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A Tale of Two EVs

Albert Einstein once said:  “Make everything as simple as possible, but no simpler.”  Pundits always pursue the former, but often fail to uphold the latter.

Such has been the case recently in regards to the prospects for electric vehicles.  Will electric vehicles be commercially successful or won’t they?  As often happens, there is superficial evidence supporting both sides of the argument.

On one hand, you have Tesla Motors (NASDAQ:  TSLA).  Tesla recently announced that it had achieved its first quarterly profit, on the back of better-than-forecasted sales of its new Model S sedan.

On the other hand, you have Fisker Automotive.  At the same time that Tesla was releasing good news, Fisker was making waves with its drastic downsizing, laying off 75% of its workforce.  Fisker’s main model, the Karma, is probably unfortunately named, as the company is certainly beset with misfortune these days.

Fisker’s bad news made more headlines than Tesla’s good news, in part because Fisker has received financial support from the U.S. government, and was thus being lambasted by some as the “next Solyndra”.  (In part, also, because bad news seems to get more attention than good news.)

So, why is Tesla doing fairly well while Fisker is definitely not?  This comparison between the two makes a strong case that Tesla simply has a better all-around product at a more attractive price than Fisker.

Moreover, it is said by many observers that Tesla has pursued a different fundamental approach to business than Fisker.  Fisker started by designing a wholly-new electric vehicle that looks cool — and the Karma is by all accounts beautiful — but only much later turned to considering how to actually manufacture it.  As a result, the costs and complexity of the car ballooned.  It’s a big challenge to source and manage thousands of parts from many vendors.  (It didn’t help Fisker when their main battery supplier, A123 Systems, had performance issues with their products and then went belly-up.)

In contrast, Tesla focused solely on developing an electric vehicle drivetrain, including the battery packs, and then outsourcing design as much as possible to other companies expert in the car business, and then focusing on making the integration/assembly of all the relevant systems as low-cost as possible.  (However, it’s an been documented to be an oversimplification to say, as some have, that Tesla’s initial model, the Roadster, is simply a Lotus Elise with an electric drivetrain.)

Time will tell if Tesla will be a long-term survivor.  No question:  succeeding as a start-up car company is very difficult.  However, Tesla may have turned the corner.

Clearly, though, there’s a long way to go and plenty of opportunities for critics to pile on.  In the wake of some bad press in February, when a New York Times reporter wrote a famously negative review of the Model S, Tesla still must fight the headwinds of skepticism about electric vehicles as a major automotive force.

Fisker’s woes don’t help.  For the too-populous segment of oversimplifiers out there, it’s easy to extrapolate Fisker’s plight to other electric vehicle companies, particularly if they have a reason to want to make the sector look bad.  To illustrate, Sarah Palin piled on by lumping Tesla with Fisker and calling them both as “losers”.

Tesla will do well to distance itself from Fisker as much and as quickly as possible, as they really do have a different tale to tell.

Why is it So Hard to Make Money in New Battery Technology?

Energy storage is still the rage in cleantech.  But after the collapse of A123 and Beacon, and the spectacular failure on the Fisker Karma in its Consumer Reports tests, fire  in Hawaii with Xtreme Power’s lead acid grid storage system and with NGK’s sodium sulphur system, and now battery problems grounding the Boeing Dreamliners, investors in batteries are again divided into the jaded camp, and the koolaid drinker camp.   Not a perjorative, just reality.  New batteries and energy storage is still one of the juiciest promised lands in energy.  And still undeniably hard.  Basically, investors are relearning lessons we learned a decade ago.

Batteries are just hard.  Investing in them is hard.  Commercialization of batteries is hard. So why is it so difficult to make money in new battery technology?

Above and beyond the numbers, there are a number of commonalities related to the commercialization and venture financing life cycle of battery technologies that seem to differ to some degree from other venture investments in IT or even other energy technologies.  Having looked at probably 100+ deals over the years, and on the back of an deep study we did a couple of years ago on benchmarking valuations in energy storage, here’s our take on the why.

Timing – Battery technology commercializations have historically tended to be one of the slower commercialization cycles from lab stage to market.  Startups and investors in batteries have a long history of underestimating both the development cycle, capital required, and the commercialization cycle, as well as underestimating the competitiveness of the market.

