In one of the largest-ever initial fundings for a startup, a company led by former SAP (SAP) executive Shai Agassi has raised $200 million to fund a plan to shake up the auto industry. The new project is a sharp professional departure for the 39-year-old Israeli, who launched two small software companies in Israel before he joined SAP. His goal is nothing short of audacious: to jump-start mass adoption of electric vehicles by introducing a radically different scheme for selling the cars and handling their batteries.
The company's name is Better Place, a sign of Agassi's hopes for its impact on the world. It has received $100 million from Israel Corp. (ILCO), a large Israeli industrial holding company, and lesser amounts from Silicon Valley venture capital firm VantagePoint Venture Partners, a large New York investment bank that wasn't immediately identified, and angel investors including Edgar Bronfman Sr.
A Business Model with Big Aspirations
The project attracted some of its backers not just for the potential financial returns but because they see it as a catalyst for fundamental shifts in transportation and energy. "We take on transformational projects. This squares with our notion of what needs to be done to effect change," says Alan Salzman, chief executive of VantagePoint, which has made a number of investments in green ventures, including Silicon Valley's Tesla Motors, an electric car company.
Agassi's company plans on operating much like a mobile-phone service provider. It hopes to sell or lease electric cars to consumers in packages that include monthly service fees. It will also operate networks of charging locations and service stations that replace batteries for people who are on the road. The whole system, called a "smart grid," will be coordinated by networking software developed by Agassi's programmers.
Agassi hopes to pilot the project in a few countries next year and begin mass deployments in 2010. He says he's close to signed agreements with several car companies and countries, but won't reveal their identities. Yet Agassi is anything but shy about his ambitions for electric cars. "If what I'm thinking is right, this will be the largest dislocation in the history of capitalism."
An 'Inevitable' Shift
Agassi and his allies expect a lot of criticism from the powers that be in the auto and energy industries. A smattering of analysts and industry observers who had been briefed ahead of the company's formal unveiling, scheduled for Oct. 29, were both intrigued and skeptical. "When I first heard about it, I thought it was just another crazy idea. It sounded far-fetched," says Stephen Girsky, a managing director at private equity firm Centerbridge Partners who was an auto analyst on Wall Street for 20 years. "Then I sat down and listened, and it just might make sense." Still, Girsky cautions that the old ways of doing things will be difficult to dislodge: "Change doesn't happen quickly in the auto sector," he says.
While Agassi's backers agree that a lot of things have to go right for this business to take off, they're totally sold on the concept. "It makes so much sense from the environmental point of view as well as the business point of view," says Idan Ofer, chairman of Israel Corp. and board chairman for Agassi's new company.
Ofer first learned of the plan from Agassi in a June meeting. Israel Corp. is a major investor in oil refineries, ocean tankers, and chemicals, but Ofer says he's not concerned about the seeming paradox of making an investment in technology that could slacken demand for gasoline. "If I didn't do it, somebody else will," he says. "What's the point of fighting something that's inevitable?"
Interest in alternative-technology vehicles is tremendous right now, largely because of the success of the Toyota Prius hybrid and oil prices that have climbed above $90 a barrel. So far, Toyota Motor (TM) and General Motors (GM) are backing gasoline-electric hybrids and playing down electric cars, while Renault (RENA) and Nissan Motor (NSANY) tilt toward all-electric cars.
A Plugged-In Network
One of the key differences between more traditional schemes and Agassi's is that he separates the battery from the vehicle. By using lithium-ion phosphate batteries that can be lifted out of a vehicle and replaced, he extends the range of the vehicles beyond the 100 miles that they can now go on a single electrical charge. He also eliminates the time it usually takes to recharge batteries.
The plan is to set up service stations that will pull out and replace the spent batteries in about the time required to fill a conventional car's tank with gasoline. The company's wireless network will tell drivers where they can get their batteries replaced when they're on the road. Stephan Dolezalek, who heads up VantagePoint's green investments, says one of the advantages of this system is that it turns vehicles and their batteries into a massive storage system for energy, solving one of the problems facing renewable-energy advocates.
Neither Agassi nor his investors would detail the status of negotiations with test-bed countries, but they say small countries with concentrated populations are the likeliest places for this business model to find acceptance. In locations like those—say, in Israel or Singapore, or in major metropolitan areas within larger countries—the concentration of drivers and the concerns about pollution make it plausible that Agassi could attain the scale of usage and build a network of service providers large enough to make the business work financially. London, for instance, has exempted electric vehicles from paying downtown congestion fees and also provides free electrical charging in parking lots.
One of the things in Agassi's favor is his deep knowledge of the tech industry. He was one of the technology visionaries at SAP and helped win wide adoption of an important new trend in software: the creation of reusable components that can be used by a whole industry to rapidly build complex new computer programs for corporations or governments. Now he's proposing a networking system that would be made of the same technology building blocks and would tie in other companies. "He's taking what has already happened in the software industry and creating a smart network and a whole business ecosystem," says Yvonne Genovese, a tech strategy analyst at market researcher Gartner (IT).
Agassi also stands to benefit from the fact that a lot of companies and investors are exploring different facets of electric transportation. Indeed, his own investors provide him with connections to a handful of potential strategic partners: VantagePoint has invested in Tesla Motors (BusinessWeek, 7/30/07) and BrightSource Energy, a utility-scale solar energy provider, and Israel Corp. has a stake in Chinese carmaker Chery Automobile. These potential synergies are among the attractions for investors as well. "It's not a build-it-all-yourself idea," says VantagePoint's Salzman.