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Did a private equity firm lose out on a quick dollar because it got spooked?
An injunction against Ring scuttled one fundraising deal it had planned just a few months before Amazon’s billion-dollar purchase of the smart-home security company, according to sources.
Ring did end up raising $ 100 million anyway this winter before the sale. But it experienced a series of unusual back-and-forth fundraising and legal events that offers a window into how deals can abruptly fall apart, how investors can miss out on a quick buck, and most intriguingly, how Amazon history could perhaps have played out differently if a judge had made a different decision.
Here’s what happened.
Ring saw an earlier planned financing round canceled after an investor got spooked by an intellectual property lawsuit filed by ADT, a competitor to Ring in the home security world. If the lead investor, Valor Equity Partners, had stuck around, the firm would’ve made a small payday in just a few months.
Ring authorized a fundraising round last August that would’ve valued the company at around $ 1 billion, albeit with heavy protection for investors. That financing was going to be in a round led by Valor, according to people with knowledge of the situation. A term sheet was signed and an updated certificate of incorporation — authorizing a new round of fundraising — had been filed with the State of Delaware.
But the deal broke down after the private equity firm grew concerned about the lawsuit. The suit was filed in the spring, so Valor knew the company was in a fight. But then a judge in November issued a preliminary injunction that forced Ring to stop selling its Ring Protect system. ADT had claimed Ring had stolen some of ADT’s software when Ring acquired a company called Zonoff, in which ADT itself had invested.
It was a setback. That injunction, according to the people, spooked Valor, a Chicago-based firm most well-known for its investments in SpaceX and Tesla. (Private equity investors are typically more risk-averse than venture investors.) The injunction came at the worst possible moment — Valor needed time to figure out if this investment was still worth it, the people say, and Ring wanted a decision.
So the deal fell through — it’s unclear who walked from whom — and Valor didn’t pay.
Would Amazon have acquired Ring if Valor hadn’t left the picture? It’s impossible to know. But let’s play it out.
The ‘no’ argument: If Ring had been fully funded as an independent company in the late summer or early fall, it may not have felt the financial need to sell in the winter. Maybe the conversations don’t even happen: Sources say the Amazon talks only got serious several months later, in the winter.
And even if they did, Valor could have tried to block the sale if their return was seen as too small and pushed Amazon for a higher price. Maybe Amazon balks.
The ‘yes’ argument: Ring did end up raising money around December before Amazon came calling — so they had the same sell-or-raise choice and made the ‘sell’ decision.
And while the talks certainly accelerated in the winter, Ring and Amazon, a Ring investor, had been speaking for a while — startups these days commonly will at least explore an acquisition and a funding round simultaneously, known as a dual-track process. So it’s certainly possible Valor could have invested and then just a few months later taken home a profit when Amazon completed the purchase.
Amazon and Ring declined to comment. Valor did not respond to requests for comment.
Ring and ADT would end up settling the suit for $ 25 million. But that settlement — maybe due to the bad taste in Ring investors’ mouths after the suddenly-dropped deal — did not ignite a new round of talks between Ring and Valor.
What Ring did need, though, was a new plan. The company, which sources say did more than $ 400 million in revenue in 2017, hadn’t raised money since December 2016 and wanted cash. That’s when a group of existing investors orchestrated a quickly-executed round of financing — about $ 200 million at the same $ 1 billion valuation.
Ring had to, again, send off a new Delaware filing. And again budget for a new investment.
But, even then, things did not go according to plan.
About half — not all — of the $ 200 million had been wired to Ring after the round’s first close. But then with the ADT suit settled, talks with Amazon heated up. And so the company halted the fundraising process between the first and second close, the people say, meaning that some existing investors got additional stakes in Ring but the second tranche of people who had yet to wire money did not.
Those who did were lucky. Amazon came with an offer that valued the company at more than the $ 1 billion that Valor felt the company was worth.
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