Special chemistry risk – There is significant risk in launching a technology in newer battery chemistry.  There have been only a limited number of new chemistries succeed, and when they do, as in the case of NiMH and Energy Conversion Devices, they are typically either co-opted by larger competitors obviating a first mover advantage (that advantage is typically much weaker in this field than others) or requiring expensive patent suits.  Also as in the case of NiMH, there is no guarantee the chemistry will have legs (just when it is hitting its stride, NiMH is already becoming eclipsed by Li-On.  This risk has proven to be especially high for new chemistries (like Zn type) that are not as widely researched, as the supply chain development does not keep pace.  In addition, the battery field is highly crowded, and research is old enough that and despite new chemistry in most cases truly defensible patent positions are extremely hard to come by, or provide only discrete advantages (ability to supply a range of quality product cheaply in high volumes (or with value add to the product) seems to be the primary competitive advantage).  Few battery technologies of any chemistry end up their commercialization cycle with anywhere near as sustained an advantage as their inventors expected.

High capital costs – In any case, almost all battery startups will require extremely large amounts of capital (on the order of US$50 to 100 mm+) to achieve commercialization (much higher for real manufacturing scale), and the end product margins tend not to be particularly high.  Even with stage gate, a very large portion of this investment (US$10-50 mm+), is generally required to be spent while the risk of technical and economic failure is still high.  In addition, during the manufacturing scale up phase post R&D, capital investment required per $1 of revenue growth tends to be linear, making these technologies capital intensive to grow.

Degradation of initial technical advantage – In many technology areas one can expect the performance of the final manufactured product to improve over the performance in initial lab results, In part because of the low cost target, high reliability, high volume requirements of this product type however, promising battery technologies, are often forced to make compromises in the scale up, manufacturing, and commercialization stages that mean the performance of actual product might be expected to fall from levels or rates seen in lab scale experiments (though cost may go the other way).    At the same time, battery performance of standard technologies, while mature, is a moving target, and during the time frame for commercialization, will often improve enough to obviate the need for the remaining technical advantages.

Size matters – Most battery products (whether batteries or components like anode or cathode materials or electrolyte), are sold to large customers with very large volume requirements, and highly competitive quality and performance requirements.  As a result, breaking into new markets generally is extremely hard to do in niche markets, and means a battery startup must prove itself and its technology farther and for a longer period of time than other technology areas (see capital costs, timing and down rounds).  Many battery components technology developers as a result will be relegated for early adopters to emerging customers with high risks in their own commercialization path.

Lack of superior economics from licensing – As a result of these size, capital cost, timing, and commercialization risk issues most battery technologies will command much lower and more short-lived economics than anticipated from licensing (or require expensive patent lawsuits to achieve), and will require almost as late a stage of development (ie manufacturing operating at scale with proof of volume customers) and commensurate capital requirements, as taking the product to market directly.

Propensity for down rounds – In addition, battery technology companies tend to have down rounds in much larger numbers in the post A rounds (Series B through D+) than other venture investment areas, as these challenges catch-up to investors and management teams who overestimated the scope of work, capital and timing required in the seed, A and B rounds.  In particular, battery investors have tended to invest in seed, A and B stage battery technologies (pre-scaled up manufacturing process or even lab and prototype scale) with expectations of typical venture style timing and economics.  Quite often instead, it is the B, C, or D investor group that post cram-down rounds achieve the Series A economics (even when the technology IS successful), and the seed, A and B investors suffer losses or subpar IRRs.

Best of Both: Diesel and Plug-in Hybrid

Audi e-tron Spyder Diesel Plug-in Hybrid

Audi Etron LA2011 1269  mid 300x199 Audi e tron Spyder Diesel Plug in Hybrid AWDOriginal Post at Clean Fleet Report

Just looking at this hot sports car invites you to get behind the wheel and leave this LA Auto Show and not stop until navigating breathtaking hairpin turns along the coast of Big Sur. The Audi e-tron Spyder is a convertible sports coupe with dramatic styling. At the moment it is a concept. Yet when Audi shows these types of concepts they normally become production cars.

The Audi e-tron Spyder is likely to be the first diesel plug-in hybrid car to be sold in the United States. With two electric motors and a 3 liter turbodiesel engine, this car has the power to race past the popular Chevy Volt. This Audi e-tron goes zero to 60 in 4.4 seconds. It is electronically governed to 155 miles per hour so that you don’t get too carried away. The Audi performance and styling will provide serious competition to Fisker.

