Thoughts on the failure of Better Place

By Anonymous

“Well, this car is automatic, systematic, hydromatic,

Why, it could be greased lightning”

—Greased Lightening, by Warren Casey and Jim Jacobs

A spectacular bubble

Some weeks ago, we examined the challenge of commercializing battery-powered electric cars. Several caselets explored three alternate business models for commercialization: the pay-as-you-go model, the subscription model, and the amenity concept. Class discussion focused on the technical limitations of batteries and charging stations, the challenge of simultaneously building consumer demand for electric vehicles while rolling out the charging infrastructure to sustain it, and the high sensitivity of the commercial case to a handful of key assumptions.

One other concept that we touched upon briefly – but did not examine in great detail – was the exchangeable battery concept pioneered by the now-defunct company Better Place.

While the $850 million failure of Better Place must surely be one of the most spectacular collapses of a venture-backed company since the Dot Com bubble burst, there remains a lot that the industry should take from the concept it pioneered.

While it is impossible to assign blame to a single cause, I would contend that the failure of Better Place is due principally to mismanagement, rather than any inherent flaw in the technology, operating or business model.

The dream of Better Place

Better Place’s main innovation was to propose a novel solution to the three problems that have hampered the widespread adoption of electric cars:

i) limited range and slow recharge speeds due to nascent battery technology;

ii) consumer unwillingness to spend big on experimental technology with uncertain resale value; and

iii) the lack of alignment in the ecosystem, from car manufacturers, to charging infrastructure providers.

Addressing the first problem, Better Place created a battery that could be swapped out of the car at robotic stations in a time equivalent to stopping to fill up a tank of gasoline, thus creating an answer to the “range anxiety” that often plagues consumers. Car owners could also charge their car at home overnight for free, giving them both quick and cheap options to refuel.

The second problem was addressed through a subscription model for “miles”. Rather than owning a battery which would depreciate over time and likely become obsolete, consumers would pay a monthly fee for access to battery swap stations up to a set equivalent number of “miles”, much in the way that the cellphone industry creates contracts for a set number of minutes every month. This multi-year contract model would give Better Place recurring revenue that it could use to finance the construction of swap stations and replacement batteries as new technologies make older batteries obsolete.

The final problem Better Place addressed was how to change the ecosystem. Right from the outset, Better Place worked hard to

convince car manufacturers (Renault), consumers and refueling infrastructure providers to adopt the technology, by creating a business model which aligned incentives throughout the ecosystem.

It was a grand vision of running a country without oil that led to Better Place being created, but it was the grandiosity of management that led to its demise.

Good strategy, bad execution

Ironically enough, its early success was the very thing that led to its undoing.

Shai Agassi, the charismatic CEO, created a compelling vision of a revolutionary model that led to hundreds of millions of venture dollars flooding into the young company.

This early financial success led to management hubris and profligacy with its cash. Rather than focusing their pilot projects on Israel and Denmark – countries with high gasoline process, small geographies, and tax incentives for electric vehicles relative to gasoline-powered cars – Better Place expanded aggressively into the US and Australia well before it had been able to successfully demonstrate critical mass.

Essentially, Better Place adopted almost the inverse of lean startup methodology, burning through $500,000 a day before it had proven a minimum viable product. (When Better Place was subsequently forced to withdraw from the US and Australia, it destroyed any chance of future equity that might have gotten it through its predicament.)

Consumers were also slow to adopt the Better Place vision, in part due to the cost of the Better Place car being comparable to conventional gasoline cars. While the Renault Fluence outsold the Prius and delivered high levels of customer-satisfaction once the car went on sale in pilot markets, sales volumes were significantly below management forecasts. But management’s overly optimistic outlook had led Better Place to commit to extraordinary aggressive minimum order numbers from Renault. When sale of the cars stalled, Better Place was left to pay cancellation penalties on the minimum order quantities that it had not been able to meet, resulting in additional costs of tens of millions of dollars that it had not anticipated and could not afford.

Without the demand it needed to attract other carmakers into its ecosystem, Better Place was forced to pay Renault over $30,000 for every car it produced. Better Place was left high up the cost curve, without the scale it needed to negotiate down the cost of new cars or the ability to cheaply build swap stations (which had been forecast at $500,000 each, but eventually cost ~$2 million apiece).

Finally, management was profligate with its cash, commissioning an unnecessary internal navigation system for $60 million and building a $5 million visitor’s center more than two years before the first car itself had been produced.

As acrimony spread between the company’s largest investors and management over a staggering $490 million of losses in 2012, the stage was set for the exit of Agassi, and a string of replacement CEOs that tried to stem but could not ultimately stop the bleeding. When the largest shareholder refused to inject more equity in 2013, the company collapsed.

So what should we learn from Better Place?

The adoption of disruptive technologies to an industry as thoroughly entrenched in modern society as the combustion engine was always going to be a bumpy ride. Encouraged by its early technological successes, Better Place’s management incorrectly assumed that consumers and automakers would embrace the technical solution and innovative business model with open arms.

So what lessons we should take from this cautionary tale?

· Brilliant technological solutions are neither a necessary nor sufficient condition for success in the marketplace. Management teams would do well to remember that executing a strategy involving revolutionary change is even more complex than conceiving it.

· Developing a new technology is always more expensive and time-consuming than expected. Keeping costs contained until a pilot project demonstrates economic viability is key to surviving the “valley of death”.

· Changing an ecosystem is complex. By not managing to convince automakers other than Renault to adopt its technology, it could not offer consumers enough choice to drive more sales. Without enough consumers, it could not justify the infrastructure it needed. Without the infrastructure, it could not get automakers or customers on board.

Ultimately, the Better Place dream came undone by the fatal flaw of hubris. The desire to expand too far and too fast led to it burning precious cash before the ecosystem had caught up. In some respects, Agassi was a visionary before his time, without the patience to see the model proven on a small scale before he rolled it out internationally.

Nevertheless, in the absence of a step change in battery charging technology, I remain optimistic that the Better Place battery swap model (or a variant thereof) will see new life. But given the falling price of gasoline, the long lifespan of regular cars, and the cost of rolling out comprehensive battery swap infrastructure, I don’t share Shai Agassi’s vision that we will see a country running without oil anytime soon.

SOURCES

Adler, R. Don’t Draw the Wrong Lessons from Better Place’s Bust, HBR Blog Network, 2013

Bleby, M. Better Place Failure Doesn’t Mean the End of Electric Cars, AFR, 2013

Chafkin, M. A Broken Place: The Spectacular Failure of the Startup that was Going to Change the World, Fast Company, 2014

Cheslow, D. Electric-Car Company ‘Better Place’ Fails to Make it in the Start-up Nation, Tablet Magazine, 2013

Kanellos, M. Seven Reasons Why Better Place Will Fail and Four Why It Won’t, Greentech Media, 2009

Levine, S. Why ‘Better Place’ Failed with Swappable Batteries, Quartz, 2013

Macomber, J. EV Charging (1), (2), (3), Harvard Business School, 2014

Wunker, S. Five Lessons from Better Place’s Collapse, Forbes, 2013

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About macomberjohnd

HBS Finance faculty interested in sustainability in the built environment including devices, structures, townships, and cities.

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