Buckwald, a serial entrepreneur and a fierce debater, comprised the company’s business savvy as CEO.

The startup’s A-list backing helped the company gain wide retail distribution for what was mostly a tool for developers. Leap Motion’s technology was embedded in an HP laptop, its product sold in Best Buy locations, and the company’s leadership could get meetings with anyone, including giants like Samsung and SoftBank.

That’s when Apple kicked the tires on Leap Motion. The tech giant wasn’t interested in Leap Motion’s hardware, according to a person familiar with the talks, but was instead looking to acquire its team of “rockstar” employees and intellectual property.

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The talks didn’t go anywhere, however. Years later, some of those “rockstars” have joined Apple to work on augmented reality projects, former employees said.

Leap Motion had raised its Series B at a valuation of $306 million in late 2013, according to PitchBook, but its founders said to their team that the fledgling startup was worth more – announcing that Leap Motion was potentially even worth $1 billion, according to people familiar with the matter, which would make it a unicorn.

Many people close to the company say that the issues afflicting Leap Motion are a case of poor management: Much of the company’s venture capital was spent on sleek office space in San Francisco’s pricey SoMa neighborhood, complete with tech industry perks including beanbag chairs and daily lunches, and costly engineering salaries.

That Leap Motion should fall upon dire financial straits when the company’s core technology had such great potential was described by many as a failure that could have been easily avoided.

Bad negotiations

While it’s unclear why Apple eventually declined to purchase Leap Motion earlier this year, one theme is clear from Business Insider’s discussions with people who had intimate knowledge of the company: The founders ultimately thought the company was more valuable than the offers on the table.

One issue for the startup was revenue: Despite Leap Motion’s widespread availability and coverage in the technology press, sales were underwhelming and never enough to sustain a company, multiple former employees told Business Insider.

One strategy the company employed was to heavily focus on the technology’s uses in virtual reality applications, which was a hot sector of the technology industry in 2014 – Facebook bought Oculus that year for $2 billion.

Eventually, Leap Motion narrowed in on augmented reality, a trendy technology that displays advanced computer graphics and information from the internet interspersed in the real word.

And in 2017, it raised what was reported by The Wall Street Journal as a $50 million round of funding led by clients advised by JPMorgan Asset Management.

But Leap Motion never received the entire $50 million, a person familiar with the matter said. Instead, the deal was a $25 million infusion of cash, with an additional $25 million based on performance goals, the person said. A representative for JPMorgan Asset Management Group and Leap Motion declined to comment.

Then, earlier this year, Leap Motion launched an augmented reality headset design, called North Star, which uses Leap Motion’s hand-tracking technology and displays advanced computer graphics inside the headset’s lenses.

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It was a smart fit – Leap Motion’s hand-tracking technology makes sense as one of the ways that people can control AR and VR goggles. On the surface, the North Star developer’s kit competes with Magic Leap One and Microsoft Hololens. But the headset has never been manufactured in volume and it needs to be connected by a cable to a desktop PC.

Earlier this year, it became clear that Leap Motion would not hit the goals needed to unlock the second part of that funding, multiple people familiar with the matter said. Scores of employees have left the startup, which is now looking to cut costs. Recently, Leap Motion moved out of its San Francisco office in a bid to cut costs, Business Insider reported last week.

“Leap Motion has moved its main technology hub from SoMa to the Financial District. Most of our team, however, is remote,” a Leap Motion representative told Business Insider in an email last week.

It’s unclear whether Apple is still interested in the company, but Leap Motion has taken meetings with other so-called “strategic” companies to explore the possibility of a deal, according to people familiar with the startup. It’s unclear if talks with potential acquirers are still ongoing. Leap Motion is also exploring uses for its technology with defense contractors.

The core underlying technology could be valuable. Leap Motion has over 100 patents and applications in its name, according to Sqoop, and its hardware is still used in many prototypes from startups seeking to build goggles or other hardware that needs gesture support.

Increasingly, it looks like Leap Motion’s technology might end up bought as a hidden gem for a company looking to add its hand-tracking technology to future smartglasses products – but only if it can get the founders on board with the deal.

Editing by Steven Tweedie.

Source: Business Insider

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