Two electric motors with a combined output of 64 kW (87 hp) and 352 Nm (259.62 lb-ft) of torque propel the front wheels. Behind the open, two-seat passenger cell is a 3.0 TDI with twin turbochargers. It generates 221 kW (300 hp) and 650 Nm (479.42 lb-ft) of torque, which is distributed by the seven-speed S tronic to the rear wheels. A 9.1 kWh lithium-ion battery is located in the front.

No current all-wheel drive (AWD) car comes close to the mileage and low-emissions of this Audi e-tron. It is speced for 107 mpg and only 95 grams of CO2 per mile.

All four wheels of the e-tron Spyder can be accelerated and braked individually, creating extremely precise, dynamic handling. The electric motors on the front wheels can be activated separately and a mechanical sport differential on the rear axle distributes the power. This form of “torque vectoring” marks a new advanced stage of the quattro principle – the e-tron Quattro with superior all-wheel drive handling on wet and icy roads.

The short wheelbase and low weight, achieved above all thanks to the aluminum body using the Audi Space Frame (ASF) construction principle, further hone its sporty character; the axle load distribution is 50:50.

The electric range is 50 km (31.07 miles) and the top speed in that mode is 60 km/h (37.28 mph). With its 50-liter (13.21 US gallons) fuel tank, the open-top two-seater has a range of more than 1,000 km (621.37 miles).

Brightsource, Fisker and Solyndra – Soul Crushingly Bad Numbers Make up 17% of Near Record 1Q11 Venture Investment

GreentechMedia and Cleantech Group this quarter reported near record levels of cleantech venture capital investment. Nearly $2.6 Billion in deals.  No, quantitative easing hasn’t made the dollar slide that much yet, the numbers are real – mainly as the solar and transport  deals vintage 2004-07 are getting deep into their capital intensive cycles.  But a near record $2.6 billion, so everybody’s happy, right?

Personally, a quick scan of Greentech Media’s summary of the top deals sent cold shivers up my spine. The deals may be getting done, but are we sure investors are making money?  Let’s take three of the big ones and the only ones where Greentech Media quoted valuation numbers:  BrightSource, Fisker, and Solyndra.  Between the three of them that’s 17% of the announced Q1 deal total by dollars.


BrightSource Energy (Oakland, Calif.) raised a $201 million Round E for its concentrated solar power (CSP) technology and deployment, bringing its total funding to more than $530 million in private equity. That funding is in addition to a federal loan guarantee of $1.3 billion. The investors include Alstom, a French power plant player, as well as the usual suspects — Vantage Point Venture Partners, Alstom, CalSTRS, DFJ, DBL Investors, Chevron Technology Ventures, and BP Technology Ventures, together with new investors with assistance from Advanced Equities.  VentureWire reports that the latest round values the company in excess of $700 million.

Brightsource has been a darling for a long, long time.  It is easily the farthest along, most experienced and most ambitious of the solar thermal developers.  So what about the numbers?   Well it’s announced 2.6 GigaWatts of PPAs with SoCal Edison and PG&E.  And they’ve started construction on the first phases of the 392 MW Ivanpah development in the Mojave desert.  That’s the good news.

Here’s the bad news: $700 mm pre-money valuation + $201 mm in round 5 means only a 1.7x TOTAL valuation for investors on the $530 mm that has gone in.  Or the previous round investors are now in aggregate up 2.1x on their money for a 7 year old company after the 5th equity round is in.  Not sure who, but a few of those rounds got rocked, and not in a good way, or else we just did four wonderfully exciting 15% uptick rounds in a row.  But it gets worse.

This first plant, the one they’re headed IPO on, still hasn’t come on line let alone finished phase I.  DOE has committed $1.37 Billion in debt to it, and NRG $300 mm in equity, with more equity capital needed.  So once completed, the venture investors after their meager 2.1x uptick in the first 7 years, are between 3-8 years in on their venture investments and now own part of a heavily leveraged state of the art $2 Bil+ highest cost in the market power plant throwing off revenues of say $125 mm/year.  Perhaps $140-$150 mm at the high end (estimates have varied on capacity factor and price).  Right sounds almost passable.  But now let’s build the cashflow statement.  Add in Brightsource’s estimated direct labor at $10-$15 mm/year ($400 mm over 30 years from their website), plus maintenance/repairs at 0.5% of assets per year of another $10 mm (and hope to God it can stay that low – that would be a tremendous success in and of itself), then add on debt service on $1.37 billion assuming an only available by government guarantee 30 year amortization at 5%, and we eat another $80-$90 mm per year.  So we’re at $100 to $120 mm in annual costs, and $125 to $140 mm in annual revenues.  And we haven’t included gas, water, or any contribution to overhead, which are all non trivial. And don’t forget we’re building this out in 3 phases over several years.

So after all that, if it works, and if it works well, those investors MAY see a net of $20 mm-$40 mm /year in cashflow from that plant by 2014/2015 or so that they can use to cover plant overhead, fuel bills, the remainder which is then split between them and NRG to cover corporate overhead and then pay taxes on; or they may be losing money every month.  But we’ll make it up in volume, right?

 

But there is hope:

#1  pray for lots and lots of ITC (30% on the $600 mm in non subsidized capital would shave almost a whole 10% off the total cost!)

#2 pray for an IPO (and think VeraSun, sell fast).

#3 pray for a utility who overpays for the development pipeline

Two good articles with some more history from Greentech Media here and here.

 

Fisker Automotive (Irvine, California), an electric vehicle maker, raised $150 million at a $600 million pre-money valuation (according to VentureWire), from New Enterprise Associates and Kleiner Perkins Caufield & Byers. The firm previously raised $350 million in VC, as well as a $528 million loan from the DOE.

Terrific, another high flyer.  Same analysis, this one’s younger, only 4 years old, and only on investment round 4, which is good, since they’ve now apparently got a total valuation of only 1.5x investors money, or 1.7x total uptick for the prior 3 rounds of  investors.  But since they’re only in so far for 1-4 years not 3-8 like in Brightsource, they’re ahead of the game ;).  But once they take down their $528 mm in DOE debt (which this last tranche was supposed to be the matching funds for), they’ll be at a soul crushing 110% Debt/Equity.  Oh, and did I mention that the real way to calculate Debt/Equity assumes equity is net book value?  And since with these startups we’re using contributed capital, once should think of our debt to equity ratios as very very very very artificially low – but I didn’t want to scare you too much.

But look on the bright side:

#1 If they really hit their 15,000 car per year at $95K/car and typical 5%-10% automotive operating margins, they could be at solidly into junk bond land at 4-7x debt to EBIT!  (Assuming of course you believe they build a $1.5 billion/year automotive company with no more cash).  Of course, they apparently have a whole 3,000 orders placed for the c. $95K car, and are currently planning closer to 1,000 shipments for year 1.  Compare that to the Nissan Leaf and Chevy Volt, which cost closer to $30K each.  Chevy has been planning on shipping 10,000 Volts in 2011, and 45,000 in 2012.  Nissan has targeted first year Leaf production at c. 20,000, and apparently had more than that many orders before they started shipping.

#2 pray for an IPO

#3 Buy Nissan stock

 

Solyndra (Fremont, California), a manufacturer of cylindrical solar PV systems for industrial and commercial rooftops, closed $75 million of a secured credit facility underwritten by existing investors. Solyndra had annual revenues exceeding $140 million in 2010 and has shipped almost 100 megawatts of panels for more than 1,000 installations in 20 countries, according to the CEO.

I’m certainly not the first or only one to cry over Solyndra.  And I’m pretty certain I won’t be the last.

Founded in 2005, with a cool billion in equity venture capital into it now, I believe they were on F series before the IPO was canceled last year? With this $75 mm Q1 deal (in secured debt, of course, their investors are learning) they’ve announced another $250 mm in shareholder loans since the IPO cancellation, and the early round investors have been already been pounded into crumbly little bits.  But it’s worse.

If I followed correctly, the original IPO was to have raised $300 mm, plus pulling down the $535 mm in DOE debt.  Here less than 9 months after that process canceled (could that be right?), they’ve now raised 80% of the cash the IPO was planning, except all in debt, and grown revenues nearly double since starting that process.  My only response to this was OMG.  So they’re at a 26% Debt/Equity Ratio for a money losing company, where debt exceeds revenues by a factor.  Pro Forma for the DOE loan fully drawn they’re at 44%, and something like 6x debt to revenue.  These are crushing numbers for healthy profitable companies.  It gets worse.

Go read their IPO prospectus.  Teasing out who invested how much in each round from each fund, and the size of those investors’ announced funds, plus the number of funds that “crossed-over” and did their follow-ons from a newer fund, and you quickly realize there are several venture funds that literally tapped out on Solyndra, likely either hitting house or contractual maximum commitments to a single deal.  The concentration risk in Solyndra is possibly enough to severely pound multiple fund managers, not just Solyndra.

 

Please somebody please tell me I’ve got the numbers all wrong.